<HTML>
<HEAD>
<TITLE>GRAVITY CO.,LTD.</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>As filed with the Securities and Exchange Commission on
June&nbsp;30, 2006</B>
</DIV>

<DIV align="center" style="font-size: 6.0pt;color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 3.0pt;color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 14.0pt;color: #000000; background: #ffffff; margin-top: 2pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

<DIV align="center" style="font-size: 12.0pt;color: #000000; background: #ffffff;">
<B>Washington,&nbsp;D.C. 20549</B>
</DIV>

<DIV align="center" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 18.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Form&nbsp;20-F</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 12.0pt; margin-top: 3pt; ">

<TR style="font-size: 1pt;">
    <TD width="14%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="83%">&nbsp;</TD>
</TR>

<TR style="font-size: 10.0pt;">
    <TD align="left" nowrap>(Mark One)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="wingdings">&#111;
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <B>REGISTRATION STATEMENT PURSUANT TO SECTION&nbsp;12(b) OR (g)
    OF THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <B>or</B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="wingdings">&#254;
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <B>ANNUAL REPORT PURSUANT TO SECTION&nbsp;13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <B>For the fiscal year ended December&nbsp;31, 2005</B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <B>or</B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="wingdings">&#111;
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <B>TRANSITION REPORT PURSUANT TO SECTION&nbsp;13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <B>or</B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="wingdings">&#111;
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <B>SHELL COMPANY REPORT PURSUANT TO SECTION&nbsp;13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <B>For the transition period
    from &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;to</B></TD>
</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Commission file
number:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B>
</DIV>

<DIV align="center" style="font-size: 22.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>GRAVITY CO., LTD.</B>
</DIV>

<DIV align="center" style="font-size: 8.0pt;color: #000000; background: #ffffff;">
<I>(Exact name of registrant as specified in its charter)</I>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 3pt; ">

<TR style="font-size: 1pt;">
    <TD width="48%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="49%">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B>N/A</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B>The Republic of Korea</B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <I>(Translation of registrant&#146;s name into English)</I></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <I>(Jurisdiction of incorporation or organization)</I></TD>
</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>14/ F Meritz Tower, 825-2 Yeoksam-Dong, Gangnam-Gu</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>Seoul 135-934 Korea</B>
</DIV>

<DIV align="center" style="font-size: 8.0pt;color: #000000; background: #ffffff;">
<I>(Address of principal executive offices)</I>
</DIV>

<DIV align="center" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 26%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Securities registered or to be registered pursuant to
Section&nbsp;12(b) of the Act:</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 3pt; ">

<TR style="font-size: 1pt;">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="center" nowrap><B>Title of Each Class</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Name of Each Exchange on Which Registered</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    Common stock, par value Won 500&nbsp;per share*</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    Nasdaq National Market</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    American depositary shares, each representing<BR>
    one-fourth of a share of common stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>*&nbsp;</TD>
    <TD align="left">
    Not for trading, but only in connection with the listing of
    American depositary shares on the Nasdaq National Market
    pursuant to the requirements of the Securities and Exchange
    Commission.</TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Securities registered or to be registered pursuant to
Section&nbsp;12(g) of the Act:</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>None</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Securities for which there is a reporting obligation pursuant
to Section&nbsp;15(d) of the Act:</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>None</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Indicate the number of outstanding shares of each of the
issuer&#146;s classes of capital or common stock as of the close
of the last full fiscal year covered by this Annual Report:
6,948,900&nbsp;shares of common stock, par value of Won
500&nbsp;per share
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Indicated by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule&nbsp;405 of the Securities
Act.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Yes&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT face="wingdings">&#254;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange
Act of
1934.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Yes&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT face="wingdings">&#254;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Indicate by check mark whether the registrant (1)&nbsp;has filed
all reports required to be filed by Section&nbsp;13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12&nbsp;months (or for such shorter period that the registrant
was required to file such reports) and (2)&nbsp;has been subject
to such filing requirements for the past
90&nbsp;days:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Yes&nbsp;<FONT face="wingdings">&#254;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of &#147;accelerated filer and large
accelerated filer&#148; in
Rule&nbsp;<FONT style="white-space: nowrap">12b-2</FONT> of the
Exchange Act.
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
Large Accelerated
filer&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accelerated
filer&nbsp;<FONT face="wingdings">&#254;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Non-accelerated-filer&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Indicate by check mark which financial statement item the
registrant has elected to follow:
Item&nbsp;17&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Item&nbsp;18&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#254;
</FONT>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in
Rule&nbsp;<FONT style="white-space: nowrap">12b-2</FONT> of the
Exchange
Act).&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Yes&nbsp;<FONT face="wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No&nbsp;<FONT face="wingdings">&#254;
</FONT>
</DIV>

<DIV align="center" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 4pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 100%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 4.0pt;color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 2.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<!-- TOC -->
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name="tocpage"></A>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>TABLE OF CONTENTS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="15%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="59%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5" align="left" valign="top">
    &nbsp;<A HREF='#101'>CERTAIN DEFINED TERMS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    4</TD>
</TR>

<TR>
    <TD colspan="5" align="left" valign="top">
    &nbsp;<A HREF='#102'>FORWARD-LOOKING STATEMENTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    4</TD>
</TR>

<TR>
    <TD colspan="5" align="left" valign="top">
    &nbsp;<A HREF='#103'>PART&nbsp;I</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    5</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#104'>ITEM 1.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#104'>IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
    AND ADVISERS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    5</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#105'>1.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#105'>Directors and Senior Management</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    5</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#106'>1.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#106'>Advisers</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    5</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#107'>1.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#107'>Auditors</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    5</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#108'>ITEM 2.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#108'>OFFER STATISTICS AND EXPECTED TIMETABLE</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    5</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#109'>ITEM 3.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#109'>KEY INFORMATION</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    5</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#110'>3.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#110'>Selected Financial Data</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    5</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#111'>3.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#111'>Capitalization and Indebtedness</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    7</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#112'>3.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#112'>Reasons for the Offer and Use of
    Proceeds</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    7</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#113'>3.D.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#113'>Risk Factors</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    7</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#114'>ITEM 4.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#114'>INFORMATION ON THE COMPANY</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    26</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#115'>4.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#115'>History and Development of the Company</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    26</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#116'>4.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#116'>Business Overview</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    26</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#117'>4.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#117'>Organizational Structure</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    50</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#118'>4.D.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#118'>Property, Plants and Equipment</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    50</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#119'>ITEM 5.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#119'>OPERATING AND FINANCIAL REVIEW AND
    PROSPECTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    51</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#120'>5.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#120'>Operating Results</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    51</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#121'>5.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#121'>Liquidity and Capital Resources</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    65</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#122'>5.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#122'>Research and Development, Patents and
    Licenses, etc.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    67</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#123'>5.D.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#123'>Trend Information</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    68</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#124'>5.E.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#124'>Off-Balance Sheet Arrangements</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    68</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#125'>5.F.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#125'>Contractual Obligations</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    68</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#126'>ITEM 6.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#126'>DIRECTORS, SENIOR MANAGEMENT AND
    EMPLOYEES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    69</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#127'>6.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#127'>Directors and Senior Management</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    69</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#128'>6.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#128'>Compensation</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    71</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#129'>6.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#129'>Board Practices</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    71</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#130'>6.D.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#130'>Employees</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    73</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#179'>6.E.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#179'>Share Ownership</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    73</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#131'>ITEM 7.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#131'>MAJOR SHAREHOLDERS AND RELATED PARTY
    TRANSACTIONS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    75</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#132'>7.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#132'>Major Shareholders</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    75</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#133'>7.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#133'>Related Party Transactions</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    76</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#181'>7.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#181'>Interests of Experts and Counsel</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    78</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#135'>ITEM 8.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#135'>FINANCIAL INFORMATION</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    78</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#136'>8.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#136'>Consolidated Statements and Other Financial
    Information</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    78</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#137'>8.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#137'>Significant Changes</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    79</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#138'>ITEM 9.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#138'>THE OFFER AND LISTING</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    79</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#139'>9.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#139'>Offer and Listing Details</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    79</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#140'>9.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#140'>Plan of Distribution</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    80</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#141'>9.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#141'>Markets</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    80</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#142'>9.D.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#142'>Selling Shareholders</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    80</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#143'>9.E.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#143'>Dilution</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    80</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#144'>9.F.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#144'>Expenses of the Issue</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    80</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#145'>ITEM 10.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#145'>ADDITIONAL INFORMATION</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    80</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#146'>10.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#146'>Share Capital</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    80</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">2

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; ">

<TR style="font-size: 1pt;">
    <TD width="15%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="59%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#147'>10.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#147'>Articles of Incorporation</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    80</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#148'>10.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#148'>Material Contracts</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    85</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#149'>10.D.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#149'>Exchange Controls</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    88</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#150'>10.E.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#150'>Taxation</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    90</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#151'>10.F.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#151'>Dividends and Paying Agents</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    98</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#152'>10.G.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#152'>Statement by Experts</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    98</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#153'>10.H.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#153'>Documents on Display</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    98</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#154'>10.I.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#154'>Subsidiary Information</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    98</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#155'>ITEM 11.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#155'>QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    98</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#156'>11.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#156'>Quantitative Information about Market
    Risk</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    98</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#157'>11.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#157'>Qualitative Information about Market
    Risk</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    99</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#158'>11.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#158'>Interim Periods</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    99</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#159'>ITEM 12.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#159'>DESCRIPTION OF SECURITIES OTHER THAN EQUITY
    SECURITIES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    99</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#160'>12.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#160'>Debt Securities</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    99</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#161'>12.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#161'>Warrants and Rights</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    99</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#162'>12.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#162'>Other Securities</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    99</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#163'>12.D.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#163'>American Depositary Shares</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    99</TD>
</TR>

<TR>
    <TD colspan="5" align="left" valign="top">
    &nbsp;<A HREF='#164'>PART&nbsp;II</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    105</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#165'>ITEM 13.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#165'>DEFAULTS, DIVIDEND ARREARAGES AND
    DELINQUENCIES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    105</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#166'>ITEM 14.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#166'>MATERIAL MODIFICATIONS TO THE RIGHTS OF
    SECURITY HOLDERS AND USE OF PROCEEDS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    105</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#167'>ITEM 15.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#167'>CONTROLS AND PROCEDURES</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    105</TD>
</TR>

<TR>
    <TD colspan="5" align="left" valign="top">
    &nbsp;<A HREF='#168'>ITEM 16.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    108</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#169'>16.A.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#169'>Audit Committee Financial Expert</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    108</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#170'>16.B.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#170'>Code of Ethics</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    108</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#171'>16.C.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#171'>Principal Accountant Fees and Services</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    109</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#172'>16.D.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#172'>Exemptions from the Listing Standards for
    Audit Committee</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    109</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#173'>16.E.</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    &nbsp;<A HREF='#173'>Purchases of Equity Securities by the
    Issuer and Affiliated Purchasers</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    109</TD>
</TR>

<TR>
    <TD colspan="5" align="left" valign="top">
    &nbsp;<A HREF='#174'>PART&nbsp;III</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    110</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#175'>ITEM 17.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#175'>FINANCIAL STATEMENTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    110</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#176'>ITEM 18.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#176'>FINANCIAL STATEMENTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    110</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#177'>ITEM 19.</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    &nbsp;<A HREF='#177'>EXHIBITS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    110</TD>
</TR>

<TR>
    <TD colspan="5" align="left" valign="top">
    &nbsp;<A HREF='#178'>INDEX TO FINANCIAL STATEMENTS</A></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">
    F-1</TD>
</TR>

<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv4w37.htm">EX-4.37 LEASE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv4w38.htm">EX-4.38 REAL ESTATE SALE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv4w39.htm">EX-4.39 GLOBAL PUBLISHING AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv4w40.htm">EX-4.40 GLOBAL PUBLISHING AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv8w1.htm">EX-8.1 LIST OF REGISTRANT'S SUBSIDIARIES</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv11w1.htm">EX-11.1 REGISTRANT'S CODE OF ETHICS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv12w1.htm">EX-12.1 CEO CERTIFICATION PURSUANT TO SECTION 302</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv12w2.htm">EX-12.2 CFO CERTIFICATION PURSUANT TO SECTION 302</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv13w1.htm">EX-13.1 CEO CERTIFICATION PURSUANT TO SECTION 906</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00617exv13w2.htm">EX-13.2 CFO CERTIFICATION PURSUANT TO SECTION 906</A></FONT></TD></TR>
</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<!-- /TOC -->
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">3
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='101'></A>
</DIV>

<!-- link1 "CERTAIN DEFINED TERMS" -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>CERTAIN DEFINED TERMS</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Unless the context otherwise requires, references in this annual
report to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &#147;China&#148; or the &#147;PRC&#148; are to the
    People&#146;s Republic of China;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &#147;Government&#148; are to the government of the Republic;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &#147;GRAVITY,&#148; &#147;the Company,&#148; &#147;we,&#148;
    &#147;us,&#148; &#147;our,&#148; or &#147;our company&#148; are
    to GRAVITY Co., Ltd. and its subsidiaries.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &#147;Japanese Yen&#148; or &#147;JPY&#148; are to the currency
    of Japan;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &#147;Korea&#148; or the &#147;Republic&#148; are to The
    Republic of Korea;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &#147;Taiwan&#148; or the &#147;ROC&#148; are to Taiwan, the
    Republic of China;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &#147;US$&#148; and &#147;U.S.&nbsp;dollars&#148; are to the
    currency of the United States;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &#147;Won&#148; or &#147;W&#148; are to the currency of the
    Republic of Korea.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For your convenience, this annual report contains translations
of certain Won amounts into U.S.&nbsp;dollars at the noon buying
rates of the Federal Reserve Bank of New York for Won in effect
on December&nbsp;31, 2005, which was Won 1,010.0 to US$1.00.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Discrepancies in tables between totals and sums of the amounts
listed are due to rounding.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='102'></A>
</DIV>

<!-- link1 "FORWARD-LOOKING STATEMENTS" -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>FORWARD-LOOKING STATEMENTS</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This annual report on
Form&nbsp;<FONT style="white-space: nowrap">20-F</FONT> for the
year ended December&nbsp;31, 2005 contains &#147;forward-looking
statements,&#148; as defined in Section&nbsp;27A of the
U.S.&nbsp;Securities Act of 1933, as amended, and
Section&nbsp;21E of the U.S.&nbsp;Securities Exchange Act of
1934, as amended (&#147;Exchange Act&#148;). All statements,
other than statements of historical facts, included in this
annual report that address activities, events or developments
which we expect or anticipate will or may occur in the future
are forward-looking statements. The words &#147;believe,&#148;
&#147;intend,&#148; &#147;expect,&#148; &#147;anticipate,&#148;
&#147;project,&#148; &#147;estimate,&#148; &#147;predict,&#148;
&#147;considering,&#148; &#147;depends,&#148; &#147;may,&#148;
&#147;could,&#148; &#147;should&#148; or &#147;could&#148; and
similar expressions are also intended to identify
forward-looking statements.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
These forward-looking statements address, among others, such
issues as:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    future prices of and demand for our products;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    future earnings and cash flow;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    expansion and growth of our business and operations;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our prospective operational and financial information.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
These statements are based on assumptions and analyses made by
us in light of our experience and our perception of historical
trends, current conditions and expected future developments, as
well as other factors we believe are appropriate in particular
circumstances. However, whether actual results and developments
will meet our expectations and predictions depends on a number
of risks and uncertainties which could cause actual results to
differ materially from our expectations, including the risks set
forth in Item&nbsp;3. &#147;Key Information&nbsp;&#151; Risk
Factors&#148; and the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    fluctuations in prices of our products;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    potential acquisitions and other business opportunities;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    general economic, market and business conditions;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    other risks and factors beyond our control.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Consequently, all of the forward-looking statements made in this
annual report are qualified by these cautionary statements. We
cannot assure you that the actual results or developments
anticipated by us will be realized or, even if substantially
realized, that they will have the expected effect on us or our
business or operations.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">4
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='103'></A>
</DIV>

<!-- link1 "PART I" -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>PART&nbsp;I</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='104'></A>
</DIV>

<!-- link1 "ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM 1.</B></TD>
    <TD>
    <B><I>IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
    ADVISERS</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='105'></A>
</DIV>

<!-- link1 "1.A. Directors and Senior Management" -->

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>1.A.</B></TD>
    <TD>
    <B>Directors and Senior Management</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='106'></A>
</DIV>

<!-- link1 "1.B. Advisers" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>1.B.</B></TD>
    <TD>
    <B>Advisers</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='107'></A>
</DIV>

<!-- link1 "1.C. Auditors" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>1.C.</B></TD>
    <TD>
    <B>Auditors</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='108'></A>
</DIV>

<!-- link1 "ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM 2.</B></TD>
    <TD>
    <B><I>OFFER STATISTICS AND EXPECTED TIMETABLE</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='109'></A>
</DIV>

<!-- link1 "ITEM 3. KEY INFORMATION" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM 3.</B></TD>
    <TD>
    <B><I>KEY INFORMATION</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='110'></A>
</DIV>

<!-- link1 "3.A. Selected Financial Data" -->

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>3.A.</B></TD>
    <TD>
    <B>Selected Financial Data</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following selected consolidated financial information is
derived from our consolidated financial statements as of each of
the dates and for each of the periods indicated below. This
information should be read in conjunction with our audited
consolidated financial statements and the related notes thereto,
included in this annual report. Our consolidated financial
statements and related notes thereto have been prepared in
accordance with accounting principles generally accepted in the
United States.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The balance sheet data as of December&nbsp;31, 2003 and the
statement of operations data for the years ended
December&nbsp;31, 2002 and 2003 have been derived from our
audited financial statements and related notes thereto not
included in this annual report. The balance sheet data as of
December&nbsp;31, 2002 are derived from our unaudited financial
statements and related notes thereto, which are not included in
this annual report.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="25%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>As of and for the Years Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005(1)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>(In millions of Won and thousands of US$, except share and per share data, operating data</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>and percentages)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Statement of operations:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenues:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Online games&nbsp;&#151; subscription revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>7,310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>18,560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>11,249</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>11,138</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Online games&nbsp;&#151; royalties and license fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,330</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,005</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mobile games</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,664</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,648</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Character merchandising, animation and other revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>427</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,185</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,696</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,065</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,067</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,515</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,426</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53,384</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>52,856</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,738</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,958</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,116</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,879</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,329</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>42,557</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>54,310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36,977</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating expenses:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling, general and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>354</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,870</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,660</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,490</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>718</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>815</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,597</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,029</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,219</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,128</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">5

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9.0pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="22%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>As of and for the Years Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2001</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2002</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005(1)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>(In millions of Won and thousands of US$, except share and per share data, operating data</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>and percentages)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(905</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,644</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>38,621</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,668</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,641</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other expenses, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,424</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,210</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,879</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(787</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(780</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income (loss) before income tax expenses, minority interest, and
    equity in loss of related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(908</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,390</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,455</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,421</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income tax expenses (benefit)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(817</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(809</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income (loss) before minority interest and equity in loss of
    related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(908</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(322</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,336</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,612</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Minority interest</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(17</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Equity in loss of related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>394</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>390</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(908</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(32</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>28,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(3,030</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>(3,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Earnings (loss) per share:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(492</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(96</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>3,730</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,056</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(445</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>(0.44</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted per ADS</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(111</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(0.11</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted average number of shares outstanding (basic and diluted)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,846,575</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,355,616</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,130,895</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,548,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,803,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,803,147</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance sheet data:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><B>(Unaudited</B></TD>
    <TD align="left" valign="bottom" nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>1,820</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>25,874</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>25,618</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,916</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,824</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>46,868</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>109,428</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>108,345</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Property and equipment, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>522</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,254</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,417</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,863</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,746</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,055</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,617</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36,424</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>68,644</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>144,857</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>143,423</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,251</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,575</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,221</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,448</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,255</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,912</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,707</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18,209</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24,073</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,835</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total shareholders&#146; equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(90</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,464</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>120,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>119,566</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Selected operating data and financial ratios:</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit margin(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>82.7</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>85.9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>84.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating profit margin(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/M</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5.0</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5.0</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net profit margin(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/M</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3.2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>38.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5.7</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5.7</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>N/ M = not meaningful</I>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    For convenience, the Won amounts are expressed in
    U.S.&nbsp;dollars at the rate of Won 1,010.0 to US$1.00.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Gross profit margin for each period is calculated by dividing
    gross profit by total revenues for each such period.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Operating profit margin for each period is calculated by
    dividing operating income (loss) by total revenues for each such
    period.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    Net profit margin for each period is calculated by dividing net
    income (loss) by total revenues for each such period.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">6

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Exchange Rates</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Fluctuations in the exchange rate between Won and
U.S.&nbsp;dollar may affect the market price of our ADSs. These
fluctuations will also affect the U.S.&nbsp;dollar conversion by
the depositary of any cash dividends paid in Won and the Won
proceeds received by the depositary from any sale of our common
shares represented by our ADSs.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In certain parts of this annual report, we have translated Won
amounts into U.S.&nbsp;dollars for convenience purposes only.
The &#147;noon buying rate&#148; is the rate in The City of New
York used for cable transfers in foreign currencies as certified
for customs purposes by the Federal Reserve Bank of New York.
Unless otherwise stated, all translations from Won to
U.S.&nbsp;dollars were made at Won 1,010.0 to US$1.00, which was
the noon buying rate announced on December&nbsp;31, 2005. The
translation is not a representation that the Won or
U.S.&nbsp;dollar amounts referred to herein could have been or
could be converted into U.S.&nbsp;dollars or Won, as the case
may be, at any particular rate, or at all. The table below sets
forth, for the periods indicated, information concerning the
noon buying rate for Won, expressed in Won per one
U.S.&nbsp;dollar.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="43%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2" align="left" nowrap><B>Year Ended December&nbsp;31,</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>At End of Period</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Average(1)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>High</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Low</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>(Won per US$1.00)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2001</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,313.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,292.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,369.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,234.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2002</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,186.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,250.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,332.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,160.6</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,192.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,192.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,262.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,146.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,035.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,139.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,195.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,035.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,010.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,023.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,059.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>997.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2006 (through June&nbsp;29, 2006)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>960.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>962.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,002.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>927.4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    January</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>958.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>981.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,002.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>958.9</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    February</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>970.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>969.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>976.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>962.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    March</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>971.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>974.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>982.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>966.8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    April</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>942.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>952.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>970.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>939.6</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    May</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>945.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>940.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>951.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>927.4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    June (through June&nbsp;29, 2006)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>960.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>954.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>961.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>942.7</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Note:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Annual and monthly averages are calculated using the average of
    the daily rates during the relevant period.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='111'></A>
</DIV>

<!-- link1 "3.B. Capitalization and Indebtedness" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>3.B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Capitalization and
Indebtedness</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='112'></A>
</DIV>

<!-- link1 "3.C. Reasons for the Offer and Use of Proceeds" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>3.C.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Reasons for the Offer and
Use of Proceeds</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='113'></A>
</DIV>

<!-- link1 "3.D. Risk Factors" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>3.D.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Risk Factors</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Risks Relating to Our Business</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We currently depend on one product, Ragnarok Online, for
    substantially all of our revenues.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Substantially all of our revenues have been and are currently
derived from a single product, Ragnarok Online, which was
commercially introduced in August 2002. In 2005, we derived
approximately 88.3% of our revenues from Ragnarok Online. We
expect to continue to derive a substantial portion of our
revenues from Ragnarok Online. Our failure to maintain, improve,
update or enhance Ragnarok Online in a timely manner or
successfully enter new markets could reduce Ragnarok
Online&#146;s user base, decrease its popularity, and reduce our
revenues which would materially and adversely affect our
business, financial condition and results of
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">7
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
operations. In addition, we are currently developing Ragnarok
Online&nbsp;II, the successor game to Ragnarok Online, as
Ragnarok online has been in the market for close to four years
and we believe that this game has reached relative maturity in
our principal markets. Although we have indicated our plan to
introduce Ragnarok Online&nbsp;II at various times in the past,
the launch of this successor game has been delayed for various
reasons, including technical difficulties. We currently intend
to launch Ragnarok Online&nbsp;II by the end of 2006, although
no assurance can be given that we will be able to meet our
current anticipated launch date for this game. In addition, no
assurance can be given that when launched, such game will gain
market acceptance and popularity. The success of Ragnarok
Online&nbsp;II will be subject to many factors, including the
quality, uniqueness and playability of the game and the launch
by our competitors of other games that may gain more market
acceptance than Ragnarok Online&nbsp;II. Our inability to launch
Ragnarok Online&nbsp;II and if launched, the lack of popularity
or market acceptance of such game, is likely to have a material
adverse effect on our business, prospects, reputation, financial
condition and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>If we are unable to consistently develop, acquire,
    license, launch, market or operate commercially successful
    online games in addition to Ragnarok Online, our business,
    financial condition and results of operations may be materially
    and adversely affected.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In order to maintain our growth and profitability, we must
continually develop or publish commercially successful online
games in addition to Ragnarok Online that will retain our
existing users and attract new users. We have recently acquired
a controlling interest in a third party developer that developed
R.O.S.E. Online, from whom we used to have an exclusive license
to distribute such game. In addition, we have acquired
publishing rights for a casual game portal, as well as games
licensed from third party online game developers. We are also
internally developing two new massively multiplayer online role
playing games, Requiem and Ragnarok Online&nbsp;II, a sequel to
Ragnarok Online. No assurance can be given that the Requiem,
Ragnarok Online&nbsp;II or any of the other games we develop or
purchase licensing rights to, will gain popularity with the
market or that we will generate sufficient revenues from such
games to justify the costs of development and/or payment of
licensing fees for such games.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A game&#146;s commercial success largely depends on appealing to
the tastes and preferences of a critical mass of users as well
as the willingness of such users to continue as paying
subscribers after the completion of the free open beta testing
stage, all of which are difficult to predict prior to a
game&#146;s development and introduction. Developing games
internally requires substantial development costs, including the
costs of employing skilled developers and acquiring or
developing game engines which enable the creation of products
with the latest technological features. In order to succeed, we
must acquire, license or develop promising games at an
acceptable cost and ensure technical support for the successful
operation of such games. The online game publishing market is
highly competitive. And in order to successfully distribute and
operate a game, we also need a sizable game management and
support staff, continued investment in technology and a
substantial marketing budget. If we are not able to consistently
develop, acquire, license, launch, market or operate
commercially successful online games, we may not be able to
generate enough revenues to offset our initial development,
acquisition, licensing or marketing costs, and our future
business, financial condition and results of operations will be
materially and adversely affected.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our limited resources may affect our ability to manage our
    growth.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our growth to date has placed, and the anticipated further
expansion of our operations will continue to place, a
significant strain on our management, systems and resources. In
addition to training and managing our employees, we will need to
continue to develop and improve our financial and management
controls as well as our reporting systems and procedures
appropriate for a publicly listed company. We cannot assure you
that we will be able to efficiently or effectively manage the
growth of our operations, and any failure to do so may limit our
future growth and materially and adversely affect our business,
financial condition and results of operations.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">8

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We depend on license fees and royalty payments from our
    overseas licensees for a substantial portion of our
    revenues.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In markets other than Korea, the United States and Canada, we
license Ragnarok Online to overseas operators or distributors
from whom we receive license fees and royalty payments based on
a percentage of such operators&#146; revenues from Ragnarok
Online. Such overseas license fees and royalty payments
represented 70.0% of our revenues in 2005. In addition, we are
heavily dependent on two licensees for a significant portion of
our revenues. In 2005, we derived 31.1% of our total revenues
from GungHo Online Entertainment Inc., our licensee in Japan,
and 19.8% of our total revenues from Soft-World International
Corporation, our licensee in Taiwan. Deterioration in our
relationship with our material licensees, or material changes in
the terms of our license with such licensees, will likely have a
material adverse affect on our business, prospects, financial
condition and results of operations. In addition, as we are
heavily dependent on certain licensees, deterioration or any
adverse developments in the operations, including changes in
senior management, of our overseas licensees may materially and
adversely affect our business, financial conditions and results
of operations. Our reliance on third parties that we do not
control exposes us to certain risks that we would not encounter
if we were to operate or distribute directly in such markets. If
our overseas licensees fail to perform their contractual
obligations or suffer from management or other problems in their
businesses, our business operations in overseas markets and our
ability to collect royalty payments from such markets may be
materially and adversely affected. We may not be able to easily
terminate our license agreements with our overseas licensees as
these agreements do not specify particular financial or
performance criteria that need to be met by our licensees. As
our overseas licensees generally have the exclusive right to
distribute our games in their respective markets generally for a
term of two years, we may not be able to enter into a new
license agreement in a particular country for the term of the
agreement unless it is terminated earlier. Under the license
arrangements, our overseas licensees may operate or publish
other online games developed or offered by our competitors.
Therefore, our overseas licensees may devote greater time and
resources to marketing their proprietary games or those of our
competitors than to ours. In general, we may not unilaterally
terminate our license agreements. Furthermore, as a part of our
license agreement with our licensees, we must provide technical
and other consulting services to our licensees in order for them
to offer Ragnarok Online in their markets. Our inability to
provide such technical and other assistance may hinder our
licensees&#146; efforts to gain market share in their market and
affect users&#146; satisfaction and loyalty as well as impact
the number of users in these markets for Ragnarok Online, which
may lead to modifications in the terms and conditions of our
licensing agreement with our licensees and, in certain
circumstances, result in our licensees terminating their
relationship with us.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our overseas licensees are responsible for remitting royalty
payments to us based on a percentage of sales from our games,
after deducting certain expenses. We generally receive royalties
earned by us from such licensee within 20 to 30&nbsp;days
following the end of each month (except Europe and China, where
such payments are received up to 60&nbsp;days after the record
date). Online payment systems in China and certain other
countries are still in a developmental stage and are not as
widely available or used. Payment for online game services in
these countries generally take the form of prepaid cards sold in
Internet caf&#233;s, convenience stores and other distribution
channels. Some of our overseas licensees rely heavily on a
multilayer distribution and payment network composed of third
party distributors for sales to, and collection of payments
from, users. Failure by our licensees to maintain a stable and
efficient billing, recording, distribution and payment
collection network in these markets may result in inaccurate
recording of sales or insufficient collection of payments from
these markets and may materially and adversely affect our
financial condition and results of operations. In addition,
although we have pursuant to our license agreement audit rights
to the database of our licensees to ensure that proper payment
amounts are being recorded and remitted, such activities can be
disruptive and time consuming and we have as a result not always
exercised such rights. Certain of our licensees in the past have
failed to accurately report amounts due to us and have diverted
certain payables to us to our former chairman, in contravention
of our license agreements.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">9

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We operate in a highly competitive industry and compete
    against many large companies.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Many companies worldwide, including over 100&nbsp;companies in
Korea alone, are dedicated to developing and/or operating online
games. We expect more companies to enter the online game
industry and a wider range of online games to be introduced in
our current and future markets. Our competitors in the massively
multiplayer online role playing game industry vary in size from
small companies to very large companies with dominant market
shares such as NCsoft of Korea and Shanda of China. We also
compete with online casual game and game portal companies such
as NHN, Nexon and CJ Internet, all from Korea. In addition, we
may face stronger competition from console game companies, such
as Sony, Microsoft, Electronic Arts, Nintendo and Sega, many of
which have announced their intention to expand their game
services and offerings over the Internet. For example,
Electronic Arts recently announced that it has entered into an
agreement to acquire Mythic Entertainment Inc. Upon consummation
of the transaction, it is expected to give Electronic Arts, one
of the world&#146;s leading games publisher by sales, an entry
into the market for massively multiplayer online games. Many of
our competitors have significantly greater financial, marketing
and game development resources than we have. As a result, we may
not be able to devote adequate resources to develop, acquire or
license new games, undertake extensive marketing campaigns,
adopt aggressive pricing policies or adequately compensate our
or third-party game developers to the same degree as certain of
our competitors.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As the online game industry in many of our markets is relatively
new and rapidly evolving, our current or future competitors may
compete more successfully as the industry matures. In
particular, any of our competitors may offer products and
services that have significant performance, price, creativity or
other advantages over those offered by us. These products and
services may weaken the market strength of our brand name and
achieve greater market acceptance than ours. In addition, any of
our current or future competitors may be acquired by, receive
investments from or enter into other strategic relationships
with larger, longer-established and better-financed companies
and therefore obtain significantly greater financial, marketing
and game licensing and development resources than we have.
Increased competition in the online game industry in our markets
could make it difficult for us to retain existing users and
attract new users, and could reduce the number of hours users
spend playing our current or future games or cause us and our
licensees to reduce the fees charged to play our current or
future games. In some of the countries in which our games are
distributed, such as Korea and Taiwan, growth of the market for
online games has slowed while competition continues to be
strong. If we are unable to compete effectively in our principal
markets, our business, financial condition and results of
operations could be materially and adversely affected.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We have a limited operating history, which may make it
    difficult for you to evaluate our business.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have a limited operating history upon which you can evaluate
our business and prospects. Our business was established in
April 2000 but Ragnarok Online was commercially introduced in
August 2002. Our senior management and employees have worked
together at our company for a relatively short period of time,
including as a result of frequent changes in senior management
to date. In addition, the online game industry, from which we
derive substantially all of our revenues, is a relatively new
industry. The first massively multiplayer online role playing
game in Korea was developed and distributed by one of our
competitors in 1996. Since then, only a limited number of
companies have successfully commercialized such online games on
an international scale. You must consider our business prospects
in light of the risks and difficulties we encounter as an
early-stage company in a new and rapidly evolving industry. We
may not be able to successfully address these risks and
difficulties, which could materially harm our business
prospects, financial condition and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Rapid technological change may adversely affect our future
    revenues and profitability.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The online game industry is subject to rapid technological
change in areas including hardware, software and content
programming. We need to anticipate the emergence of new
technologies and games, assess their likely market acceptance,
and make substantial game development and related investments.
In addition, new technologies in online game programming or
operations could render our current or future games obsolete or
unattractive to our subscribers, thereby limiting our ability to
recover game-related development, acquisition
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">10

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
or licensing costs and potentially materially and adversely
affecting our business, financial condition and results of
operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>If we fail to retain and hire skilled and experienced game
    developers or other key personnel in order to design and develop
    new online games and additional game features, we may be unable
    to achieve our business objectives.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In order to meet our business objectives and maintain our
competitiveness in the future, we will need to attract and
retain skilled and experienced online game developers and other
key personnel. While certain of our current senior employees or
staff members are bound by non-competition agreements for six
months after termination of employment with us, since our
industry is characterized by high demand and intense competition
for talent, we may need to offer higher compensation and other
benefits in order to retain or replace key employees, and no
assurance can be given that should such key employees leave,
that we will be able to hire qualified employees to replace
them, or on terms that are reasonable. In addition, as we are
still a relatively young company and our business has grown
rapidly since our establishment, at times our ability to train
and integrate new employees into our operations may not meet the
growing demands of our business.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Undetected programming errors or flaws in our games could
    harm our reputation or decrease market acceptance of our games,
    which would materially and adversely affect our business
    prospects, reputation, financial condition and results of
    operations.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our current and future games may contain programming errors or
flaws, which may become apparent only after their release. In
addition, our online games are developed using programs and
engines developed by and licensed from third party vendors,
which may include programming errors or flaws over which we have
no control. If our users have a negative experience with our
games related to or caused by undetected programming errors or
flaws, they may be less inclined to continue or resume
subscriptions for our games or recommend our games to other
potential users. Undetected programming errors and game defects
can also harm our reputation, cause our users to cease playing
our games, divert our resources or delay market acceptance of
our games, any of which could materially and adversely affect
our business, financial condition and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Unexpected network interruptions, security breaches or
    computer virus attacks could harm our business.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any failure to maintain satisfactory performance, reliability,
security and availability of our network infrastructure, whether
maintained by us or by our overseas licensees, may cause
significant harm to our reputation and our ability to attract
and maintain users. Major risks relating to our network
infrastructure include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any breakdowns or system failures, including from fire, flood,
    earthquake, typhoon or other natural disasters, power loss or
    telecommunications failure, resulting in a sustained shutdown of
    all or a material portion of our servers;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any disruption or failure in the national or international
    backbone telecommunications network, which would prevent users
    in certain countries in which our games are distributed from
    logging onto or playing our games for which the game servers are
    all located in other countries;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any security breach caused by hacking, loss or corruption of
    data or malfunctions of software, hardware or other computer
    equipment, and the inadvertent transmission of computer viruses.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
From time to time, we detect users that gain an unfair advantage
by modifying Ragnarok Online execution files saved on the
users&#146; computers to facilitate the progression of their
game characters. Unauthorized character manipulation may
negatively impact the image and users&#146; perception of
Ragnarok Online and could limit the popularity of the games and
damage our reputation.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any of the foregoing factors could reduce our users&#146;
satisfaction, harm our business and reputation and have a
material adverse effect on our financial condition and results
of operations.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">11

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Unauthorized use of our intellectual property by third
    parties, and the expenses incurred in protecting our
    intellectual property rights, may adversely affect our
    business.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We regard our copyrights, service marks, trademarks, trade
secrets and other intellectual property as critical to our
success. Unauthorized use of the intellectual property used in
our business, whether owned by us or licensed to us, may
materially and adversely affect our business and reputation.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We rely on trademark and copyright law, trade secret protection
and confidentiality agreements with our employees, customers,
business partners and others to protect our intellectual
property rights. Despite certain precautions taken by us, it may
be possible for third parties to obtain and use our intellectual
property without authorization. For example, in April 2003, we
discovered that the server-end software of Ragnarok Online was
unlawfully released in Korea, China and the United States. This
enabled unauthorized third parties to set up local server
networks to operate Ragnarok Online, which may have resulted in
a diversion of a significant number of paying subscribers. Since
then, we have designated certain employees to be responsible for
detecting these illegal servers and reporting them to the
relevant enforcement authority in Korea in charge of crimes on
the Internet. In overseas markets, we cooperate with and rely on
our overseas licensees to seek enforcement actions against
operators of illegal free servers. We may incur considerable
costs in the future to remedy software piracy and to enforce our
rights against the operators of unauthorized server networks.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The validity, enforceability, enforcement mechanisms and scope
of protection of intellectual property in Internet-related
industries are uncertain and evolving. In particular, the laws
and enforcement regime of Korea, Japan, Taiwan, Thailand, China
and certain other countries in which our games are distributed
are uncertain or do not protect intellectual property rights to
the same extent as do the laws and enforcement procedures of the
United States and other developed countries. Moreover,
litigation may be necessary in the future to enforce our
intellectual property rights. Such litigation could result in
substantial costs and diversion of our resources, and could
disrupt our business, as well as have a material adverse effect
on our business, prospects, financial condition and results of
operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We may be subject to claims with respect to the
    infringement of intellectual property rights of others, which
    could result in substantial costs and diversion of our financial
    and management resources.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We cannot be certain that our online games do not or will not
infringe upon patents, copyrights or other intellectual property
rights held by third parties. We may become subject to legal
proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our
business. If we are found to have violated the intellectual
property rights of others, we may be enjoined from using such
intellectual property, and we may incur licensing fees or be
forced to develop alternative technology or obtain other
licenses. In addition, we may incur substantial expenses in
defending against these third party infringement claims,
regardless of their merit. In addition, certain of our employees
were recruited from other online game developers, including
certain of our current or potential competitors. To the extent
these employees have been and are involved in the development of
our games similar to the development in which they have been
involved at their former employers, we may become subject to
claims that such employees or we have improperly used or
disclosed trade secrets or other proprietary information.
Although we are not aware of any pending or threatened claims of
this type, if any such claims were to arise in the future,
litigation or other dispute resolution procedures might be
necessary to retain our ability to offer our current and future
games, which could result in substantial costs and diversion of
our financial and management resources.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Successful infringement or licensing claims against us may
result in substantial monetary damages, which may materially
disrupt the conduct of our business and have a material adverse
effect on our reputation, business, financial condition and
results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The discontinuation of any of the preferential tax
    treatments currently available to us in Korea could materially
    and adversely affect our business, financial condition and
    results of operations.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under Korean law and regulations, small- and medium-sized
venture companies may be entitled to enjoy a preferential tax
treatment from the Korean government in the form of a 50%
reduction in corporate income tax rates for the year in which it
first generates taxable income and the following five years if
such company
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">12

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
satisfies a number of financial and non-financial criteria,
including the maintenance of its status as a designated venture
company. In 2002, when we first generated taxable income, we
qualified for the preferential tax treatment and enjoyed the 50%
reduction in corporate income tax rates. In 2005, we also
qualified for this preferential treatment and our applicable
corporate income tax rate (including resident surtax) was 13.75%
after the 50% reduction. A company that engages in data
processing or computer related businesses, including us, may
qualify as a small-and medium-sized enterprise under the
Framework Act on Small- and Medium-Sized Enterprises if, among
other things, (i)&nbsp;we hire less than three hundred full-time
employees or (ii)&nbsp;our total revenue does not exceed Won
30&nbsp;billion (US$30&nbsp;million). In 2004, we failed to
satisfy both of these tests. However, even if a company fails to
satisfy both of the preceding requirements, it may continue to
enjoy its status as a small- and medium-sized enterprise for the
following three years so long as that company neither
(x)&nbsp;merges into, nor consolidates with, another company nor
(y)&nbsp;becomes an affiliate of certain large enterprises.
Accordingly, we believe that we qualify as a small- and
medium-sized company through September 2007 as long as we
satisfy such conditions. See Item&nbsp;5.A. &#147;Operating
Results&nbsp;&#151; Overview&nbsp;&#151; Income tax
expenses.&#148; However, if the National Tax Service were to
audit us and determine that we were not entitled to such tax
benefit, we may be required to pay back-taxes and statutory
interest.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We may not be able to successfully implement our growth
    strategies.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are pursuing a number of growth strategies, including the
following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    distributing games developed in-house;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    publishing games acquired from third parties or developed by
    third parties through licensing arrangements;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    offering our games in countries where we currently have little
    or no presence;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    taking advantage of our popular online games to strengthen our
    other lines of businesses, such as mobile games, animation and
    character merchandising;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    selectively pursuing acquisitions of, investments in, or joint
    ventures with, game development companies, technologies and
    personnel that are complementary to our existing
    business;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    investing our capital in investment funds which target online
    game industry, with the goal, among others, of increasing our
    knowledge of, as well as building relationship with, potential
    third party developers of online games.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, we have formulated a strategic vision to promote
our role as a hub for integrating the financial and human
resources, technology and distribution networks worldwide to
create and publish online games globally. To this end, we will
continue to (i)&nbsp;strengthen our efforts to develop online
games, (ii)&nbsp;identify and implement opportunities for
overseas publishing of our games, (iii)&nbsp;establish strategic
alliances with major players in the online game industry in
Korea, (iv)&nbsp;enhance brand recognition for our key online
games and facilitate cross-selling of other products and
(v)&nbsp;promote our mobile games.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We cannot assure you that we will be successful in any of these
strategies. Some of these strategies relate to new services or
products for which there are no established markets, or in which
we lack experience and expertise. If we are unable to
successfully implement our growth strategies, our revenues,
profitability and competitiveness may be materially and
adversely affected. Our growth potential in many of the markets
in which Ragnarok Online is currently distributed or which we
intend to enter may be limited since the penetration rate for
personal computers is relatively low and the cost of Internet
access relative to the per capita income is higher in such
markets when compared to some of our principal markets such as
Korea and Japan. If we decide to pursue acquisitions,
investments or joint ventures to achieve growth, the success of
such acquisitions, investments or joint ventures will depend on
the availability of suitable acquisition and investment
candidates at an acceptable cost, our ability to compete
effectively to attract and reach agreement with acquisition
candidates or joint venture partners on commercially reasonable
terms, and the availability of financing to complete such
acquisitions, joint ventures or investments. For example, in May
2006, we entered into a contract to invest US$9&nbsp;million in
Perpetual Entertainment, Inc. an online game developer based in
the
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">13

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
United States. Also, in December 2005, we completed our
acquisition of a controlling interest in NEOCYON, Inc., a mobile
Internet solution provider in Korea. In December 2005, we
entered into an agreement with Movida Investment Inc., SOFTBANK
CORP. and eight other companies to invest in &#147;Online Game
Revolution Fund&nbsp;No.&nbsp;1,&#148; with total capital
commitment in the amount of Japanese Yen 1&nbsp;billion, which
represents 10% of the aggregate size of the fund. As of the date
hereof, we have invested Japanese Yen 100&nbsp;million, which
represents 10% of our total capital commitment. We cannot be
certain that any particular acquisition, investment or joint
venture will produce the intended benefits on a timely basis or
at all.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Mr.&nbsp;Il Young Ryu, our chairman, chief executive
    officer and representative director and also the representative
    director of EZER Inc., our largest shareholder, has substantial
    control over us and can delay or prevent a change in corporate
    control.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of June&nbsp;26, 2006, Mr.&nbsp;Il Young Ryu, our chairman,
chief executive officer and representative director and also the
representative director of EZER Inc., our largest shareholder,
beneficially owned, in the aggregate, approximately 52.4% of our
outstanding common shares. As a result, Mr.&nbsp;Ryu exerts
significant control over all matters requiring shareholder
approval, including the election of directors and approval of
significant corporate transactions, including acquisitions,
divestures, strategic relationships and other matters.
Mr.&nbsp;Ryu also has the power to prevent or cause a change in
control. In addition, the rights and responsibilities of our
shareholders and members of our board of directors under Korean
law may be different from those that apply to shareholders and
directors of a corporation incorporated in the United States.
While the facts and circumstances of each case will differ, the
duty of care required of a director under Korean law may not be
the same as the fiduciary duty of a director of a corporation
incorporated in the United States. Holders of our ADSs may have
more difficulty protecting their interests against actions of
our management, members of our board of directors or controlling
shareholder than they would as shareholders of a corporation
incorporated in the United States.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our business may be adversely affected by developments
    affecting the Korean economy and other of our principal
    markets.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are incorporated and headquartered in Korea, and derived
18.9% of our revenues in 2005 from our operations in Korea. In
addition, in 2005, we derived an aggregate of 61.3% of our
revenues from Japan, Taiwan and Thailand. Accordingly, our
business, financial condition, results of operations and
prospects are subject, to a significant extent, to economic,
political, legal and regulatory conditions and developments in
these countries.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We have limited business insurance coverage in
    Korea.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The insurance industry in Korea is still at an early stage of
development. In particular, Korean insurance companies offer
limited business insurance products. As a result, we do not have
any business liability or disruption insurance coverage for our
operations in Korea. In 2004 and 2005, we derived 21.0% and
18.9% of our total revenues from Korea, respectively. Any
business disruption, litigation or natural disaster might result
in our incurring substantial costs and the diversion of our
resources.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Slow growth or contractions in the Internet caf&#233;
    industry in Korea may affect our ability to target a core group
    of potential users.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
According to the 2005 report issued by the Korean Game
Development and Promotion Institute, or KGDI, the growth in the
number of active Internet caf&#233;s in Korea has stabilized
since 2000 and the number of such caf&#233;s actually declined
in 2003, with no significant change to the number of active
Internet caf&#233;s in 2004 from 2003. We believe that there was
no significant change in the number of active Internet
caf&#233;s in 2005. Intensifying competition for users of online
games, as well as more widespread availability of personal
computers, or PCs, and broadband Internet access in homes in
Korea could trigger further declines in the number of Internet
caf&#233;s. Future reductions in the number of Internet
caf&#233;s operating in Korea could adversely affect our ability
to target a core group of potential users, who tend to prefer
playing online games, in particular, massively multiplayer
online role playing games, at Internet caf&#233;s.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">14

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We may be required to take significant actions that are
    contrary to our business objectives in order to avoid being
    deemed an investment company as defined under the Investment
    Company Act of 1940, as amended.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Generally, the Investment Company Act provides that a company is
not an investment company and is not required to register under
the Investment Company Act as an investment company if:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the company is primarily engaged, directly or through a
    wholly-owned subsidiary or subsidiaries, in a business or
    businesses other than that of investing, reinvesting, owning,
    holding or trading in securities;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    40% or less of the fair market value of the company&#146;s
    assets is represented by investment securities.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that we are engaged primarily and directly in the
businesses of providing online game services, that less than 40%
of the fair market value of our assets is represented by
investment securities and, consequently, that we are not an
investment company as that term is defined under the Investment
Company Act. However, in the future we may be required to take
actions to avoid the requirement to register as an investment
company, such as shifting a significant portion of our long- and
short-term investment portfolio into low-yielding bank deposits
or other short-term securities which are not considered to be
investment securities due to their liquidity and certain other
characteristics. These types of investments may reduce the
amount of interest on other income that we could otherwise
generate from our investment activities. In addition, we may
need to acquire additional income or loss generating assets that
we might not otherwise have acquired or forego opportunities to
acquire minority interests in companies that could be important
to our strategy.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Investment Company Act also contains regulations with
respect to investment companies, including restrictions on their
capital structure, operations, transactions with affiliates and
other matters which would be incompatible with our operations.
If we were to be deemed an investment company in the future, we
would, among other things, effectively be precluded from making
public offerings in the United States. We could also be subject
to administrative or legal proceedings and, among other things,
contracts to which we are a party might be rendered
unenforceable or subject to rescission.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our businesses may be adversely affected by developments
    affecting the economies of the countries in which our games are
    distributed.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our future performance will depend in large part on the future
economic growth of our principal markets. Adverse developments
in such markets may have an adverse effect on the number of our
subscribers and results of operations, which could have a
material adverse effect on our business.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A deterioration in the economies of the countries in which our
games are distributed can also occur as a result of
deterioration in global economic conditions. The worldwide
economy has experienced periods of economic weakness since the
beginning of 2001, which has been exacerbated by the terrorist
attacks in the United States on September&nbsp;11, 2001, recent
developments in the Middle East, including the war in Iraq and
terrorist attacks and threats across the globe and rising oil
prices. In addition, if investors perceive that there is a
crisis in Asia, such as due to economic difficulties similar to
those that Asian economies experienced in the late 1990s,
companies and economies in that region may be adversely affected
irrespective of their economic soundness.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any future deterioration in global economic conditions, or a
significant adverse change in politics and economies in Asia or
a loss of investor confidence in the financial systems of
emerging and other markets could have a material adverse effect
on our business, financial condition and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We may have been in 2005, and may be in subsequent years,
    a passive foreign investment company, which could result in
    adverse U.S.&nbsp;tax consequences to you.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In light of the nature of our business activities and our
holding of a significant amount of cash, short-term investments
and other passive assets after our initial public offering in
2005, we may have been in 2005, and
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">15

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
may be in subsequent years, a passive foreign investment company
for U.S.&nbsp;federal income tax purposes. If we are a passive
foreign investment company for any taxable year during which you
hold our ADSs or common shares, you could be subject to adverse
U.S.&nbsp;federal income tax consequences. You are urged to
consult your tax advisors concerning the U.S.&nbsp;federal
income tax consequences of holding our ADSs or common shares if
we are considered a passive foreign investment company in any
taxable year. See Item&nbsp;10.E. &#147;Taxation&nbsp;&#151;
U.S.&nbsp;federal income tax considerations&nbsp;&#151; Passive
foreign investment companies.&#148;
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We have identified certain material weaknesses in our
    internal controls over financial reporting. If we fail to
    achieve and maintain an effective system of internal controls
    over financial reporting, we may be unable to accurately report
    our financial results on a timely basis or reduce our ability to
    prevent or detect fraud, and investor confidence and the market
    price of our ADSs may be adversely affected.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with the audit of our financial statements
prepared under U.S.&nbsp;GAAP for the year ended
December&nbsp;31, 2005, we have identified certain material
weaknesses (as defined under Standards of the Public Company
Accounting Oversight Board (United States)) in our system of
internal controls over financial reporting. Specifically, we did
not maintain a control environment adequate to encourage the
prevention or detection of the override of our controls or
intentional misconduct, including the embezzlement of revenues
due to us, improper payment for assets not purchased for our
benefit, the intentional and inappropriate early recognition of
revenue and the preparation of false management reports,
accounting records, financial statements and documents together
with forged invoices. The absence of effective control
environment allowed our former Chairman to take inappropriate
actions that resulted in certain transactions not being properly
reflected in our consolidated financial statements as of
December&nbsp;31, 2003 and 2004 and for the years ended
December&nbsp;31, 2002, 2003 and 2004. Such intentional
misconduct by the former Chairman included the preparation of
false accounting records and documents to deceive accounting
personnel under his supervision, other members of senior
management, our Board of Directors and our independent
registered public accountants. Additionally, the lack of an
effective control environment allowed our lines of communication
among, and our monitoring of, our operations and accounting
personnel, including the former Chairman, to be ineffective in
preventing or detecting these instances of intentional
misconduct. Taken as a whole, our control environment did not
adequately emphasize appropriate judgment, skepticism and
objectivity, which we believe contributed to the events which
necessitated our having to restate our financial statements and
us having to file an amendment to our annual report on F-20 for
the fiscal year ended December&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This control environment material weakness could result in
misstatements of any of our financial statement accounts that
are not prevented or detected which could result in a material
misstatement to our annual consolidated financial statements.
Accordingly, our management has determined that this control
deficiency constitutes a material weakness. This material
weakness in our control environment contributes to the existence
of the certain additional material weaknesses, including, lack
of independent oversight and supervision controls, lack of
controls over the reported revenues from our overseas licensees,
lack of controls over bank accounts, lack of sufficient
complement of personnel, lack of controls over the purchase and
accounting for fixed assets and lack of controls over the
financial close and reporting process.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our management, in particular, our CEO and CFO along with the
Audit Committee, is in the process of addressing the material
weaknesses and will seek to put in place a system of internal
control over financial reporting which will remediate such
material weaknesses as expeditiously as possible. All disclosure
controls and procedures, no matter how well designed, however,
have inherent limitations including the possibility of human
error and the circumvention or overriding of the controls and
procedures. A company&#146;s internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
company&#146;s internal control over financial reporting
includes those policies and procedures that (i)&nbsp;pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii)&nbsp;provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">16

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
(iii)&nbsp;provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or
disposition of the company&#146;s assets that could have a
material effect on the financial statements.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Furthermore, we are subject to the Sarbanes-Oxley Act of 2002,
or the Sarbanes-Oxley Act. The Sarbanes-Oxley Act requires us
to, among other things, maintain an effective system of internal
controls over financial reporting, and requires our management
to provide a certification on the effectiveness of our internal
controls on an annual basis. Additionally, our independent
accountants must provide an attestation report on
management&#146;s assessment of internal controls beginning from
the fiscal year ending December&nbsp;31, 2006. We have not yet
fully completed the establishment of a system of internal
controls appropriate for our anticipated reporting requirements.
No assurance can be given that we will be able to establish such
system in a timely manner and even if we do, that our internal
controls system will not fail in the future.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If we fail to create an effective system of internal controls
over financial reporting, we may be unable to accurately report
our financial results in a timely manner or prevent errors or
fraud, and investor confidence and the market price of our ADSs
may be adversely affected. See Item&nbsp;15. &#147;Controls and
Procedures&#148; for additional discussion concerning our
material weaknesses.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Risks Relating to Recent Developments at GRAVITY</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our senior management team is required to devote a
    significant amount of attention to matters arising from events
    related to the embezzlement of funds by the former
    Chairman.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our Chief Executive Officer, our Chief Financial Officer and all
members of our Audit Committee and certain senior members of our
management have changed from the time of filing of our annual
report on
Form&nbsp;<FONT style="white-space: nowrap">20-F</FONT> for the
fiscal year ended December&nbsp;31, 2004 originally filed on
June&nbsp;30, 2005. Our new directors and senior management
team&#146;s ability to manage the Company&#146;s business has
been hindered by their need to spend significant time, effort
and resources addressing our internal review of events related
to the internal investigation into embezzlement of company funds
by Mr.&nbsp;Jung Ryool Kim, our former Chairman, which led to
the issuance by the Company of restated financial statements as
of December&nbsp;31, 2003 and 2004 and for the years ended
December&nbsp;31, 2002, 2003 and 2004 and our amending our
annual report on
Form&nbsp;<FONT style="white-space: nowrap">20-F</FONT> for the
fiscal year ended December&nbsp;31, 2004. Our board of directors
and our senior management have had to spend considerable amount
of time communicating with regulators, auditors, external
advisors with respect to the investigation, developing effective
corporate governance procedures and designing and implementing
effective internal control over financial reporting. In
addition, because our directors and senior management are new to
the company, and by virtue of their relatively short tenure in
their respective positions, these individuals may be required to
expend more time and resources to undertake such efforts as they
are not as familiar with our business. We cannot assure you that
the demands on our senior management and directors to address
such matters will not adversely affect our business, prospects,
financial condition and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Harm from continued regulatory scrutiny and securities
    litigation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have received and continue to receive requests and inquiries
from the staff of the Securities and Exchange Commission, the
officials of Nasdaq, shareholders and others seeking information
regarding our financial condition and results of operations,
accounting and related internal controls over financial
reporting and details related to the Investigation and the
Restated Financial Statements. We cannot predict if such
inquiries will ultimately lead to formal investigations and
enforcement actions by the Securities and Exchange Commission or
Nasdaq, or other government agencies or lead to lawsuits filed
by our shareholders. If such formal investigations or
enforcement actions occur or lawsuits are brought, we may be
required to pay material fines, consent to injunctions on future
conduct, be subject to other penalties or be required to expend
time and resources on defending against such litigation, each of
which could have a material adverse effect on our business,
financial condition and results of operations.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Furthermore, we are currently subject to a class action lawsuit
pending in the United States District Court for the Southern
District of New York titled <I>In Re Gravity Co., Ltd.
Securities Litigation </I>(Consolidated Civ. Act.
No.&nbsp;1:05-CV-4804 (LAP.)). This action combines three
separate lawsuits filed in the Southern District in May 2005,
which were consolidated by an order of the Court entered on
December&nbsp;12, 2005. The
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">17

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
plaintiffs seek to represent a class of persons who purchased
our ADSs in the open market between February&nbsp;7, 2005 and
May&nbsp;12, 2005. Each of the complaints alleged violations of
the Securities Act of 1933 and the Exchange Act of 1934 against
us and the former individual directors and officers. The claims
arise out of an initial public offering of our ADSs in the
United States beginning February&nbsp;7, 2005. Plaintiffs allege
that, in connection with the public offering of the ADSs, we
misstated or omitted material information relating to various
aspects of our business, including an alleged decline in sales
of our core online product, and material adverse trends
affecting our mobile animation business and Chinese operations.
Plaintiffs seek, for themselves and the class members,
compensatory damages, fees and expenses and other unspecified
relief. Following the consolidation of the actions, a
Stipulation and Order was entered by the Court in which, among
other things, it provided for the filing of a single
consolidated amended complaint by the later of February&nbsp;28,
2006 or 45&nbsp;days after we announce a restatement of our
previously issued financial statements. As of the date of this
report, the consolidated amended complaint has not yet been
filed or served. We cannot at this time determine what the final
conclusion of such litigation will be, including any damages
which may need to be paid or any amounts which may be paid in
settlement. A judgment against us in such litigation may result
in significant damages. Also, any settlement amounts, if we were
to agree to settle, may be significant and may have a material
adverse affect on our financial condition, results of operations
and liquidity.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, certain of our minority shareholders in Korea and
outside of Korea have recently made various demands on our
management, including with respect to our corporate governance
practices. For example, certain of our minority shareholders
have formed a committee named The Gravity Committee for the Fair
Treatment of Minority Shareholders, or the Minority Shareholders
Committee, in March 2006 and have since made a number of
requests, including inspection of our financial documents. In
particular, the Minority Shareholders Committee has recently
issued a press release announcing the intention to review
decisions made by our management concerning transactions entered
into with certain parties, and to pursue legal action if the
committee views such transactions to have been entered into
improperly. Our management may be required to expend substantial
time, effort and resources to respond to such requests from our
minority shareholders, including the Minority Shareholders
Committee, in the future, which may negatively impact the
ability of our management to address business challenges and
operational requirements facing us, and adversely affect our
business, financial condition and results of operation.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Risks Relating to Our Regulatory Environment</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our operations are subject to the regulation of the
    Internet in certain of the countries in which our games are
    distributed, such as Korea, China, Taiwan, Japan and Thailand,
    the impact of which is difficult to predict.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The regulatory and legal regimes in nearly all of the countries
in which our games are distributed have yet to establish a
sophisticated set of laws, rules or regulations designed to
regulate, among other things, the social, political and
financial risks relating to the online game industry. However,
in many of our principal markets, such as Korea, China, Taiwan
and Thailand, the legislators and regulators have, either
through public announcements or press releases, indicated their
intention to implement laws, rules or regulations regulating and
restricting this industry, which include laws or regulations
relating to issues such as user privacy, defamation, pricing,
advertising, taxation, promotions, financial market regulation,
consumer protection, content regulation, quality of products and
services, and intellectual property ownership and infringement
that may directly or indirectly impact our activities. In some
of these countries, distribution of information over the
Internet and electronic commerce are currently under legal and
regulatory review. Other countries in which our games are
distributed or which we intend to enter may adopt similar laws
and regulations. The impact of such laws and regulations on our
business and results of operations is difficult to predict.
However, as we might unintentionally violate such laws or such
laws may be modified and new laws may be enacted in the future,
any such developments, or developments stemming from enactment
or modification of other laws, could increase the costs of
regulatory compliance, force changes in business practices or
otherwise have a material adverse effect on our business and
results of operations.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">18

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our online games may be subject to governmental
    restrictions or rating systems, which could delay or prohibit
    the release of new games or reduce the existing and potential
    range of our user base.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Legislation is periodically introduced in many of the countries
in which our games are distributed to establish a system for
protecting consumers from the influence of graphic violence and
sexually explicit materials contained in various types of games.
For instance, Korean law requires online game companies to
obtain rating classifications and implement procedures to
restrict the distribution of online games to certain age groups.
Similar mandatory rating systems and other regulations affecting
the content and distribution of our games have also been adopted
or are under review in Taiwan, China, the United States and
other markets for our online games. In the future, we may be
required to modify our games or alter our marketing strategies
to comply with new governmental regulations or new ratings
assigned to our current or future games that may call for
restrictions or modifications to our game content or features,
which could delay or prohibit the release of new games or
upgrades and reduce the existing and potential range of our user
base. Moreover, uncertainties regarding governmental
restrictions or rating systems applicable to our business could
give rise to market confusion, thereby materially and adversely
affecting our business.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The legal systems in some of the countries where our games
    are distributed have uncertainties which could limit the legal
    protections available to us.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The laws, regulations and legal requirements in many of the
countries in which our games are distributed are constantly
changing, and their interpretation and enforcement involve
uncertainties. These uncertainties could limit the legal
protections available to us. We cannot predict the effect of
future developments in the legal systems in these countries,
particularly with regard to the Internet, including the
promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, or the preemption of
local regulations by national laws. If the cost of regulatory
compliance increases for our licensees as a result of regulatory
changes, our licensees may in the future seek to reduce
royalties and license fees, which may materially and adversely
affect our licensee&#146;s business and our results of
operations and financial condition.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>If our licensee in Taiwan adopts the model consumer
    contract promulgated by the ROC Ministry of Economic Affairs or
    the ROC Ministry of Economic Affairs imposes additional
    regulatory burdens on our licensee in Taiwan, our licensee in
    Taiwan may require us to reduce the license fee or royalties, or
    share the cost of regulatory compliance.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2004 and 2005, we derived 22.7% and 19.8%, respectively, of
our total revenues from our licensee in Taiwan. As a result of
increasing disputes between the online game companies and
consumers in Taiwan, on February&nbsp;17, 2006, the ROC Ministry
of Economic Affairs of the Executive Yuan (the &#147;ROC
MOEA&#148;) has promulgated a model consumer contract that
online game companies are encouraged to adopt. In addition, the
ROC MOEA may, within its authority, further consider
promulgating certain standard provisions that must be included
in a consumer contract that online game companies must use in
order to operate in the future when necessary. If our licensee
in Taiwan adopts the above model consumer contract or these
standard provisions are implemented, the cost of regulatory
compliance may significantly increase for our Taiwanese
licensee. Our Taiwanese licensee may in the future seek to
reduce royalties and license fees, which may materially and
adversely affect our licensee&#146;s business and our results of
operations and financial condition.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our business may be adversely affected by complexities,
    uncertainties and changes in law and regulations of China
    regulating Internet companies and businesses operating in China,
    including those related to online games.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2004 and 2005, we derived 4.4% and 2.2%, respectively, of our
total revenues from our licensee in China. The Chinese
government, through various regulatory authorities, heavily
regulates the Internet sector, which includes the online game
industry. These laws and regulations include the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    restrictions on content on the Internet, including restriction
    on distribution of online games containing content that purports
    to propagate obscenity, gambling or violence, instigate crime,
    undermine public morality or the cultural traditions of China,
    or compromise state security or secrets;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">19

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    license and permit requirements for companies in the Internet
    industry, including for importing and operating online games,
    from various regulatory authorities;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    restrictions on and supervision of Internet caf&#233;s,
    including closing of unlicensed Internet caf&#233;s and
    requiring installation of security software to prevent access to
    subversive sites.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, there are uncertainties in the interpretation and
application of existing Chinese laws, regulations and policies
regarding the businesses and activities of Internet companies
and businesses in China, including those related to our online
games. Any violations of the foregoing laws and regulations as
well as other laws and regulations to be introduced in the
future could materially and adversely affect the business and
results of operations of our Chinese licensee and us.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Restrictions on currency exchange in certain of the
    countries in which our games are distributed may limit our
    ability to receive and remit revenues effectively.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The governments in certain countries, including Taiwan, Thailand
and China, in which our games are distributed, impose controls
on the convertibility of the local currency into foreign
currencies and, in some cases, the remittance of currency
outside of their countries. Under current foreign exchange
control regulations, shortages in the availability of foreign
currency may restrict the ability of our overseas licensees to
pay license fees and royalties to us in U.S.&nbsp;dollars.
Restrictions on our ability to receive license fees, royalties
and other payments from our overseas licensees would adversely
affect our financial condition and liquidity.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>In many of our markets, we rely heavily on our overseas
    licensees to operate and distribute our games and to comply with
    applicable laws and government regulations.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We rely on our overseas licensees for substantially all aspects
of our overseas operations, including:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    holding the required government licenses for the operation and
    distribution of our games;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    publishing, advertising and marketing our games;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    establishing the pricing of our games after consultation with us;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    owning and operating the server network and other aspects of
    game management and maintenance;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    providing customer service and trouble-shooting;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    maintaining network security and providing
    <FONT style="white-space: nowrap">back-up</FONT> for game data
    and software;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    billing and collecting subscription fees from users and
    remitting royalty payments to us.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our overseas licensees are responsible for complying with local
laws, including obtaining and maintaining the requisite
government licenses and permits. Failure by our overseas
licensees to do so may have a material adverse effect on our
business, financial condition and results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Restrictions on currency exchange in Korea in certain
    emergency circumstances may limit our ability to utilize
    effectively revenues generated in Won to fund our business
    activities outside Korea or expenditures denominated in foreign
    currencies.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The existing and any future restrictions on currency exchange in
Korea, including Korean exchange control regulations, may
restrict our ability to convert Won into foreign currencies
under certain emergency circumstances, such as an outbreak of
natural calamities, wars, conflict of arms or grave and sudden
changes in domestic or foreign economic circumstances,
difficulties in Korea&#146;s international balance of payments
and international finance and obstacles in carrying out currency
policies, exchange rate policies and other macroeconomic
policies of Korea. Such restrictions may limit our ability to
utilize effectively revenues generated in the Won to fund our
business activities outside Korea or expenditures denominated in
foreign currencies.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">20

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Adverse changes in the withholding tax rates in the
    countries from which we receive license fees and royalties could
    adversely affect our net income.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may be subject to income withholding in countries where we
derive revenues. Such withholding is made by our overseas
licensees at the current withholding rates in such countries. To
the extent Korea has a tax treaty with any such country, the
withholding rate prescribed by such tax treaty will apply. Under
the Corporation Tax Law of Korea, we are entitled to, and
recognize, a tax credit computed based on the amount of income
withheld overseas when filing our income tax return in Korea, up
to a limited amount. Accordingly, the amount of taxes withheld
overseas may be offset against tax payable in Korea. Adverse
changes in tax treaties between Korea and the countries from
which we receive license fees and royalties, in the rate of
withholding tax in the countries in which our games are
distributed or in Korean tax law enabling us to recognize tax
credits for taxes withheld overseas could adversely affect our
net income.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Risks Relating to Our Market Environment</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Fluctuations in exchange rates could result in foreign
    currency exchange losses.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2005, approximately 81.1% of our revenues were denominated in
foreign currencies, primarily in the U.S.&nbsp;dollar and the
Japanese Yen. In most of the countries in which our games are
distributed, other than the United States, Japan and Europe, the
revenues generated by our licensees in those markets are
denominated in local currencies, which include the NT dollar,
the Baht and the Renminbi. Depreciation of these local
currencies against the U.S.&nbsp;dollar will result in reduced
license fees and monthly royalty payments in U.S.&nbsp;dollar
terms and may materially and adversely affect our financial
condition and results of operations.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
While we receive our monthly royalty revenues from our overseas
licensees in foreign currencies, primarily the U.S.&nbsp;dollar,
the Japanese Yen and the Euro, substantially all of our costs
are denominated in Won. Our financial statements are also
prepared and presented in the Won. We receive monthly royalty
payments from our overseas licensees based on a percentage of
revenues confirmed and recorded at the end of each month
applying the foreign exchange rate applicable on such date. We
generally receive these royalty payments 20 to 30&nbsp;days
after such record date (except in Europe and China, where such
payments are received up to 60&nbsp;days after the record date).
Appreciation of the Won against these foreign currencies during
this period will result in foreign currency losses that may
materially and adversely affect our financial condition and
results of operations.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, there are no outstanding foreign
currency forward exchange contracts entered into by us. We may
enter into hedging transactions in the future to mitigate our
exposure to foreign currency exchange risks, but we may not be
able to do so in a timely or cost-effective manner or at all.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Increased tensions with North Korea could adversely affect
    us.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Relations between Korea and North Korea have been tense over
most of Korea&#146;s modern history. The level of tension
between Korea and North Korea has fluctuated and may increase or
change abruptly as a result of current and future events,
including ongoing contacts at the highest levels of the
governments of Korea and North Korea. The level of tension
between Korea and North Korea, as well as between North Korea
and the United States, has increased as a result of North
Korea&#146;s admission in October 2002 to the maintenance of a
nuclear weapons program in breach of the peace accord executed
in October 1994. In response, the United States, Japan, Korea
and the European Union (which became party to the 1994 accord in
November 2002) decided to suspend shipments of oil to North
Korea called for by the 1994 accord and reiterated their demands
for the dismantling of North Korea&#146;s nuclear weapons
program. Following the suspension of oil shipments, North Korea
removed the seals and surveillance equipment from its Yongbyon
nuclear power plant and evicted inspectors from the United
Nations International Atomic Energy Agency, or IAEA, and has
reportedly resumed activity at its Yongbyon power plant. In
January 2003, North Korea announced its intention to withdraw
from the Nuclear Non-Proliferation Treaty, demanding that the
United States sign a non-aggression pact as a condition to North
Korea dismantling its nuclear program. In August 2003,
representatives of Korea, the United States, North Korea, China,
Japan and Russia held multilateral talks in an effort to resolve
issues relating to North Korea&#146;s nuclear weapons program.
While the talks
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">21

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
concluded without resolution, participants in the August meeting
indicated that further negotiations may take place in the future
and, in February and June 2004, six-party talks were held in
Beijing, China. In June 2004, the third round of the six-party
talks resumed in Beijing, which ended with an agreement by the
parties to hold further talks by the end of September 2004,
which failed to take place as planned due to North Korea&#146;s
refusal to participate. In February 2005, North Korea announced
that it possessed nuclear weapons. In September 2005, North
Korea agreed to end its nuclear weapons program, and the six
participating nations signed a draft preliminary accord pursuant
to which North Korea agreed to dismantle its existing nuclear
weapons, abandon efforts to produce new future weapons and
readmit international inspectors to its nuclear facilities. In
return, the other five nations participating in the talks,
China, Japan, Korea, Russia and the United States, expressed
willingness to provide North Korea with energy assistance and
other economic support. The six parties agreed to hold further
talks in November 2005. However, one day after the joint
statement was released, North Korea announced that it would not
dismantle its nuclear weapons program unless the United States
agreed to provide civilian nuclear reactors in return, a demand
that the United States rejected. We cannot assure you that
future negotiations will result in a final agreement on North
Korea&#146;s nuclear program, including critical details such as
implementation and timing, or that the level of tensions between
Korea and North Korea will not escalate. Any further increase in
tensions, resulting for example from a break-down in contacts,
test of long-range nuclear missiles coupled with continuing
nuclear programs by North Korea or an outbreak in military
hostilities, could adversely affect our business, prospects,
financial condition and results of operations and could lead to
a decline in the market value of our ADSs.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Disruptions in Taiwan&#146;s political environment could
    seriously harm our business and operations in Taiwan.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The government of China asserts sovereignty over mainland China
and Taiwan and does not recognize the legitimacy of the
government of Taiwan. The government of China has indicated that
it may use military force to gain control over Taiwan if Taiwan
declares independence or a foreign power interferes in
Taiwan&#146;s internal affairs. On the other hand, the
government of Taiwan promulgated the Referendum Law on
December&nbsp;31, 2003 and as last amended on May&nbsp;30, 2006
allowing referenda on a range of issues to be proposed and voted
upon. The law allows a referendum on key constitutional issues
in the event that Taiwan comes under military attack from a
foreign power and its sovereignty is threatened. In 2004 and
2005, we derived 22.7% and 19.8% of our total revenues from our
licensee in Taiwan. Deteriorations in the relationship between
Taiwan and China and other factors affecting Taiwan&#146;s
political environment may materially and adversely affect our
Taiwanese licensee&#146;s business and our results of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The economic, political and social conditions, as well as
    government policies in China, could adversely affect our
    operations in China.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2004 and 2005, we derived 4.4% and 2.2% of our total revenues
from our licensee in China, respectively. While the Chinese
economy has experienced significant growth in the past twenty
years, growth has been uneven, both geographically and among
various sectors of the economy. The Chinese government has
implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures
benefit the overall Chinese economy, but may also have a
negative effect on us. For example, our financial condition and
results of operations may be adversely affected by government
control over capital investments or changes in tax regulations
that are applicable to us or our licensees.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Chinese economy has been transitioning from a planned
economy to a more market-oriented economy. Although the Chinese
government has implemented measures since the late 1970s
emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets
and the establishment of sound corporate governance in business
enterprises, a substantial portion of productive assets in China
is still owned by the Chinese government. In addition, the
Chinese government continues to play a significant role in
regulating industry development by imposing industrial policies.
The Chinese government also exercises significant control over
China&#146;s economic growth through the allocation of
resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential
treatment to particular industries or companies.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">22

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Risks Relating to Our American Depositary Shares</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>The public shareholders of our ADSs may have more
    difficulty protecting their interests than they would as
    shareholders of a U.S.&nbsp;corporation.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our corporate affairs are governed by our articles of
incorporation and by the laws and regulations governing Korean
corporations. The rights and responsibilities of our
shareholders and members of our board of directors under Korean
law may be different from those that apply to shareholders and
directors of a U.S.&nbsp;corporation. For example, minority
shareholder rights afforded under Korean law often require the
minority shareholder to meet minimum shareholding requirements
in order to exercise certain rights. Under applicable Korean
law, a shareholder must own at least (i)&nbsp;one percent of the
total issued shares to bring a shareholders&#146; derivative
lawsuit, (ii)&nbsp;three percent to demand an extraordinary
meeting of shareholders, demand removal of directors or inspect
the books and related documents of a company, (iii)&nbsp;ten
percent to apply to the court for dissolution if there is gross
improper management or a deadlock in corporate affairs likely to
result in significant and irreparable injury to the company or
to apply to the court for reorganization in the case of an
insolvency and (iv)&nbsp;20&nbsp;percent to block a small-scale
share exchange that may be approved only by a board resolution.
In addition, while the facts and circumstances of each case will
differ, the duty of care required of a director under Korean law
may not be the same as the fiduciary duty of a director of a
U.S.&nbsp;corporation. Although the concept of &#147;business
judgment rule&#148; exists in Korea, there is insufficient case
law or precedent to provide guidance to the management and
shareholders as to how it should be applied or interpreted in a
particular circumstance. Holders of our ADSs may have more
difficulty protecting their interests against actions of our
management, members of our board of directors or controlling
shareholder than they would as shareholders of a
U.S.&nbsp;corporation.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Any dividends paid on our common shares will be in the Won
    and fluctuations in the exchange rate between the Won and the
    U.S.&nbsp;dollar may affect the amount received by you.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If and when we declare cash dividends, the dividends will be
paid to the depositary for the ADSs in Won and then converted by
the depositary into U.S.&nbsp;dollars in connection with the
deposit agreement. Fluctuations in the exchange rate between the
Won and the U.S.&nbsp;dollar will affect, among other things,
the U.S.&nbsp;dollar amounts you will receive from the
depositary as dividends. Holders of ADSs may not receive
dividends if the depositary does not believe it is reasonable or
practicable to do so. In addition, the depositary may collect
certain fees and expenses, at the sole discretion of the
depositary, by billing the holders of ADSs for such charges or
by deducting such charges from one or more cash dividends or
other cash distributions from us to be distributed to the
holders of ADSs.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Your ability to deposit or withdraw common shares
    underlying the ADSs into and from the depositary facility may be
    limited, which may adversely affect the value of your
    investment.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the terms of our deposit agreement, holders of our common
shares may deposit such shares with the depositary&#146;s
custodian in Korea and obtain ADSs, and holders of our ADSs may
surrender the ADSs to the depositary and receive our common
shares. However, to the extent that a deposit of common shares
exceeds the difference between:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the aggregate number of common shares we have consented to be
    deposited for the issuance of ADSs (including deposits in
    connection with offerings of ADSs and stock dividends or other
    distributions relating to ADSs);&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the number of common shares on deposit with the custodian for
    the benefit of the depositary at the time of such proposed
    deposit;</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
such common shares will not be accepted for deposit unless
(i)&nbsp;our consent with respect to such deposit has been
obtained or (ii)&nbsp;such consent is no longer required under
Korean laws and regulations or under the terms of the deposit
agreement.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the terms of the deposit agreement, no consent is required
if the common shares are obtained through a dividend, free
distribution, rights offering or reclassification of such
shares. Under the terms of the
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">23
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
deposit agreement, we have consented to any deposit to the
extent that, after the deposit, the aggregate number of
deposited common shares does not exceed 3,552,229 common shares
or any greater number of common shares we determine from time to
time (i.e., as a result of a subsequent offering, stock dividend
or rights offer), unless the deposit is prohibited by applicable
laws or violates our articles of incorporation; provided,
however, that in the case of any subsequent offer by us or our
affiliates, the limit on the number of common shares on deposit
shall not apply to such offer and the number of common shares
issued, delivered or sold pursuant to the offer (including
common shares in the form of ADSs) shall be eligible for deposit
under the deposit agreement, except to the extent such deposit
is prohibited by applicable laws or violates our articles of
incorporation, or, in the case of any subsequent offer by us or
our affiliates, we determine with the depositary to limit the
number of common shares so offered that would be eligible for
deposit under the deposit agreement in order to maintain
liquidity of the shares in Korea as may be requested by the
relevant Korean authorities. We might not consent to the deposit
of any additional common shares. As a result, if a holder
surrenders ADSs and withdraws common shares, it may not be able
to deposit the common shares again to obtain ADSs.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>You may not be able to exercise preemptive rights or
    participate in rights offerings and may experience dilution of
    your holdings.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Korean Commercial Code and our articles of incorporation
require us to offer shareholders the right to subscribe for new
common shares in proportion to their existing ownership
percentages whenever new common shares are issued, except under
certain circumstances as provided in our articles of
incorporation. See Item&nbsp;10.B. &#147;Articles of
Incorporation&nbsp;&#151; Preemptive rights and issuance of
additional shares.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Such exceptions include offering of new shares:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    through a general public offering;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    to the members of the employee stock ownership association;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    upon exercise of a stock option;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    in the form of depositary receipts;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    to induce foreign direct investment necessary for business in
    accordance with the Foreign Investment Promotion Act of Korea;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    for the purpose of raising funds on an emergency basis;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    as necessary for the inducement of technology, to certain
    companies under an alliance arrangement with us;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    by a public offering or subscribed for by the underwriters for
    the purpose of listing on the Korean public stock markets.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Accordingly, if we issue new shares to non-shareholders based on
such exception, a holder of our ADSs will be diluted. If none of
the above exemptions is available under Korean law, we may be
required to grant subscription rights when issuing additional
common shares. However, under U.S.&nbsp;law, we would not be
able to make those rights available in the United States unless
we register the securities to which the rights relate or an
exemption from the registration requirements of the
U.S.&nbsp;Securities Act is available. Under the deposit
agreement governing the ADSs, if we offer rights to subscribe
for additional common shares, the depositary under the deposit
agreement, after consultation with us, may make such rights
available to you or dispose of such rights on behalf of you and
make the net proceeds available to you or, if the depositary is
unable to take such actions, it may allow the rights to lapse
with no consideration to be received by you. The depositary is
generally not required to make available any rights under any
circumstances. We are under no obligation to file a registration
statement under the Securities Act to enable you to exercise
preemptive rights in respect of the common shares underlying the
ADSs, and we cannot assure you that any registration statement
would be filed or that an exemption from the registration
requirement under the Securities Act would be available.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">24

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
Accordingly, you may not be entitled to exercise preemptive
rights and may thereby suffer dilution of your interests in us.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>You will not be treated as our shareholder and you will
    not have shareholder rights such as the voting rights of a
    holder of common shares.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As an ADS holder, we will not treat you as one of our
shareholders and you will not have the rights of a shareholder.
Korean law governs shareholder rights. The depositary will be
the shareholder of the common shares underlying your ADSs. As a
holder of ADSs, you will have ADS holder rights. A deposit
agreement among us, the depositary and you, as an ADS holder,
sets out ADS holder rights as well as the rights and obligations
of the depositary. New York law governs the deposit agreement
and the ADSs. Upon receipt of the necessary voting materials,
you may instruct the depositary to vote the number of shares
your ADSs represent. The depositary will notify you of
shareholders&#146; meetings and arrange to deliver our voting
materials to you only when we deliver them to the depositary
with sufficient time under the terms of the deposit agreement.
If there is a delay, we cannot ensure that you will receive
voting materials or otherwise learn of an upcoming
shareholders&#146; meeting in time to ensure that you may
instruct the depositary to vote your shares. In addition, the
depositary and its agents are not responsible for failing to
carry out voting instructions or for the manner of carrying out
voting instructions.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>You would not be able to exercise dissent and appraisal
    rights unless you have withdrawn the underlying common shares
    from the depositary facility and become our direct
    shareholders.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In some limited circumstances, including the transfer of the
whole or any significant part of our business, our acquisition
of a part of the business of any other company having a material
effect on our business, our merger or consolidation with another
company, dissenting shareholders have the right to require us to
purchase their shares under Korean law. However, if you hold our
ADSs, you will not be able to exercise such dissent and
appraisal rights unless you have withdrawn the underlying common
shares from the depositary facility and become our direct
shareholder prior to the record date for the shareholders&#146;
meeting at which the relevant transaction is to be approved.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>We may amend the deposit agreement and the ADRs without
    your consent for any reason and, if you disagree, your option
    will be limited to selling the ADSs or withdrawing the
    underlying securities.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may agree with the depositary to amend the deposit agreement
and the American depositary receipts, or ADRs, without your
consent for any reason. If an amendment adds or increases fees
or charges, except for taxes and other governmental charges or
expenses of the depositary, for registration fees, facsimile
costs, delivery charges or similar items, or prejudices a
substantial right of ADS holders, it will not become effective
for outstanding ADRs until 30&nbsp;days after the depositary
notifies ADS holders of the amendment. At the time an amendment
becomes effective, you are considered, by continuing to hold
your ADSs, to agree to the amendment and to be bound by the ADRs
and the deposit agreement as amended. If you do not agree with
an amendment to the deposit agreement or the ADRs, your option
is limited to selling the ADSs or withdrawing the underlying
securities. No assurance can be given that the sale of ADSs
would be made at a price satisfactory to you in such
circumstances. In addition, as of the date hereof, the common
shares underlying the ADSs are not listed on any stock exchange
in Korea. Your ability to sell the underlying common shares
following withdrawal and the liquidity of the common shares may
be limited.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>You may be subject to Korean withholding tax.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under Korean tax law, if you are a U.S.&nbsp;investor, you may
be subject to Korean withholding taxes on capital gains and
dividends in respect of the ADSs unless an exemption or a
reduction under the income tax treaty between the United States
and Korea is available. Under the United States-Korea tax
treaty, capital gains realized by holders that are residents of
the United States eligible for treaty benefits will not be
subject to Korean taxation upon the disposition of the ADSs.
However, under the United States-Korea income tax treaty, the
following holders are not eligible for such tax treaty benefits:
(i)&nbsp;in case the holder is a United States corporation, if
by reason of any special measures, the tax imposed on such
holder by the United States
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">25

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
with respect to such capital gains is substantially less than
the tax generally imposed by the United States on corporate
profits, and 25% or more of the holder&#146;s capital is held of
record or is otherwise determined, after consultation between
competent authorities of the United States and Korea, to be
owned directly or indirectly by one or more persons who are not
individual residents of the United States and (ii)&nbsp;in case
the holder is an individual, if such holder maintains a fixed
base in Korea for a period or periods aggregating 183&nbsp;days
or more during the taxable year and the holder&#146;s ADSs or
common shares giving rise to capital gains are effectively
connected with such fixed base or such holder is present in
Korea for a period or periods of 183&nbsp;days or more during
the taxable year.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>You may have difficulty bringing an original action or
    enforcing any judgment obtained outside Korea against us, our
    directors and officers or other offering participants, such as
    underwriters or experts, who are not U.S.&nbsp;persons.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are organized under the law of Korea, and all of our
directors and officers reside in Korea. All or a significant
portion of our assets and the assets of such persons are located
outside of the United States. As a result, it may not be
possible for you to effect service of process within the United
States upon these persons or to enforce against them or us court
judgments obtained in the United States that are predicated upon
the civil liability provisions of the federal securities laws of
the United States or of the securities laws of any state of the
United States. We have, however, irrevocably appointed an agent
in New York to receive service of process in any proceedings in
the State of New York relating to our ADSs. Notwithstanding the
foregoing, there is doubt as to the enforceability in Korea,
either in original actions or in actions for enforcement of
judgments of United States courts, of civil liabilities
predicated on the federal securities laws of the United States
or the securities laws of any state of the United States.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='114'></A>
</DIV>

<!-- link1 "ITEM 4. INFORMATION ON THE COMPANY" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM 4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></TD>
    <TD>
    <B><I>INFORMATION ON THE COMPANY</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<A name='115'></A>
</DIV>

<!-- link1 "4.A. History and Development of the Company" -->

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>4.A.</B></TD>
    <TD>
    <B>History and Development of the Company</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>History and Development of the Company</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We were incorporated as a company with limited liability under
Korean law on April&nbsp;4, 2000 under the legal name of GRAVITY
Co., Ltd. In August 2002, we commercially launched Ragnarok
Online, our first online game, in Korea. In March 2003, we
established GRAVITY Interactive, LLC, our wholly-owned
subsidiary in the United States. The name of GRAVITY
Interactive, LLC was changed on January&nbsp;1, 2006 to GRAVITY
Interactive, Inc. In January 2004, we acquired 50% of the voting
shares of GRAVITY Entertainment Corporation, formerly RO
Production Co., Ltd., our subsidiary in Japan. In October 2004,
we obtained from GungHo Online Entertainment Inc., then the
other 50% shareholder of RO Production, their ownership interest
in RO Production, which made GRAVITY Entertainment our
wholly-owned subsidiary. RO Production changed its corporate
name to GRAVITY Entertainment Corporation on February&nbsp;5,
2005. In April and May 2005, we acquired an aggregate of 88.15%
equity interest in TriggerSoft Corporation, which develops our
R.O.S.E. Online game. In November and December 2005, we acquired
an aggregate of 96.11% of the total shares of NEOCYON, Inc.,
which provides mobile multimedia and online game distribution
services in Korea and Russia.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Capital Expenditures</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For the year ended December&nbsp;31, 2003, 2004 and 2005, we
expended Won 4,749&nbsp;million, Won 12,324&nbsp;million and Won
8,459&nbsp;million (US$8,375 thousand) for capital expenditures
(including capitalized interest) in connection with purchase of
property and equipment.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='116'></A>
</DIV>

<!-- link1 "4.B. Business Overview" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>4.B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Business Overview</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Overview</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are a leading developer and distributor of online games in
Japan, Taiwan and Thailand based on the number of peak
concurrent users. We are based in Korea and our principal
product, Ragnarok Online, is
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">26

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
currently commercially offered in 21 markets, including Korea.
We also offer a number of mobile games and license the
merchandizing of character-related products based on our online
games. We intend to diversify our online game offering by
developing online games internally and publishing additional
online games developed by third parties. We have in the past
produced a televised animation series and intend to create other
animation products for international distribution in the future.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Other than Korea, the United States, Canada and Russia, in all
the countries in which Ragnarok Online is distributed, our
overseas licensees are responsible for the marketing, operation,
billing and customer service in their respective markets in
consultation with us. Our license agreements generally have a
term of two years. We rely, as a significant source of our
revenue, on the initial license fees and the ongoing royalties
from our overseas licensees. The ongoing royalties are based on
a percentage of revenues generated by our overseas licensees
from the subscription to Ragnarok Online in their respective
markets. In Korea, we directly manage game operations while in
the United States and Canada, our wholly-owned subsidiary,
GRAVITY Interactive, Inc., is responsible for all aspects of the
operation in such countries. In Russia, Mados, Inc., a
subsidiary of Cybermedia International Inc., a wholly-owned
subsidiary of NEOCYON, Inc., manages our game operations.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The table below provides for the periods indicated, the peak
concurrent users and average concurrent users of Ragnarok Online
since August&nbsp;1, 2002, in each of our principal markets.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 6.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="16%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="-1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 7.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>3Q 02</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>4Q 02</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>1Q 03</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2Q 03</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>3Q 03</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>4Q 03</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>1Q 04</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2Q 04</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>3Q 04</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>4Q 04</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>1Q 05</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2Q 05</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>3Q 05</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>4Q 05</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>1Q 06</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Taiwan</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>PCU(1)</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>73,274</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>112,823</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>158,695</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>184,436</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>206,904</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>250,030</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>342,228</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>339,843</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>352,592</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>325,351</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>344,534</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>326,848</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>213,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>134,869</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>132,539</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>&#38; Hong Kong</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>ACU(2)</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>31,338</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53,134</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>79,410</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>91,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>168,913</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>220,448</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>176,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>193,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>241,170</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>283,553</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>231,980</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>146,467</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>104,702</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>107,141</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Thailand</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>PCU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>65,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>66,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>72,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>82,385</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>86,133</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>107,798</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>130,148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>116,672</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>111,959</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>102,716</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75,373</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>69,997</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>ACU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,451</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,519</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,025</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36,048</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>31,757</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43,609</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>56,465</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,935</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>81,312</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>88,475</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>74,087</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71,097</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>57,948</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>52,404</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Japan</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>PCU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>56,033</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>58,785</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75,582</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>75,026</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>83,880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>89,111</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>101,983</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100,503</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>104,559</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>106,195</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96,119</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>93,954</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>95,706</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>73,751</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>ACU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,875</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>34,076</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,146</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40,634</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>47,086</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50,306</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50,699</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>56,091</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59,345</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>52,213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,647</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36,362</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>China</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>PCU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>112,844</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>125,183</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>118,257</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>147,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>116,208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100,002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>78,302</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>76,993</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,970</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>58,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35,336</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,248</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>ACU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>73,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>87,577</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>81,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>97,547</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>81,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>78,509</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>63,767</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>62,006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>46,840</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>41,756</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,734</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21,909</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Korea</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>PCU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24,966</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>31,294</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,598</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,103</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,491</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27,931</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,059</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,051</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26,508</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21,459</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,784</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,520</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,145</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>ACU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,930</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,758</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,687</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,554</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,430</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,439</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,023</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,179</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,569</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,153</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,124</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,342</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="center" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>USA&nbsp;&#38; Canada</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>PCU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,484</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,456</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,230</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,965</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,190</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,997</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,219</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,433</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,088</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <B>ACU</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,641</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,995</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,477</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,919</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,108</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,457</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,426</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,922</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,222</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    PCU, or peak concurrent users, represents the highest number of
    users of Ragnarok Online during the specified time period as
    recorded on the servers for the various countries.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    ACU, or average concurrent users, represents the average number
    of concurrent users of Ragnarok Online during the specified time
    period as recorded on the servers for the various countries.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    We believe that the number of users as measured by PCU or ACU
    (i)&nbsp;is reflective of our active user base and (ii)&nbsp;is
    co-related to revenues as revenues from an online game depend on
    the numbers of users as well as the time spend playing the game.
    However, PCU and ACU are not measures under K-GAAP or US GAAP
    and should not be construed as an alternative to operating
    income or another measure of performance determined in
    accordance with U.S.&nbsp;GAAP or K-GAAP. Other companies may
    determine PCU or ACU differently than we do.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">27
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth a summary of our consolidated
statement of operations as a percentage of total revenues for
the periods indicated.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="28%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 7.0pt;">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 7.0pt;">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>2005(1)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>



<TR style="font-size: 7.0pt;">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 7.0pt;">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="26" align="center" nowrap><B>(In millions of Won and thousands of US$, except percentages)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="5" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Ragnarok Online and R.O.S.E. Online revenues:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Subscriptions:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Korea</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>W16,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32.7</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>W12,725</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19.7</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>W8,548</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>8,464</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    United States(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,374</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,528</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,701</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,674</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Royalties and license fees:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Japan</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,383</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,009</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,447</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,294</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28.9</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Taiwan</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,863</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,770</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,674</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18.3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Thailand</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,459</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,335</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,817</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,769</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Others</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,022</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,407</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,341</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,268</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13.8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Sub-total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>60.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="5" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mobile games</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,664</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,648</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Character merchandising and other revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,185</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,696</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,065</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>W49,515</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>W64,426</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>W53,384</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>52,856</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    For convenience, the Won amounts are expressed in
    U.S.&nbsp;dollars at the rate of Won 1,010.0 to US$1.00.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Includes subscription revenues from Canada.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Strategy</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our key strategic objective is to strengthen our competitive
position and to be a leading developer and publisher of online
games with a broad product offering and presence in multiple
markets. Our business strategy consists principally of the
following elements:
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Maintain and strengthen our competitive position in online
    games</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We aim to maintain and strengthen the competitive position of
our online games by continuing to upgrade game content and
quality to satisfy user expectations. We, along with our
overseas licensees, will continue to conduct marketing campaigns
and online in-game events to increase the loyalty and playing
time of our existing user and attract new users. We also plan to
expand our game community by developing attractive community
features and tools to enhance user interaction and loyalty. For
instance, we plan to further update and enhance the content of
our principal product, Ragnarok Online, generally on a quarterly
basis. In addition, we plan to continue to provide dedicated
customer service and technical support to provide our users with
a stable game playing environment. Moreover, we decided to
invest Japanese Yen 1&nbsp;billion in &#147;Online Game
Revolution Fund&nbsp;No.&nbsp;1,&#148; an investment fund
organized in Japan, pursuant to the approval of our board of
directors&#146; meeting held in November&nbsp;29, 2005.
&#147;Online Game Revolution Fund&nbsp;No.&nbsp;1,&#148; with a
total proposed investment size of Japanese Yen 10&nbsp;billion,
has an investment objective of investing in companies which
develop online games in Japan. Furthermore, we are contemplating
a future investment in another fund, which will invest
approximately Won 100&nbsp;billion in developers of games and
game related technology companies in Korea and elsewhere. We
intend to continue to utilize some of our available cash to
invest indirectly in companies with excellent technical
competence and capability to commercially offer their products.
For example, in May 2006, we entered into a contract to invest
approximately US$9&nbsp;million in Perpetual Entertainment,
Inc., an online game developer based in the United States. We
believe that we will be able to participate in the management of
Perpetual Entertainment by appointing one member to Perpetual
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">28

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
Entertainment&#146;s board of directors. We further believe that
this investment will provide us with access to game content,
game engine and also the platform of Perpetual Entertainment,
which gives us priority negotiation rights for future access to
contents and other intellectual property rights of Perpetual
Entertainment.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Continue to focus on international expansion</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We plan to continue the expansion and penetration of our
products in new overseas markets. We are currently conducting
open beta testing of Ragnarok Online in Russia, Vietnam, Spain
and 25 Latin American countries. We plan to maintain our
existing relationships with online game operators in overseas
markets and take advantage of our relationships to distribute
other products and/or obtain more favorable contractual terms.
We also intend to focus on the operations of our overseas
subsidiaries in the United States and Russia to enhance our
presence in these markets. We believe that further geographic
diversification will contribute to the growth and stabilization
of our revenue streams. As we evaluate our license agreements in
these markets, we may selectively choose to operate directly in
certain markets through our subsidiaries.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Enhance development of proprietary games and publication
    of licensed games</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We intend to offer a broader and more sophisticated game
offering by developing and procuring additional games. We will
continue to devote significant resources to the in-house
development of our own games by hiring new talented development
staff to augment our game development capabilities and to make
additional investments in new technologies. We are currently
developing Ragnarok Online&nbsp;II and Requiem and expect to
commence open beta testing of Ragnarok Online&nbsp;II by the end
of 2006 and Requiem by the first half of 2007, respectively.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Moreover, we will continue to focus on publishing online games
licensed from third party developers by taking advantage of our
game distribution capability. For example, in June 2005, we
entered into an agreement with Sonnori Co., Ltd, a third-party
game developer, to publish, market and offer a casual game
portal, STYLIA. Under this agreement, we have the right to
publish games on STYLIA for five years, which right encompasses
publishing in markets both in and outside of Korea. In November
2005, we also concluded a contract with Ndoors Corp. for the
worldwide publishing right of Time N Tales, an online game. In
addition, in December 2005, we entered into a contract with
GungHo Online Entertainment Inc. for the rights to publish Emil
Chronicle Online worldwide (except Japan).
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Taking advantage of our current products for revenue
    diversification and growth</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In order to continually diversify our revenue base, we intend to
take advantage of our current products to expand into related
businesses, including mobile games, animation and game
character-based merchandise businesses. We offer mobile games in
Korea, Japan, Taiwan, the Philippines, Thailand, Singapore,
Malaysia, Indonesia and the United States, based on game content
that is derived from Ragnarok Online. We generated revenue of
Won 1,664&nbsp;million (US$1,648 thousand) from mobile games in
2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Our products</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We currently have four product lines: online games including
massively multiplayer online role playing games as well as
casual games, mobile games animation and character-based
merchandise. Revenues from our principal product, Ragnarok
Online, accounted for 95.2% of our revenue in 2004 and 88.3% of
our revenue in 2005. We are seeking to diversify our revenue
sources by offering additional massively multiplayer online role
playing games and other products and services, including mobile
games.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Massively multiplayer online role playing games</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Until recently, we commercially offered one massively
multiplayer online role playing game, Ragnarok Online. In
January 2005, we commercially launched another massively
multiplayer online role playing game, R.O.S.E. Online. In
addition, we are currently in the process of developing two
additional massively multiplayer online role playing games,
Requiem and Ragnarok Online II.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">29

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes the massively multiplayer online
role playing games that we are either currently offering or in
the process of developing, as well as publishing games licensed
from third parties we are planning to offer in the near future.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="25%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="24%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="19%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="23%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Date of Commercial</B></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Game Title</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Description</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Game source</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Launch/Testing(2)</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Ragnarok Online</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Action adventure with 99 levels of skill upgrades, which
    features two- dimensional characters in three-dimensional
    backgrounds(1)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Developed in-house</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Launched in August 2002</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Ragnarok Online&nbsp;II</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Three-dimensional sequel to Ragnarok Online</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Developed in-house</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Currently in development with open beta testing planned by the
    end of 2006</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Requiem</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Three-dimensional action adventure</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Developed in-house</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Currently in development with open beta testing with
    commercialization planned in the first half of 2007</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    R.O.S.E. Online</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Three-dimensional action adventure with seven independent
    storylines</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Licensed from third party developer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Launched in January 2005</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Time N Tales</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Two-dimensional real- time tactical game</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Licensed from third party developer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Commercial launch scheduled in the third quarter of 2006</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Emil Chronicle Online</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Three-dimensional action adventure</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Licensed from third party developer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    To be determined</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    A game with such features is generally referred to as a 2.5
    dimensional game.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    The actual date of commercial launch of games are dependent on a
    variety of factors, including technical viability and
    durability, availability of in-house development capability,
    market conditions, beta testing results and availability of
    licensing partners in various jurisdictions, among others.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Massively multiplayer online role playing games currently
    offered</I></B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Ragnarok Online</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Ragnarok Online represented 88.3% of our total revenues or Won
47,152&nbsp;million (US$46,685 thousand) in 2005, compared with
95.2% of our total revenues or Won 61,354&nbsp;million in 2004.
Ragnarok Online is offered commercially in 21 markets as of
June&nbsp;26, 2006.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In developing Ragnarok Online, we obtained an exclusive license
from Mr.&nbsp;Myoung-Jin Lee to use the storyline and characters
from his cartoon titled &#147;Ragnarok&#148; for the production
of online games, animation and character merchandising. We paid
Mr.&nbsp;Lee an initial license fee of Won 40&nbsp;million and
are required to pay royalties based on a percentage of adjusted
revenues (net of value-added taxes and certain other expenses)
or net income generated from the use of the Ragnarok brand,
including the operation or licensing of Ragnarok Online through
January 2033.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Ragnarok Online is an action adventure-based massively
multiplayer online role playing game that combines cartoon-like
characters, community-oriented themes and combat features in a
virtual world within which thousands of players can interact
with one another. Unlike games offered by many of our
competitors, Ragnarok Online features cute, fantasy-based
characters and is not centered on sexual or violent content.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">30

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
Furthermore, we believe that the highly interactive and
community-oriented nature of Ragnarok Online, such as marriages
and organization of guilds, are important to users who
appreciate social interaction in a virtual setting.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Other key features of Ragnarok Online include the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    players may assume an ongoing role, or alter-ego, of a
    particular game character, each with different strengths and
    weaknesses. In Ragnarok Online, the user starts as a
    &#147;novice&#148; and undergoes training in a specialized
    mapped game zone to become familiar with the game features. Once
    that stage is completed, the user can choose from six basic
    characters, each with a distinct combination of different traits;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    as each game character advances in challenge levels, the
    character can enter into a greater range of mapped game zones
    and morph into a more sophisticated game character in terms of
    game attributes and special powers;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Ragnarok Online characters may visually express the users&#146;
    mood and emotions by using emotive icons that appear within a
    bubble above the characters&#146; heads. We believe that this
    feature significantly expands the interface for user interaction
    and elevates the level of social reality of the game;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    game features may be traded or sold within the game, and game
    characters may simulate real-life experiences such as marriage,
    group fights and joining a guild. In addition, players may
    communicate with each other through in-game chatting or instant
    messaging;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    special events are held from time to time to stimulate community
    formations. For example, we periodically host &#147;fortress
    raids&#148; for which players are encouraged to organize
    themselves into a team to compete against other teams to capture
    a fortress within a set time;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the game has no preordained ending and is designed to
    continuously evolve in terms of plots, mapped game zones and
    character attributes through enhancements from time to time.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that the personal computer, or PC, configurations
required to run Ragnarok Online are lower than or on par with
many other competing massively multiplayer online role playing
games, which we believe has facilitated our successful entry
into and continued expansion of Ragnarok Online in many of the
developing countries in which Ragnarok Online is distributed. As
we were developing and preparing to launch Ragnarok Online in
Korea and overseas markets, we carefully balanced perceived
demand for sophisticated three-dimensional graphics with
prevailing computer processing and graphics capabilities in such
markets. Based on these considerations, we opted to launch
Ragnarok Online based on a combination of two-dimensional
characters with a three-dimensional background, which would
require lower PC configurations than three-dimensional massively
multiplayer online role playing games. The recommended minimum
PC configuration for Ragnarok Online is Pentium&nbsp;III
1.6&nbsp;GHz, 256&nbsp;MB RAM and 32&nbsp;MB graphic card.
Ragnarok Online can be accessed through a
<FONT style="white-space: nowrap">dial-up</FONT> modem as well
as broadband Internet.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>R.O.S.E. Online</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
R.O.S.E. Online, which was commercially launched in January
2005, represented 2.8% of our total revenues or Won
1,472&nbsp;million (US$1,458 thousand) in 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We commenced open beta testing of our second massively
multiplayer online role playing game, R.O.S.E. Online, in
September 2004 and commercially launched R.O.S.E. Online in
January 2005. R.O.S.E. Online, a three-dimensional game, is the
first online game developed by a third party that we published
pursuant to an exclusive publishing license agreement. R.O.S.E.
Online was developed by TriggerSoft Corporation, a Korean game
developer with nearly ten years of experience in PC game
development, in close coordination with our in-house game
development team. The term of our exclusive publishing license
under this agreement is for a five year period beginning in
October 2003. Under this agreement, we have a right to
sublicense R.O.S.E. Online to third parties, including our
overseas licensees. In addition, we have a right to participate
in the development or licensing of the games which will be
developed by TriggerSoft. Of the seven episodes to be introduced
for R.O.S.E. Online, three episodes are currently available and
the remaining four
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">31

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
episodes are expected to be added over time. In May 2005, we
acquired control of TriggerSoft, which we believe will enhance
our ability to update and improve R.O.S.E. Online more
effectively and on a more timely basis. In January and February
2005, we entered into arrangements with three licensees to
distribute R.O.S.E. Online in Japan, Taiwan, Hong Kong, Macao
and the Philippines. We have been offering R.O.S.E. Online
commercially in Korea, Japan, the Philippines and the United
States and Canada since 2005. In Europe, we had licensed the
distribution of R.O.S.E. Online in 17 European countries with
Gamesrouter Ltd., , but have since ceased offering commercial
service in Europe beginning in January 2006 Gamesrouter is
currently in bankruptcy proceedings. We are pursuing various
other options in Europe and expect to find an alternative
licensee or directly market the game in Europe.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Time N Tales</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We commenced open beta service of Time N Tales in March 2006
under a publishing agreement entered into with Ndoors Corp., a
Korean online game developer, in November 2005. We plan to
commercially launch Time N Tales in the third quarter of 2006.
Time N Tales allows users to vary game settings, in particular,
the country or the time period for the particular episode to be
played according to their preferences. Moreover, Time N Tales
allows game users to select one game character for each episode,
as well as to supplement their game character with up to five
additional game characters that are hired as mercenaries upon
payment of game credit.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Expected future release of massively multiplayer online
    role playing games</I></B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Ragnarok Online&nbsp;II</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are currently developing Ragnarok Online&nbsp;II as a sequel
to Ragnarok Online. We plan to commence open beta testing by the
end of 2006. We expect that this game will offer substantially
the same gaming experience as Ragnarok Online with respect to
storyline and other central features of the game, but in a more
dynamic three-dimensional format. We currently have 31
designers, 9 programmers and 14 game planners dedicated to the
development of Ragnarok Online&nbsp;II.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Requiem</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are currently developing Requiem and plan to commence its
open beta testing in the first half of 2007. Unlike Ragnarok
Online, which we believe did not emphasize violent themes, we
are designing Requiem to prominently feature
<FONT style="white-space: nowrap">user-to</FONT>-user combat. In
addition, we are using advanced game development engines for
enhanced graphics and to capture the game&#146;s speedy and
streamlined action movements. We currently have 38 designers, 10
programmers and 7 game planners dedicated to the development of
Requiem.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Emil Chronicle Online</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are currently preparing to test the Korean language version
of Emil Chronicle Online. This game was developed by GungHo
Online Entertainment Inc., the publisher of Ragnarok Online in
Japan. Emil Chronicle Online has been commercially offered for
service in Japan since 2005. We entered into a software
licensing agreement for the right to publish Emil Chronicle
Online worldwide (except Japan), together with a software
purchase agreement in respect of the game, with GungHo Online
Entertainment, in December 2005.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Casual games currently offered</I></B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>STYLIA</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We commenced the open beta testing of STYLIA, a casual online
game portal site, with Love Forty, an online tennis game,
followed by TVBoyz, a three-dimensional action game, in May and
June 2006, respectively. We commenced commercial service of
STYLIA in June 2006. STYLIA was developed by Sonnori Co., Ltd.
We entered into a publishing contract with Sonnori Co., Ltd. in
June 2005. We plan to launch one new game every month, for a
total of seven titles during 2006. In addition, we have been
contacting
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">32

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
various developers to publish diverse games through STYLIA and
we have entered into arrangements with four online game
developers to publish their games through STYLIA as of
June&nbsp;1, 2006.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Expected future release of casual games</I></B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Pucca Online</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We plan to commence open beta service of a casual bike racing
game, which we have tentatively named Pucca Online, in the
second quarter of 2007 after three closed beta test runs from
December 2006 to February 2007, with a target user base
comprising female online game users aged from late teens to
early twenties. Pucca is a character originally designed by Vooz
Co., Ltd., a character development and licensing company in
Korea. We entered into the contract of co-development with Vooz
and worldwide publishing of an online game incorporating and
using the Pucca character in July 2005. The development team of
Pucca Online consists of the developers of Gravity, who are
responsible for game planning and programming, and the designers
from Vooz, in charge of the storyline and graphic design. Pucca
Online is expected to offer game users with the experience of
driving motorcycles in well-known tourist destinations such as
the Great Wall in China, Paris and the Alps, among other locales.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Mobile games currently offered</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As compared to massively multiplayer online role playing games,
mobile games, which are played using mobile phones and other
mobile devices, have shorter game playtime and less complex
user-game interaction. We believe that mobile games, due to such
characteristics, provide less-experienced users with a means to
become familiar with both game playing and the online game
culture without making substantial commitment in terms of time
and resources. As a result, we believe that mobile games will
allow us to target a broader audience of users, help us expand
the online game culture beyond Internet caf&#233;s and
users&#146; homes and act as effective marketing tools to
attract new users to our massively multiplayer online role
playing games.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Our game-related products and services</I></B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Animation</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
GRAVITY Entertainment, our Japanese subsidiary, entered into an
agreement with G&#38;G Entertainment Inc. and three other
Japanese media and entertainment companies for the production
and distribution of 26 half-hour episode animation series based
on the storyline and characters of our online game Ragnarok
Online licensed from us. The series was broadcast on television
in Korea, Japan, the Philippines, Indonesia, Taiwan, Hong Kong
and Malaysia. The series has also been exported to China,
Taiwan, Hong Kong, Thailand, Malaysia, Singapore and Brazil. We
intend to expand the distribution of Ragnarok animation to other
countries in North and South America, Europe and elsewhere in
which Ragnarok Online is in service and create other animation
products for international distribution. In addition to the
potential revenue generated from the sale of broadcasting
rights, videos, DVDs and Internet viewing, we believe that our
animation products will enhance the brand recognition of
Ragnarok Online and facilitate cross-selling of other products.
Our revenues from our animation business was Won
614&nbsp;million (US$608 thousand) in 2005.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Game character merchandising</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In order to take advantage of the commercial opportunities
presented by the popularity generated by our games and game
characters, we and our licensees have been marketing dolls,
fancy items and other character-based merchandise, as well as
game manuals, monthly magazines and other publications, based on
Ragnarok Online characters. We market the merchandise mostly
through convenience stores where, in China and many Southeast
Asian countries, prepaid game cards for our games are sold.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into arrangements with seven Korean vendors and
five overseas vendors to license Ragnarok&#146;s animation
characters in Japan, Taiwan, Hong Kong, China, Thailand, the
Philippines, Indonesia, Singapore, Malaysia and Brazil. In 2005,
the total amount of licensing fees from our contracts with
Korean vendors was approximately Won 204&nbsp;million (US$202
thousand) and the total amount of licensing fees from
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">33

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
our contracts with overseas vendors was approximately Won
1,648&nbsp;million (US$1,632 thousand). We intend to expand our
character marketing to other countries in Asia, North and South
America and Europe.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Our markets</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2004, revenues generated from Korea accounted for 21.0% of
our total revenues while 79.0% of our revenues were generated
from our overseas markets. In 2005, approximately 18.9% of our
revenues were generated in Korea, while 81.1% of our revenues
were generated from our overseas markets.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Korea</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In Korea, we commercially launched Ragnarok Online and began to
charge subscribers in August 2002. Ragnarok Online subscribers
in Korea consist of individual PC account subscribers and
Internet caf&#233; subscribers. Individual PC account
subscribers are individuals who log on to our game servers from
places other than Internet caf&#233;s, such as from home or
work, whereas Internet caf&#233; subscribers are commercial
businesses operating Internet caf&#233; outlets equipped with
multiple PCs that provide broadband Internet access to their
customers who typically prefer to play the most
<FONT style="white-space: nowrap">up-to</FONT>-date versions of
online games. Most Internet caf&#233;s charge their customers PC
usage and Internet access fees that generally range from Won 500
to Won 1,500&nbsp;per hour and subscribe to various online
games. As of December&nbsp;31, 2005, over 8,000 Internet
caf&#233;s offered Ragnarok Online in Korea. In order to offer
Ragnarok Online, an Internet caf&#233; typically purchases from
us minimum game hours. In 2005, the subscription collected from
Internet caf&#233;s accounted for 12.9% of our subscription
revenues in Korea.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Overseas markets</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Ragnarok Online is currently offered in 20 overseas markets:
Taiwan, Hong Kong, Japan, China, United States, Canada,
Singapore, Malaysia, Thailand, the Philippines, Indonesia,
Germany, Austria, Switzerland, Italy, Turkey, Australia, New
Zealand, Brazil and India. We are currently conducting open beta
testing for Ragnarok Online in Russia, Spain, Vietnam and the
following 25 countries: Mexico, Guatemala, El Salvador,
Nicaragua, Panama, Honduras, Belize, Cuba, Jamaica, Haiti, the
Dominican Republic, Costa Rica, Puerto Rico, Ecuador, Colombia,
Peru, Venezuela, Guyana, Surinam, French Guiana, Chile, Bolivia,
Paraguay, Argentina and Uruguay. In addition, we currently plan
to conduct closed beta testing of Ragnarok Online in the
following 12 countries: United Arab Emirates, Saudi Arabia,
Kuwait, Qatar, Bahrain, Oman, Yemen, Iraq, Egypt, Israel,
Lebanon and Jordan. In February 2006, we revised the licensing
agreement with the distributor for in the Middle East to exclude
Iran and Syria, as these two countries have been identified by
the U.S.&nbsp;State Department as state sponsors of terrorism
and are subject to economic sanctions administered by the
U.S.&nbsp;Treasury Department&#146;s Office of Foreign Assets
Control. In most of our overseas markets, Ragnarok Online is
distributed through local game operators and distributors.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">34

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table lists the countries in which Ragnarok Online
is commercially offered, names or our licensees, where
applicable, the dates of license agreements, commercial launch
and expiry of the license agreements.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="24%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Date of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Date of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>License</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Commercial</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Country</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Licensee</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Agreement</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Launch</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Date of Expiry</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Japan</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>GungHo Online Entertainment Inc.</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>July 2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>December&nbsp; 2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>August 2006(1)</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Taiwan/ Hong Kong(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>Soft-World International</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>May 2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>October 2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>October 2006(3)</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Thailand</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>Asiasoft International Company Ltd.</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>June&nbsp;2002</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>March&nbsp;2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>March&nbsp;2007(4)</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    China</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>Shengqu Information Technology</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>August 2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>May 2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>July 2008</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>(Shanghai) Co., Ltd(5)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Singapore/Malaysia(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>Value Central Corporation(6)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>May 2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>April 2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>April 2006(7)</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Philippines</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>Level Up! Inc.</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>March&nbsp;2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>September&nbsp; 2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>August 2008(8)</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Indonesia</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>PT. Lyto Datarindo Fortuna(9)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>February 2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>November 2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>February 2007(10)</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Europe(11)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>Burda Holdings International GmbH</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>November 2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>April 2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>April 2006(12)</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Australia/ New Zealand(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>Ongamenet PTY LTD.</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>July 2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>December&nbsp; 2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>November 2006</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Brazil</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>Level Up! Interactive S.A.</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>August 2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>February 2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>February 2007</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    India</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>Level Up! Network India Pvt. Ltd.</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>May 2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>March&nbsp;2006</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" nowrap>March&nbsp;2008</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp; (1)&nbsp;</TD>
    <TD align="left">
    Renewed in September 2004.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp; (2)&nbsp;</TD>
    <TD align="left">
    Governed under a single license agreement covering both markets.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp; (3)&nbsp;</TD>
    <TD align="left">
    Renewed in October 2004.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp; (4)&nbsp;</TD>
    <TD align="left">
    Renewed in October 2004.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp; (5)&nbsp;</TD>
    <TD align="left">
    Shengqu is a wholly owned subsidiary of Shanda Interactive
    Entertainment Ltd., previously with different licensee.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp; (6)&nbsp;</TD>
    <TD align="left">
    Wholly-owned subsidiary of Soft-World International which offers
    and operates Ragnarok Online through Game Flier (Malaysia) Sdn.
    Bhd., another subsidiary of Soft-World International.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp; (7)&nbsp;</TD>
    <TD align="left">
    License Agreement with Value Central Corporation expired in
    April 2006. We are considering entering into a new license
    agreement with Game Flier (Malaysia) Sdn. Bhd. for a period
    through April 2008. Although we currently do not have a license
    agreement with Game Flier (Malaysia), Game Flier (Malaysia)
    services our game in Singapore/Malaysia and has been remitting
    royalty payments to us.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp; (8)&nbsp;</TD>
    <TD align="left">
    Renewed in March 2006.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp; (9)&nbsp;</TD>
    <TD align="left">
    Previously with a different licensee.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>(10)&nbsp;</TD>
    <TD align="left">
    Renewed in October 2004.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(11)&nbsp;</TD>
    <TD align="left">
    Represents massively multiplayer online role playing game
    operations in Germany, Austria, Switzerland, Italy and Turkey. A
    single operator services these five countries under one license
    agreement.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(12)&nbsp;</TD>
    <TD align="left">
    License Agreement with Burda Holdings International GmbH expired
    in April 2006. We currently contemplate extending the term of
    the expired license agreement with Burda through April 2007.
    Although there is no license agreement in effect, Burda
    currently continues to service our game in Europe.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">35
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our licensees pay us:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an initial license fee for initial
    <FONT style="white-space: nowrap">set-up</FONT> costs, technical
    support and advisory services that we provide until commercial
    launch;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    ongoing royalty payments based on a percentage of revenues
    generated from Ragnarok Online subscription in the respective
    overseas markets.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, if the license agreement is renewed, we typically
negotiate a renewal license fee. The license agreements may be
terminated in the event of bankruptcy or a material breach by
either party, including by us, the licensee fails to pay royalty
fees in a timely manner. To date, only our Australian licensee
has failed to pay our license fees when due.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Pricing</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our overseas licensees generally develop, after consultation
with us, a retail pricing structure for the Ragnarok Online
users in their respective markets. Pricing structures are
determined primarily based on the cost of publishing and
operating the game, the playing and payment patterns of the
users, the pricing of competing games in a given market and the
purchase power parity of consumers in that market. Since the
launch of Ragnarok Online in August 2002, we have tracked and
accumulated user data generated from our user base, which
provide us with an extensive database to analyze user patterns
and establish pricing for other markets. The pricing for
Ragnarok Online has remained generally stable in each of our
markets since the respective date of Ragnarok Online&#146;s
commercial launch in those markets.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Korea</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We determine the pricing plan for Ragnarok Online in Korea. We
offer separate pricing plans to Internet caf&#233;s and
individual PC account subscribers. Our subscribers have an
option to pay an hourly fee or a flat monthly fee. The following
table sets forth our published pricing plans in Korea for
Ragnarok Online access as of December&nbsp;31, 2005, although we
provide discounts based on the volume of business generated.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="69%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>



<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Subscription Fees</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Individual PC users</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Flat-fee rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>One month</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>W22,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>Two months</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>41,800</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>Three months</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59,400</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Hourly-fee rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5 hours</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,300</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20 hours</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,800</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="61%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="13%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="13%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Flat Fee per</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number of PCs</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>PC</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Internet caf&#233;s(1)</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Monthly flat-fee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1-4 PCs</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>W33,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5-10 PCs</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>31,350</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11-20 PCs</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,250</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21-30 PCs</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,700</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>over 30 PCs</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,700</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Hourly-fee rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>300 hours</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>77,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>600 hours</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>154,000</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,000 hours</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>238,700</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,000 hours</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>455,400</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Note:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Actual monthly and hourly-rate fees may vary depending on volume
    of use by the subscriber.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">36

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Approximately 87.1% of our revenues from Ragnarok Online in
Korea in 2005 were derived from subscriptions by individual PC
users and the remaining 12.9% was derived from Internet
caf&#233;s.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Individual PC subscribers in Korea can choose from a number of
alternative payment options, including charges made through
mobile or fixed telephone service provider payment systems,
prepaid cards, gift certificates, online credit card payments
and bank transfers. We pay a commission in the range of 9% to
13% to third parties to process payments. These third parties
bear the delinquency risk associated with payments from
subscribers.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Overseas markets</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The pricing for Ragnarok Online in our principal overseas
markets, Japan, Taiwan, China, Thailand and the United States,
is as follows:
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Japan</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our licensee in Japan, GungHo Online Entertainment, offers only
one rate for Ragnarok Online and charges Japanese Yen
1,500&nbsp;per 30&nbsp;days of unlimited use. Users in Japan
typically pay for access to Ragnarok Online with credit cards or
cyber money, which is increasingly becoming a popular payment
method in Japan.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Taiwan</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our licensee in Taiwan, Soft-World International, typically does
not offer a separate subscription plan for Internet caf&#233;
outlets. In Taiwan, most users purchase prepaid debit point
cards to access Ragnarok Online. The prepaid cards can be
purchased online, by mobile phones or at convenience stores,
Internet caf&#233;s and at other locations. Taiwan also has
websites dedicated to selling prepaid cards for various uses,
including online game payments. Our licensee in Taiwan currently
offers approximately 200 different rates for Ragnarok Online.
The following table sets forth our licensee&#146;s published
basic pricing for Ragnarok Online access in Taiwan as of
December&nbsp;31, 2005:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="77%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Points(1) or Days</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Retail Price(2)</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    150 points</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">NT$</TD>
    <TD align="right" valign="bottom" nowrap>142</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    450 points</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>450</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    30&nbsp;days</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>350</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Each time a user logs onto Ragnarok Online, 20 points are
    deducted. After a user&#146;s playtime exceeds 12&nbsp;hours,
    additional 20 points are deducted for every 12&nbsp;hours of use.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    As of December&nbsp;31, 2005, the noon buying rate of NT dollars
    to U.S.&nbsp;dollars quoted by the Federal Reserve Bank of New
    York was NT$32.8 to US$1.00.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>China</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our licensee in China, Shanda Interactive Entertainment Limited,
operates and offers Ragnarok Online through Shengqu Information
Technology (Shanghai) Co., Ltd, its wholly-owned subsidiary. In
China, Ragnarok Online can be accessed through prepaid cards.
The prepaid card system was introduced to take account of the
limited availability of online and credit card payment systems
in China. A majority of Ragnarok Online players purchase prepaid
debit point cards at Internet caf&#233;s or retail game outlets
or purchase prepaid online credits by directly paying at
Internet caf&#233;s, which in turn purchase online credits from
our China licensee. Each prepaid card contains a network access
password to access Ragnarok Online from a PC at home or at an
Internet caf&#233;. Ragnarok Online access prices were set
significantly lower in China than in Korea to take into account
the prevailing pricing structure of other online games in the
Chinese market as well as relatively low consumer spending
levels. Our licensee in China currently offers approximately 200
different
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">37
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
rates for Ragnarok Online. The following table sets forth our
licensee&#146;s published basic pricing for Ragnarok Online
access in China as of December&nbsp;31, 2005:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="77%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="18%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Points(1) or Days</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Retail Price(2)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    150 points</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>RMB9</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    450 points</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    30&nbsp;days</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Six points are deducted for every hour of use.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    As of December&nbsp;31, 2005, the noon buying rate of Renminbi
    to U.S.&nbsp;dollars quoted by the Federal Reserve Bank of New
    York was RMB 8.07 to US$1.00.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Thailand</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our licensee in Thailand, Asiasoft International, permits users
to access Ragnarok Online through prepaid cards. Each prepaid
card has a specified maximum number of hours or days of use.
Users can purchase prepaid cards from automated teller machines,
Internet caf&#233;s or convenience stores. The following table
sets forth our licensee&#146;s published basic pricing for
Ragnarok Online access in Thailand as of December&nbsp;31, 2005:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="77%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="18%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Hours or Days</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Retail Price(1)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    10&nbsp;hours</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>55</TD>
    <TD align="left" valign="bottom" nowrap>Baht</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    20&nbsp;hours</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>89</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    40&nbsp;hours</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>159</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    15&nbsp;days</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>189</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    30&nbsp;days</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>349</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Note:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    As of December&nbsp;31, 2005, the noon buying rate of Baht to
    U.S.&nbsp;dollars quoted by the Federal Reserve Bank of New York
    was Baht&nbsp;40.99 to US$1.00.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>The United States</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
GRAVITY Interactive, Inc. (formerly known as GRAVITY
Interactive, LLC), our wholly-owned subsidiary in the United
States, permits users to access Ragnarok Online through credit
cards, money orders, and wire and/or bank transfers. The
following table sets forth our licensee&#146;s published basic
pricing for Ragnarok Online access in the United States as of
December&nbsp;31, 2005:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center" nowrap><B>Retail Price</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Hours or Month</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Money Order</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Wire/Bank Transfer</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Credit Card/Debit Card</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    30 hours</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>9.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>8.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>7.99</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    1&nbsp;month</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    3&nbsp;months</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>35.98</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    6&nbsp;months</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>63.48</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>57.00</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Game development and publishing</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We expect the online game industry to be characterized by
increasing demand for sophisticated games with higher graphics
resolution, better sound quality and more life-like animation.
In response, we intend to expand our game offerings by
continuing to develop additional games in-house and by
publishing new games developed by us or licensed or acquired
from third party developers.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">38
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To prepare for the commercial launch of a new game, we conduct
&#147;closed beta testing&#148; for the game to eliminate
technical problems, which is followed by &#147;open beta
testing&#148; in which we allow registered users to play the
game free of charge. During these testing periods, users provide
us with feedback and our technical team seeks to address any
technical problems and programming flaws that may compromise a
stable and consistent game environment.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>In-house game development</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We developed Ragnarok Online in-house. In order to remain
competitive, we are focusing our in-house game development
efforts on enhancing the Ragnarok Online experience and on
developing new massively multiplayer online role playing games
incorporating the latest technologies. We currently have two
massively multiplayer online role playing games, Ragnarok
Online&nbsp;II and Requiem and several casual online games under
in-house development. Our game development department is divided
into four development teams, each responsible for the massively
multiplayer online role playing games in operation or under
development. We also have another development team dedicated to
developing mobile games. As of December&nbsp;31, 2005, we
employed a total of 211 game developers.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Publishing</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
R.O.S.E. Online was developed by TriggerSoft Corporation, a
Korean game developer with more than ten years of game
developing experience, and is published by us pursuant to an
exclusive publishing license agreement with TriggerSoft. Under
this agreement, we paid TriggerSoft an initial license fee of
Won 700&nbsp;million, and we are obligated to pay ongoing
royalties equal to 25% of domestic, and 50% of overseas,
adjusted revenues (net of value-added taxes and marketing and
certain other expenses) related to R.O.S.E. Online. In April and
May 2005, we acquired an aggregate of 88.15% of equity interest
in TriggerSoft, which we believe will enable us to obtain more
timely and effective updates to and improvements on R.O.S.E.
Online. In line with our product diversification strategy, we
intend to publish more games developed by third parties. For
details concerning new games to be offered by us in the future,
see &#147;&#151;&nbsp;Our Products.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our publishing and licensing process includes the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Preliminary screening.</I> Our preliminary screening process
    for a game typically includes our preliminary review and testing
    of the game and discussions with the game developer regarding
    technological and operational questions.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>In-depth examination, analysis and commercial
    negotiation.</I> Once a game passes the preliminary screening,
    we thoroughly review and test the game, conduct a cost analysis,
    develop operational and financial projections and formulate a
    preliminary game operating plan. We then begin commercial
    negotiations with the developer.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Game rating and regulatory registration and approval.</I>
    Once a license agreement for a game is signed, we submit an
    application to the Korea Media Rating Board to obtain a game
    rating. This process generally takes anywhere from seven days to
    three months. We also typically register our intellectual
    property rights with respect to our license agreements with the
    relevant Korean government agency. We or our licensees follow
    similar procedures in the respective markets where our games are
    commercially offered.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Testing and marketing.</I> Once the required registration and
    approvals are obtained, we conduct closed beta testing and open
    beta testing of the new game and assist the licensor with
    development of the game. Closed beta testing usually takes
    6-12&nbsp;months for massively multiplayer online role playing
    games but may take significantly more time if material problems
    are detected. Open beta testing of massively multiplayer online
    role playing games usually takes three to six months before
    commercial launch. We generally commence our other marketing
    activities for the game during the open beta testing stage. For
    overseas markets, we also localize the language and content of
    our games to tailor to the local cultural preferences.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">39

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Marketing</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We employ a variety of traditional and online marketing programs
and promotional activities, including in-game events, in-game
marketing and offline events. Due to the close-knit nature of
the online game community, we believe that
<FONT style="white-space: nowrap">word-of</FONT>-mouth is an
important medium for the promotion of our games.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In Korea, seven independent promotional agents currently promote
our online games to Internet caf&#233;s pursuant to agency
agreements. Under these agreements, each promotional agent is
granted non-exclusive promotion rights within a specified
geographical area. The agent is generally paid a monthly base
commission of 30% of revenues received from Internet caf&#233;s
in the allocated area.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We conduct a variety of marketing programs and online and
offline events to target potential subscribers accessing the
Internet from home. Our main marketing efforts include
advertising on website portals and in online game magazines,
conducting online promotional events, participating in trade
shows and entering into promotional alliances with Internet
service providers. We spent Won 4,233&nbsp;million in 2003, Won
4,614&nbsp;million in 2004 and Won 6,273&nbsp;million (US$6,211
thousand) in 2005 on advertising and promotions.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We frequently organize in-game events, such as &#147;fortress
raids&#148; for our users, which we believe encourages the
development of virtual communities among our users and increases
user interest in our games. We also host from time to time
in-game tournaments in which users can compete against each
other either as a team or individually. In addition, we use
in-game events to introduce users to new features of our games.
We organized six in-game events for Ragnarok Online users in
2004, and 18 in-game events in 2005. In July 2004, we hosted in
Korea the Ragnarok World Championship, an offline competition
event, at which more than 200 users from 21 countries convened
to compete. The event was visited by approximately 100,000
visitors and was broadcast over one of Korea&#146;s cable
television channels. Other recent offline events in 2005 include
our hosting of 60 booths at G-Star 2005 in November 2005 in
Korea, where we had more than 45,000 visitors to our booths. We
also participated in the Tokyo Game Show 2005, which was held in
September 2005, where we introduced Ragnarok Online&nbsp;II to
the public for the first time.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In most of our overseas markets, marketing activities are
principally conducted by our overseas licensees and typically
consist of advertising on website game portals and online game
magazines and through television commercials, as well as hosting
online and offline promotional events. The licensees are
responsible for the costs associated with such advertising and
promotional activities. From time to time our licensees also
market our games through sponsoring promotional events jointly
with other local game publishers in order to reach a broader
local audience.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our licensees are selected in part on the basis of their
marketing capabilities, including the size and scope of their
distribution networks. We believe that conducting marketing
through our licensees is more effective and cost-efficient than
direct marketing by us in light of the established brand
recognition and marketing networks of our licensees and their
comparative advantage in identifying and taking advantage of the
cultural and other local preferences of overseas users.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Game support and customer service</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are committed to providing superior customer service to our
users directly and through our licensees. As of
December&nbsp;31, 2005, 69 employees were game masters, or
persons who are in charge of test, updates, server maintenance
for online games, as well as dealing with customer complaints,
72 employees were members of our domestic customer service team
and 66 employees were members of our overseas customer support
team. With the growth of our user base and the diversification
of our game offering and in order to better serve our users, we
expect to continue to expand the size of our customer service
team.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In Korea, we provide customer service for our massively
multiplayer online role playing games through in-game bulletin
boards, call centers, email and facsimile and at our walk-in
customer service center. Our in-game bulletin boards allow our
customers to post questions to, and receive responses from,
other users and our support staff. In our overseas markets, our
licensees administer customer service through varying
combinations of in-game bulletin boards, call centers, email and
facsimile, with assistance, from time to time, from our overseas
customer support staff.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">40

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to providing customer service to our users, our
customer service staff also collect user comments with respect
to Ragnarok Online and generate daily and weekly reports for our
management and operations that summarize important issues raised
by users as well as how such issues have been addressed.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Network and technology infrastructure</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have designed and assembled a game server network and
information management system in Korea to allow a centralized
game management on a global basis. Our system network is
designed to speedily accommodate a growing subscriber base and
demand for faster game performance. Our game server architecture
runs multiple servers on a parallel basis to readily accommodate
increased user traffic through deployment of connection to
servers, which permits us to route users in the same country to
servers with less user traffic. Each of these servers is linked
to our information systems network to ensure rapid
implementation of game upgrades and to facilitate game
monitoring and supervision.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We maintain our server hardware in a single climate-controlled
facility at Korea Internet Data Center in Seocho-dong,
Seocho-gu, Seoul, Korea and our other system hardware in our
offices in Seoul. As of December&nbsp;31, 2005, our server
network for our game operations in Korea consisted of a total of
451 servers.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In overseas markets, our overseas licensees own or lease the
servers necessary to establish the server network for the online
games and we assist our overseas licensees with initial assembly
and installation of operating game servers and optimizing their
systems network for game operations in their respective markets.
While the overseas system architectures are modeled on our
system architecture in Korea, they are also tailored to meet the
specific needs of each market. When we install and initialize a
game in an overseas market, we generally dispatch network
engineers and database technicians from Korea to assist with
assembly and operation of the system network and game servers.
Following installation, we typically station two to five of our
technicians and customer support staff in that market to assist
with <FONT style="white-space: nowrap">on-site</FONT> game
operation and technical support. Our overseas licensees are
responsible for providing database and other game information
backup.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our game management software can program the game content to
include localized features such as virtual map zones specific to
each market. These features can be updated disparately at the
host country level in order to encourage development of a
communal spirit among the users from the same country.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Competition</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We compete primarily with other massively multiplayer online
role playing game developers and distributors in each of our
markets. In addition, we compete against providers of games on
various platforms, such as console games, handheld games, arcade
games and mobile games. We compete primarily on the basis of the
quality of the online game experience offered by us to our
users, which depends on a number of factors, including our
ability to do the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    hire and retain creative personnel to develop games that appeal
    to our users;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    maintain online game platform that is stable and is not prone to
    server shutdowns, connection problems or other technical
    difficulties;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    provide timely and responsive customer service;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    establish payment systems which are secure and efficient.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Competition in Korea</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The online game market in Korea is comprised of the massively
multiplayer online game market and the market for casual games,
such as online card games, that are available on game portal
websites. Currently, the leading providers of massively
multiplayer online games in Korea are NCsoft Corporation, Nexon
Corporation and Webzen Inc. based on the number of peak
concurrent users. NCsoft released Lineage&nbsp;II, a sequel to
the original Lineage in July 2003. Lineage&nbsp;II is an
enhanced version of the original Lineage game released in 1998,
which gained dominant popularity in Korea. Nexon released in
1996 the Kingdom of the Winds, the
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">41

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
world&#146;s first massively multiplayer online role playing
game to be introduced commercially, and Kart Rider, an online
racing game, in Korea in 2004. Webzen released Mu in May 2001
and has recently commenced open beta service of Soul of the
Ultimate Nation Online, its second massively multiplayer online
role playing game. The leading providers of portal-based online
casual games in Korea are Neowiz Corporation, operating under
the brand portal of Pmang, NHN Corporation operating under the
brand portal of Hangame, and CJ Internet operating under the
brand portal of NetMarble. Many of our competitors have
significantly greater financial, marketing and game development
resources than we have.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
While the number of domestic massively multiplayer online game
developers in Korea may increase in the future, we expect the
online game industry will consolidate into a small number of
leading massively multiplayer online role playing game companies
as the high cost of game development, marketing and distribution
networks drives a greater number of unsuccessful massively
multiplayer online role playing game providers to go out of
business or be acquired.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Competition in overseas markets</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In each of the overseas markets in which Ragnarok Online is
distributed, we face strong competitive pressures. For example,
Japan&#146;s large game market is primarily driven by console
games although online games are gaining popularity among
Japanese game users. Our major competitors in Japan are Square
Enix Co., Ltd., well-known for its Final Fantasy games, NCsoft
Corporation and Webzen, Inc. Taiwan&#146;s online game industry
has demonstrated significant growth in recent years with the
market dominated by games developed in Korea. Our principal
competitors in Taiwan include Blizzard Entertainment, NCsoft
Corporation and Nexon Corporation. Thailand is also a fast
growing online game market in Asia, where we believe that
Ragnarok Online is the dominant online game based on the number
of peak concurrent users. There are many online game developers
and distributors in China such as The9 Limited, which publishes
the World of Warcraft, and Shanda Interactive Entertainment.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Competition from other game platforms</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We also compete against PC- and console-based game developers
that produce popular package games, such as Electronic Arts,
Sony Computer Entertainment, Blizzard Entertainment and Namco,
and game console manufacturers such as Microsoft, Sony and
Nintendo. In 2003, Microsoft and Sony introduced
Internet-enabled video consoles and we believe that they plan to
enhance their respective game platforms to provide online games
in Korea and other markets. For example, in Korea, Sony Computer
Entertainment Korea started distributing the PlayStation 2 game
consoles, equipped with a network adapter to enable online game
beginning in November 2003, and Microsoft started an online game
service on Xbox Live consoles beginning in October 2003. Several
PC-based game developers are introducing online features to
their <FONT style="white-space: nowrap">PC-packaged</FONT>
games, such as team plays or
<FONT style="white-space: nowrap">users-to</FONT>-users combat
features. In 2004, Nintendo launched Nintendo DS, a sequel to
Gameboy Advance, a handheld game console. In addition, Microsoft
launched Xbox 360, an enhanced version of Xbox in 2005.
Moreover, at the Electronic Entertainment Expo held in May 2006,
Sony announced PlayStation&nbsp;3, the next generation of
PlayStation platform, and Nintendo released details concerning
Wii, a sequel to its Game Cube platform.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Competition in the online game market is and is expected to
remain intense as established game companies with significant
financial resources seek to enter the industry. For a discussion
of risks relating to competition, see Item&nbsp;3.D. &#147;Risk
Factors&nbsp;&#151; Risks Relating to Our Business&nbsp;&#151;
We operate in a highly competitive industry and compete against
many large companies.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Insurance</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We maintain medical and accident insurance for our employees to
the extent required under Korean law, and we also maintain fire
and general commercial insurance with respect to our facilities.
We do not have any business liability or disruption insurance
coverage for our operations in Korea. We maintain a
directors&#146; and officers&#146; liability insurance policy
covering certain potential liabilities of our directors and
officers.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">42

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Laws and Regulations</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Korea</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Korean game industry and online game companies operating in
Korea are subject to the following law and regulations:
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B><I>The Sound Records, Video
Products and Game Products Act.</I>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In April 2006, the Korean National Assembly passed the Act on
Promotion of the Game Industry (&#147;New Act&#148;), which will
become effective in October 2006. Upon this Act becoming
effective, the Sound Records, Video Products and Game Products
Act (&#147;Current Act&#148;) will no longer be effective.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Report of business operation.</I> Under the Current Act, a
person or entity who desires to operate a game manufacturing
and/or distributing business shall report its business to the
relevant mayor or provincial governor. A person or entity who
has duly reported its game manufacturing and/or distributing
business under the Current Act will be deemed to have reported
under the New Act.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Rating regulation.</I> Under the Current Act, a person or
entity who desires to manufacture or distribute games in Korea
must obtain a game rating in advance from the Korea Media Rating
Board established under the Current Act. Online games are
generally divided into two rating categories: &#147;suitable for
users of all ages&#148; and &#147;suitable for users
18&nbsp;years of age or older.&#148; At the request of
applicants, however, the ratings category may be classified into
four categories: &#147;suitable for users of all ages,&#148;
&#147;suitable for users 12&nbsp;years of age or older,&#148;
&#147;suitable for users 15&nbsp;years of age or older&#148; and
&#147;suitable for users 18&nbsp;years of age or older.&#148;
Our online game, Ragnarok Online, was classified as
&#147;suitable for users 12&nbsp;years of age or older.&#148; In
addition, we received the same rating for R.O.S.E. Online.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the New Act, classification will be carried out by a game
rating board to be established under the New Act. Online games
will be generally divided into two rating categories:
&#147;suitable for users of all ages&#148; and &#147;not
suitable for adolescence.&#148; For purposes of the New Act,
&#147;adolescence&#148; means a person younger than
18&nbsp;years of age or a person enrolled in a high school under
the Elementary, Middle and High School Act. At the request of
applicants, however, the ratings category may be classified into
three categories: &#147;suitable for users of all ages,&#148;
&#147;not suitable for adolescence,&#148; and &#147;suitable for
users 12&nbsp;years of age or older.&#148; Online games
classified as &#147;suitable for users 12&nbsp;years of age or
older&#148; or &#147;suitable for users 15&nbsp;years of age or
older&#148; under the Current Act will be deemed to be
classified as &#147;suitable for users of all ages&#148; under
the New Act.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>The Telecommunications Business Act</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Report of business operation.</I> Under this Act we are
classified as a value-added communications service provider. A
person who intends to run a value-added communications business
shall report to the relevant Commissioner of Communications
Office to which the Minister of Information and Communication,
or MIC, has delegated its authority to accept and monitor such
reports.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Report of operation status.</I> We, as a value-added
communications service provider, are required to prepare and
submit statistical reports regarding, among others, the current
status of facilities by telecommunications service, subscription
records, current status of users, etc., to the MIC upon its
request. The MIC is responsible for information and
telecommunications policies under this Act. In addition, we are
required to report any transfer, takeover, suspension or closing
of our business activities to the MIC. The MIC may cancel our
registration or order us to suspend our business for a period of
up to one year if we fail to comply with its rules and
regulations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>The Act on Consumer Protection for Transactions through
    Electronic Commerce</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Protection of consumer information for electronic settlement
services.</I> Under this Act, we are required to take necessary
measures to maintain the security of consumer information
related to our electronic settlement services. We are also
required to notify consumers when electronic payments are made
and to indemnify consumers for damages resulting from
misappropriation of consumer information by third parties.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">43

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that we have instituted appropriate safety measures
to protect consumers against data misappropriation. To date, we
have not experienced material disputes or claims in this area.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>The Act on Promotion of Information and Communications
    Network Utilization and Information Protection</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Protection of personal information for users of information
and communications services.</I> Under this Act, we are
permitted to gather personal information relating to our
subscribers within the scope of their consent. We are, however,
generally prohibited from using personal information or
providing it to third parties beyond the purposes disclosed in
our subscriber agreements. Disclosure of personal information
without consent from a subscriber is permitted if:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    it is necessary for the settlement of service charges;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the personal information is processed so that the specific
    individual is unidentifiable and is provided for compiling
    statistics, academic research or surveys;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    it is otherwise permitted by other law and regulations.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are required to indemnify users for damages occurring as a
result of our violation of the foregoing restrictions, unless we
can prove the absence of willful misconduct or negligence on our
part. We believe that we have instituted appropriate measures
and are in compliance with all material restrictions regarding
internal mishandling of personal information.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>The Korean Civil Code and the Telecommunication Framework
    Act</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Protection of interests of online game users under
20&nbsp;years of age.</I> Pursuant to the Korean Civil Code,
contracts entered into with persons under 20&nbsp;years of age
without parental consent may be invalidated. Under the
Telecommunication Framework Act, the Korea Communications
Commission, or KCC, a regulatory agency of the MIC, was
established for, among others, deliberating issues related to
fair competition and consumer protection with respect to
telecommunication services and arbitrating disputes involving
telecommunication service carriers and their users. As a result,
telecommunication service contracts and online game user
agreements are required to specifically set forth procedures for
rescinding service contracts, which may be entered into by
persons under 20&nbsp;years of age without parental consent.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In November 2003, the KCC issued an order addressed to 15 major
online game companies in Korea, including us, to regulate
certain business practices relating to the settlement of service
charges involving persons under 20&nbsp;years of age. The KCC
raised concerns about the ability of persons under 20&nbsp;years
of age to subscribe to online game services without parental
consent by settling charges payable to online game companies
through settlement systems operated by fixed-line or broadband
service providers. The order required online game companies to
implement more specific and effective procedures to ensure,
where relevant, that parental consent has been specifically
obtained.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Although only a small number of our current subscribers are
using the settlement options mentioned in the KCC order, we are
enhancing our age verification and parental consent procedures
for players using the relevant settlement options. We do not
expect compliance with the KCC order to be burdensome.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>The Special Tax Treatment Control Law</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Taxation.</I> We are currently entitled to a reduced
corporate income tax rate of 13.75%, which is 50% of the
statutory tax rate, under this Law. This reduced tax rate
applies to certain designated small- and medium-sized venture
companies operating in Korea for six years. We are entitled to
such reduced tax rate for the fiscal year ended
December&nbsp;31, 2006. However, we do not know if we will
continue to be entitled to this reduced tax rate in 2007 and
thereafter. See Item&nbsp;5.A. &#147;Operating
Results&nbsp;&#151; Overview&nbsp;&#151; Income tax
expenses.&#148;
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">44

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Other related laws and regulations</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Even though there are no mandatory filing or reporting
obligations, since online games generally consist of animation
based on computer program software, the Copyright Act and the
Computer Programs Protection Act also apply to online games.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Taiwan</I></B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Consumer protection</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of increasing disputes between online game companies
and consumers in Taiwan, on February&nbsp;17, 2006, the ROC MOEA
promulgated a model consumer contract that online game companies
are encouraged to adopt and the ROC MOEA may, within its
authority, further consider promulgating certain standard
provisions that must be included in a consumer contract, which
governs the relationship between a consumer and an online game
company in the future when necessary. In general, the above
model contact and these standard provisions, once adopted by or
applied to online game companies, as the case may be, will
impose more responsibilities and liabilities on online game
companies. Deviations from this model contract or these standard
provisions may cause certain clauses to be invalidated.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Regulations of Internet content and game software</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the Children and Juvenile Welfare Act, it is illegal
to transmit or provide children under 18&nbsp;years of age with,
among other things, computer software, Internet, electronic
signal, DVD and compact disk, that contains content which
propagates violence, obscenity or similar material that may
undermine the mental health of a minor. Any person or entity
violating this Act may be subject to a fine and/or the
enterprise may be forced to cease to operate for up to one year.
In addition, according to this Act and the Regulations for the
Rating of Internet Content, or the Regulations, promulgated on
April&nbsp;26, 2004 and last amended on October&nbsp;17, 2005,
under this Act, Internet content shall not violate any mandatory
law and shall be classified as &#147;restricted&#148; and
therefore shall not be viewed by the children and juvenile under
age&nbsp;18, if such content meets, among others, any of the
following circumstances and harms the physical or mental
development of children or juvenile:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Excessive depiction of gambling, drug abuse, drug trafficking,
    robbery, burglary, kidnapping, homicide, or other criminal
    offenses;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Excessive depiction of the process of suicide;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Plot involving terror, bloodshed, cruelty, or perversion, which
    is presented in an intense manner, yet is still acceptable to
    adults in general;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Depiction of sexual acts or sexual obscenity, or exposure of
    genitals, through action, image, language, text, dialogue,
    sound, picture, photograph, or any other form, yet which does
    not embarrass or disgust adults in general.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, the Regulations suggest that the Internet content
that is not rated as restricted is better to be viewed by
children under the guidance of the parents, guardians, or others
taking care of them. Internet content rated as restricted shall
be labeled in accordance with the Regulations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Internet caf&#233; regulation</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Currently, there is no mandatory national legislation
specifically covering the operation of Internet caf&#233;s.
However, several municipalities and counties such as Taipei City
and Taipei County have promulgated specific ordinances imposing
restrictions on Internet caf&#233;s, which relate to the
location, building structure, facilities, business hours, age
limit of customers and the classification of Internet content.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Currently, an Internet caf&#233;s may be set up by registering
with the competent authority. However, according to the latest
public news, the ROC MOEA is considering to amend the Electronic
Game Arcade Business Regulation&nbsp;Act so that the Internet
caf&#233;s may be set up only after obtaining the approval of the
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">45
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
authority in the future. Furthermore, according to the public
news, the ROC MOEA is considering the limit the total numbers of
the Internet caf&#233;s. The ROC MOEA has also proposed draft
legislation that, if implemented, would regulate all Internet
Caf&#233;s located in the ROC. It is unclear, however, whether
or when the above Act and draft legislation will be amended or
passed by the Legislative Yuan. In addition, pursuant to the
Public Order Maintenance Act, Internet caf&#233;s may be subject
to a fine and/or a business suspension or shut-down if minors
are found at Internet caf&#233;s during late hours.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Privacy protection</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The ROC government has promulgated the Computer-Processed
Personal Data Protection Act to regulate the collection
processing, usage and transmission of computer-processed
personal data. Generally, an Internet content provider, or ICP,
will not be subject to this Act if it does not collect or
process the personal data through the computer as its main
business activity. However, an ICP may become liable for the
loss of any data so collected.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Japan</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Online game companies in Japan are not currently subject to any
government regulations targeted to the industry.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Protection of personal information.</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Businesses in Japan are subject to certain statutory
requirements with respect to personal information acquired
during the course of business. Pursuant to these statutory
requirements, businesses must set up procedures to appropriately
protect personal information from being used for any purpose
other than the initial purpose.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Regulations on sound upbringing of minors</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In Japan, Internet and game software content is generally
regulated at the local, rather than the national, level. Many
local governments have ordinances for sound upbringing of
minors, which, among other things, empower competent authorities
to designate game software as detrimental to the sound
upbringing of minors and prohibit the sale or distribution of
such designated game software. In addition, the Computer
Entertainment Rating Organization, or CERO, a nonprofit
organization, offers rating services for home-use games,
including online games. Game developers may request a rating for
their game software from CERO, which will then review such
software and assign one of the following four ratings:
&#147;suitable for users of all ages,&#148; &#147;suitable for
users 12&nbsp;years old or older,&#148; &#147;suitable for users
15&nbsp;years old or older,&#148; &#147;suitable for users
17&nbsp;years old or older,&#148; and &#147;suitable only for
users 18&nbsp;years old or older.&#148; The rating is based on,
among others, the degree of sex, violence and anti-social
expression in the game software content. Once a rating is
assigned, the relevant game software must prominently display
such rating.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Thailand</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
There is no specific law or regulation that directly governs
online games, online game companies or the industry. The online
game industry in Thailand operates under a legal regime that
generally regulates vendors of Internet caf&#233;s and game
shops rather than online game operators. Several of the
governmental agencies in Thailand work in cooperation with one
another in regulating the industry. The Thai government,
principally through the ICT Ministry with the cooperation of the
Ministry of Culture, is making efforts to regulate the
fast-growing Internet business, in particular the online game
industry. The Thai government has, since 2004, proposed measures
that would affect the online game industry, including the
restriction on the playing time of game users under
18&nbsp;years of age to three hours per day, prohibition of
gambling, lottery or game item trading via online games and
mandatory Internet caf&#233; registration. These measures are
pending legislative approval. The Ministry of Commerce in
Thailand is also responsible for regulating online businesses by
requiring registration.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">46

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Registration of Internet caf&#233;s and online game
    operators</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
There is no specific legislation that regulates online game
operators, Internet caf&#233;s or online game shops. The
Ministry of Commerce in Thailand, however, requires that online
game operators that offer online games over websites or Internet
portals to register for
<FONT style="white-space: nowrap">e-business</FONT> registration
and also requires Internet caf&#233;s and online game shops to
register under the Commercial Registration Act.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Regulation of business hours</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Control of Business Relating to Tape Cassette and
Television Material Act, computer game vendors and shops are
required to obtain a license to broadcast tape cassette and
television material, which includes CD-ROMS or digital
videodiscs. A condition to this license restricts the business
hours of game shops to generally from 10:00&nbsp;a.m. to
10:00&nbsp;p.m. In addition, game users under 18&nbsp;years of
age would be restricted from playing for more than three hours a
day under the pending legislative proposals. The Ministry of
Culture is responsible for granting licenses. The Act is
currently applicable to only offline game shops that use
CD-ROMs, hard discs or digital videodiscs.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Restriction on access by children</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Child Protection Act, the Royal Thai Police has the
authority to set restricted hours for children at game shops to
limit their time spent at such shops. Under this Act, the Royal
Thai Police also prohibits any person from forcing, threatening,
inducing, advocating, causing or permitting children to
misbehave or engage in misconduct. In addition, under this Act,
the ICT Minister requests online game operators to close access
to its game server after curfew hours. Users over 18&nbsp;years
of age, however, are permitted password protected access to
certain online game servers even during curfew hours by
obtaining a password available at the post office. The ICT
Minister has also implemented the Goodnet project, which
recommends that members of the computer and Internet service
provider community cooperate in restricting their business hours
to prevent children under the age of 18 from entering their
place of business during curfew hours.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Intellectual property</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Copyright Act, online games are classified as
copyrightable work in the category of computer program or
software, and, therefore, automatically protected in Thailand
without requiring further registration with or notification to
any governmental agency. Despite the lack of mandatory
registration or notification requirements, it is recommended
that copyright owners of online games notify the Department of
Intellectual Property, the Ministry of Commerce of their online
games to ensure that their names officially and publicly appear
in the listing of copyrighted computer software. The copyright
owner has the exclusive right to copy, modify and publish its
copyrighted work.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>China</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The online game industry in China operates under a legal regime
that consists of the State Council, which is the highest
authority of the executive branch of the PRC central government,
and various ministries and agencies under its leadership. These
ministries and agencies include:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the Ministry of Information Industry;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the Ministry of Culture;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the State Press and Publications Administration;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the State Copyright Bureau;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the Ministry of Public Security;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the Bureau of State Secrecy.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">47

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The State Council and these ministries and agencies have issued
a series of rules that regulate a number of different
substantive areas of our business, which are discussed below.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Licenses.</I> Online game companies are required to obtain
licenses from a variety of PRC regulatory authorities.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As an ICP business, online game companies are required to hold a
value-added telecommunications business operation license, or
ICP license, issued by the Ministry of Information Industry or
its local offices. Moreover, ICP operators providing ICP
services in multiple provinces, autonomous regions and centrally
administered municipalities may be required to obtain an
inter-regional ICP license.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Each ICP license holder that engages in the supply and servicing
of Internet cultural products, which include online games, must
obtain an additional Internet culture business operations
license from the Ministry of Culture.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The State Press and Publications Administration and the Ministry
of Information Industry jointly impose a license requirement for
any company that intends to engage in Internet publishing,
defined as any act by an Internet information service provider
to select, edit and process content or programs and to make such
content or programs publicly available on the Internet.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Furthermore, the Ministry of Information Industry has
promulgated rules requiring ICP license holders that provide
online bulletin board services to register with, and obtain an
approval from, the relevant telecommunications authorities.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Regulation of Internet content.</I> The PRC government has
promulgated measures relating to Internet content through a
number of ministries and agencies, including the Ministry of
Information Industry, the Ministry of Culture and the State
Press and Publications Administration. These measures
specifically prohibit Internet activities, which includes the
operation of online games, that result in the publication of any
content which is found to, among other things, propagate
obscenity, gambling or violence, instigate crimes, undermine
public morality or the cultural traditions of the PRC, or
compromise State security or secrets. If an ICP license holder
violates these measures, the PRC government may revoke its ICP
license and shut down its websites.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Regulation of information security.</I> Internet content in
China is also regulated and restricted from a State security
standpoint. The National People&#146;s Congress, China&#146;s
national legislative body, has enacted a law that may subject to
criminal punishment in China any effort to: (i)&nbsp;gain
improper entry into a computer or system of strategic
importance; (ii)&nbsp;disseminate politically disruptive
information; (iii)&nbsp;leak State secrets; (iv)&nbsp;spread
false commercial information or (v)&nbsp;infringe intellectual
property rights.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Ministry of Public Security has promulgated measures that
prohibit use of the Internet in ways which, among other things,
result in a leakage of State secrets or a spread of socially
destabilizing content. The Ministry of Public Security has
supervision and inspection rights in this regard. If an ICP
license holder violates these measures, the PRC government may
revoke its ICP license and shut down its websites.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Import regulation.</I> Licensing online games from abroad and
importing them into China is regulated in several ways. Any
license agreement with a foreign licensor that involves import
of technologies, including online game software into China, is
required to be registered with the Ministry of Commerce. Without
that registration, a licensee cannot remit licensing fees out of
China to any foreign game licensor. In addition, the Ministry of
Culture requires the licensee to submit for its content review
and approval any online games to be imported. If a licensee
imports games without that approval, the Ministry of Culture may
impose penalties, including revoking the Internet culture
business operations license required for the operation of online
games in China. Moreover, imported online games are required to
be registered with the Ministry of Information Industry or its
designated agencies pursuant to the Measures Concerning
Administration of Software Products before they can be operated
in China. Furthermore, the State Copyright Bureau requires the
licensee to register copyright license agreements relating to
imported software. Without the State Copyright Bureau
registration, a licensee cannot remit licensing fees out of
China to any foreign game licensor and is not allowed to publish
or reproduce the imported game software in China.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">48

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Intellectual property rights.</I> The State Council and the
State Copyright Bureau have promulgated various regulations and
rules relating to protection of software in China. Under these
regulations and rules, software owners, licensees and
transferees may register their rights in software with the State
Copyright Bureau or its local branches and obtain software
copyright registration certificates. Although such registration
is not mandatory under PRC law, software owners, licensees and
transferees are encouraged to go through the registration
process and registered software rights may receive better
protection.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Internet caf&#233; regulation.</I> Internet caf&#233;s are
required to obtain a license from the Ministry of Culture and
the State Administration of Industry and Commerce, and are
subject to requirements and regulations with respect to minimum
registered capital, location, size, number of computers, age
limit of customers and business hours. The PRC government has
published a series of rules in recent years to intensify its
regulation of Internet caf&#233;s. In February 2004, the State
Administration of Industry and Commerce, together with other
governmental authorities, issued a notice to suspend issuance of
new Internet caf&#233; licenses. Although such suspension has
generally been lifted, the aggregate number and the distribution
of Internet cafes in each province are subject to government
control.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Privacy protection.</I> PRC law does not prohibit Internet
content providers from collecting and analyzing personal
information from their users. PRC law prohibits Internet content
providers from disclosing to any third parties any information
transmitted by users through their networks unless otherwise
permitted by law. If an Internet content provider violates these
regulations, the Ministry of Information Industry or its local
bureaus may impose penalties and the Internet content provider
may be liable for damages caused to its users.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
While we believe that our licensee is in compliance with the
applicable laws and regulations governing the online game
industry in China, we cannot assure you that our operation of
Ragnarok Online in China will not be found to be in violation of
any current or future Chinese laws and regulations. Failure by
our overseas licensees to comply with laws and regulations in
China, including obtaining and maintaining the requisite
government licenses and permits, may have a material adverse
effect on our business, financial condition and results of
operations. See Item&nbsp;3.D. &#147;Risk Factors&nbsp;&#151;
Risks Relating to Our Business&nbsp;&#151; In many of our
markets, we rely heavily on our overseas licensees to operate
and distribute our games.&#148;
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>United States</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The content of video game software is not subject to federal
regulation in the United States. However, many video game
software publishers comply with the standardized rating system
established by the Entertainment Software Rating Board, or ESRB,
an independent entity established in 1994. ESRB rates video
games, websites and online games and reviews advertising by
video game publishers. Video game software publishers typically
include ESRB ratings and their meanings on their game software
packages.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Certain industry organizations may also require interactive
entertainment software publishers to provide consumers with
information on graphic violence, profanity or sexually explicit
material contained in software titles, and impose penalties for
noncompliance. Several proposals have been made for federal
legislation to regulate the interactive entertainment software,
motion picture and recording industries, including a proposal to
adopt a common rating system for interactive entertainment
software, television and music containing violence or sexually
explicit material, and the Federal Trade Commission has issued
reports with respect to the marketing of such material to
minors. Consumer advocacy groups have also opposed sales of
interactive entertainment software containing graphic violence
or sexually explicit material by pressing for legislation in
these areas (including legislation prohibiting the sale of
certain &#147;M&#148; rated video games to minors) and by
engaging in public demonstrations and media campaigns. If any
groups (including international, national and local political
and regulatory bodies) were to target &#147;M&#148; rated
titles, producers of such titles might be required to
significantly change or discontinue them.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">49

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='117'></A>
</DIV>

<!-- link1 "4.C. Organizational Structure" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>4.C.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Organizational Structure</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following is our organization chart:
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<IMG src="h00617h0061701.gif" alt="(FLOW CHART)">
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<A name='118'></A>
</DIV>

<!-- link1 "4.D. Property, Plants and Equipment" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>4.D.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property, Plants and
Equipment</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, our property and equipment mainly
consisted of (i)&nbsp;the land and building in which our
research institute was located at 619-4 Shinsa-Dong, Gangnam-Gu,
Seoul, 135-894, Korea, (ii)&nbsp;game engines,
(iii)&nbsp;network servers and (iv)&nbsp;personal computers. On
May&nbsp;22, 2006, we sold the land and building where our
research institute was located to Yahoh Communication for Won
9.5&nbsp;billion. As of December&nbsp;31, 2005, the net book
value of our property and equipment was Won 11,863&nbsp;million
(US$11,746 thousand). Because our main business is to develop
and distribute online game services, we do not own any factories
or facilities that manufacture products. There are no factories
currently under construction, and we have no plans to build any
factories in the future.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Korea</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our principal executive and administrative offices are located
at
14<SUP style="font-size: 85%; vertical-align: text-top">th</SUP>&nbsp;floor
of Meritz Tower, 825-2 Yeoksam-Dong, Gangnam-Gu, Seoul, 135-934,
Korea. We currently occupy 97,767&nbsp;square feet of office
space, which we lease from Meritz Fire and Marine Insurance Co.,
Ltd., pursuant to a lease that will expire on December&nbsp;4,
2007 and which is renewable for one additional year. The annual
lease payment amounts to Won 1,068&nbsp;million (US$1,057
thousand).
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that our existing facilities are adequate for our
current requirements and that additional space can be obtained
on commercially reasonable terms to meet our future requirements.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>United States</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The offices of GRAVITY Interactive, Inc., our wholly-owned
subsidiary in the United States, are located at 4505 Glencoe
Ave, 2nd&nbsp;Floor, Marina Del Ray, California. GRAVITY
Interactive occupied 5,815&nbsp;square feet of office space,
leased from a third party, as of December&nbsp;31, 2005. The
annual lease payment amounts to Won 96&nbsp;million (US$95
thousand). We believe that the existing facilities of GRAVITY
Interactive are adequate for its current requirements and that
additional space can be obtained on commercially reasonable
terms to meet its future requirements.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">50

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Japan</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, the registered offices of GRAVITY
Entertainment Corporation, our wholly-owned subsidiary in Japan,
were located at 18th&nbsp;Floor, Shinkasumigaseki Building,
I-Park 3-3-2 Kasumigaseki, Chiyoda-ku, Tokyo, Japan. GRAVITY
Entertainment occupied 355.3&nbsp;square feet of office space,
leased from a third party, as of December&nbsp;31, 2005. The
annual lease payment amounted to Won 34&nbsp;million (US$34
thousand) for the year ended December&nbsp;31, 2005. As of
March&nbsp;31, 2006, Gravity Entertainment terminated the lease
at Shinkasumigaseki Building and it has not entered into any
transaction for the lease or purchase of any real property for
its operations.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='119'></A>
</DIV>

<!-- link1 "ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;5.</B></TD>
    <TD>
    <B><I>OPERATING AND FINANCIAL REVIEW AND PROSPECTS</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>You should read the following discussion together with our
consolidated financial statements and the related notes which
appear elsewhere in this report. The following discussion is
based on our consolidated financial statements, which have been
prepared in accordance with U.S.&nbsp;GAAP. Our historic
performance may not be indicative of our future results of
operations and capital requirements and resources.</I>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='120'></A>
</DIV>

<!-- link1 "5.A. Operating Results" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>5.A.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating Results</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Overview</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are based in Korea and are a leading developer and
distributor of online games in Japan, Taiwan and Thailand based
on the number of peak concurrent users. From our inception in
April 2000 until commercialization of our first online game,
Ragnarok Online, in August 2002, our operating activities were
limited primarily to developing Ragnarok Online and rolling out
a free test, or beta-test, version of Ragnarok Online in
November 2001.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Ragnarok Online is currently commercially offered in Korea, the
United States and Canada by us and in 18 other overseas markets
by our overseas licensees, and accounted for 88.3% of our
revenues in 2005. Revenues generated from Ragnarok Online are
determined largely by the following factors: pricing and pricing
structure, the number of Ragnarok Online users and the average
number of hours users spend playing Ragnarok Online. In order to
play Ragnarok Online, users either pay a flat monthly fee or
purchase a fixed number of game hours. The pricing structure of
Ragnarok Online in a given country is determined primarily based
on the cost of publishing and operating Ragnarok Online, the
playing and payment patterns of users, the pricing of competing
games and the income per capita of consumers in that country.
The pricing of Ragnarok Online is determined by us in Korea, the
United States and Canada, and, in other countries, by our
overseas licensees after consultation with us and has remained
generally stable since its commercial launch in each of the
countries in which it is distributed. Due to competitive
pressure, we and our licensees have generally not raised prices
for Ragnarok Online following its commercial launch. The number
of Ragnarok Online users and the amount of Ragnarok Online usage
in a given country depend in part on the perceived quality of
Ragnarok Online and the level of local competition. While it is
difficult to accurately determine what accounts for the superior
quality of an online game, we believe that Ragnarok
Online&#146;s storyline, graphics and community-oriented themes,
together with our ability to timely maintain, update and enhance
the content and technical aspects of the game, have been largely
responsible for the game&#146;s commercial success to date.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In Korea, YNK Korea Inc. had the exclusive right to distribute
Ragnarok Online until July 2005, although we have managed
marketing, operation and billing activities of Ragnarok Online
since its commercial launch. In overseas markets other than the
United States and Canada, our licensees administer such
functions under a licensing agreement with us, under which we
generally receive initial license fees and royalty payments. The
term of the licensing agreements are generally two years, and
renewing licensees typically pay a lump-sum renewal fee in
addition to ongoing royalty payments. Our principal overseas
markets in which we offer Ragnarok Online through our licensees
are Japan, Taiwan and Thailand and China, and our licensees are
GungHo Online Entertainment Inc. in Japan, Soft-World
International in Taiwan, Shengqu Information Technology
(Shanghai) Co., Ltd., an affiliate of Shanda Interactive
Entertainment Limited in China and Asiasoft International in
Thailand.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">51

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Since Ragnarok Online&#146;s initial commercial launch in August
2002, we have experienced significant growth in revenues and net
income until 2004. However, in 2005, revenues and net income
decreased significantly. Our revenues decreased by 17.1% to Won
53,384&nbsp;million (US$52,856 thousand) in 2005 from Won
64,426&nbsp;million in 2004 but increased by 30.1% to Won
64,426&nbsp;million in 2004 from Won 49,515&nbsp;million in
2003. We recorded a net loss of Won 3,030&nbsp;million (US$3,000
thousand) in 2005 as compared to a net income of Won
19,140&nbsp;million and Won 28,057&nbsp;million in 2003 and
2004, respectively. Our gross profit margin also decreased from
85.9% in 2003 to 84.3% in 2004 and to 70.0% in 2005, and our
operating margin increased slightly from 59.8% in 2003 to 59.9%
in 2004 but turned to negative 5.0% due to an operating loss of
Won 2,668&nbsp;million (US$2,641 thousand) in 2005. We attribute
our revenue growth until 2004 largely to our early entry into
additional markets since Ragnarok Online&#146;s commercial
launch and the continuing popularity of Ragnarok Online among
users in the existing markets. We attribute our margin
improvement to the scalability of the online game business. Once
a game is launched and the initial development and marketing
costs have been expensed, relatively low marginal costs are
incurred to expand into additional markets through licensing
arrangements. Our revenue growth may be adversely affected in
the future by the popularity of online games newly introduced by
our competitors. Our future success depends largely on our
ability to develop or publish commercially successful new online
games.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In January 2005, we commercially launched R.O.S.E. Online, our
second online game, in Korea. R.O.S.E. Online is currently
commercially offered in the United States and Canada by us and
in two other overseas markets by our overseas licensees. Despite
our commercial launch of R.O.S.E. Online, our revenues and net
income declined in 2005 as compared to 2004. The decrease in
revenues was primarily due to the continuing decline in
subscription revenues and royalties from Ragnarok Online due to
Ragnarok Online reaching relative maturity in our principal
markets. Our operating expenses for 2005 increased as compared
to 2004 primarily as a result of the investigation into
accounting irregularities committed by the former Chairman and
the payment of STYLIA licensing fees and increase in development
costs. Our income tax rate in 2005 was 13.75%. In September
2005, as we were designated as a venture company and were
entitled to a 50% reduction in corporate income tax in 2005. We
also expect to enjoy such income tax rate reduction for the
fiscal year ended December,&nbsp;31, 2006.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Revenue recognition</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We derive, and expect to continue to generate, most of our
revenues from online game subscription fees paid by users in
Korea, the United States and Canada, and royalties and license
fees paid by our licensees in the overseas markets. Our revenues
can be classified into the following four categories:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    online games&nbsp;&#151; subscription revenue;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    online games&nbsp;&#151; royalties and license fees;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    mobile games;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    character merchandising, animation and other revenue.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Online games&nbsp;&#151; subscription revenue</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prepaid online game subscription fees are deferred and
recognized as revenue on a monthly basis in proportion to the
number of days lapsed or based on actual hours used.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Online games&nbsp;&#151; royalties and license fees</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We license the right to market and distribute our games in
various countries for a license fee and receive monthly
royalties based on a percentage of the licensees&#146; revenues
from our games. We generally are advised by each of our
licensees as to the amount of royalties earned by us from such
licensee within 15 to 25&nbsp;days following the end of each
month.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The initial license fees are deferred and recognized ratably as
revenue over the license period, which generally does not exceed
two years. The guaranteed minimum royalty payments are deferred
and recognized
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">52

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
as the relevant royalty is earned. For a table setting forth
details of each license agreement, see Item&nbsp;4.B.
&#147;Business Overview&nbsp;&#151; Our markets&nbsp;&#151;
Overseas markets.&#148; In addition, the license agreements are
renewed upon the expiration of their terms, we generally receive
renewal license fees, which are deferred and recognized ratably
over the new license period.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We also receive royalty revenues from our licensees based on an
agreed percentage of the licensee&#146;s revenues from our
games. Royalty revenues are recognized on a monthly basis after
the licensee confirms its revenues based on the licensees&#146;
sales from our games during the month.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Mobile games revenue</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Mobile games are played using mobile phones and other mobile
devices. Mobile game revenues are derived from contract prices
and a percentage of the per-download fees that users pay.
Contract prices are recognized when the products or services
have been delivered or rendered and the customers can begin its
exploitation or sale with accordance with the contractual terms,
and per-download fees are recognized in a monthly basis as they
are earned by the licensee.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Character merchandising, animation and other revenue</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We license the right to commercialize or distribute our games
characters or animation in exchange for contract prices. These
contract prices are recognized when the products or services
have been delivered or rendered and the customers can begin its
exploitation or sale with accordance with the contractual terms.
In addition, we receive royalty payment based on a specified
percentage of the licensees&#146; sales.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Cost of revenues</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our cost of revenues consists principally of the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    operational expenses, server depreciation expenses, server
    maintenance costs and related personnel costs and amortization
    of development-related costs as described in
    &#147;&#151;&nbsp;Critical accounting policies&nbsp;&#151;
    Capitalized software development costs&#148;;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    royalty payments to Mr.&nbsp;Myoung-Jin Lee, on whose cartoon
    series our game Ragnarok Online is based.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In developing Ragnarok Online, we obtained an exclusive license
from Mr.&nbsp;Myoung-Jin Lee to use the storyline and characters
from his cartoon titled Ragnarok for the production of online
games, animation and character merchandising. In return, we paid
Mr.&nbsp;Lee an initial license fee of 40&nbsp;million and are
required to pay royalties based on 1.0% or 1.5% of adjusted
revenues (net of value-added taxes and certain other expenses)
or 2.5%, 5% or 10% of net income generated from the use of the
Ragnarok brand, depending on the type of revenues received from
the operation or licensing of Ragnarok Online.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The cost of revenues from the payments to Mr.&nbsp;Myoung-Jin
Lee was Won 787&nbsp;million for 2004 and Won 542&nbsp;million
for 2005. This agreement expires in January 2033.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Selling, general and administrative expenses</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Selling, general and administrative expenses consist of sales
commissions paid to independent promotional agents that
distribute our online games to our Internet caf&#233;
subscribers in Korea, commissions paid to payment settlement
providers, administrative expenses and related personnel
expenses of executive and administrative staff, and marketing
and promotional expenses and related personnel expenses.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Research and development expenses</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Research and development expenses consist primarily of payroll
and other overhead expenses which are all expensed as incurred
until technological feasibility of a game is reached. Once
technological feasibility of a game is reached, these costs are
capitalized and, once commercial operation commences, amortized
as cost of revenues. See &#147;&#151;&nbsp;Critical accounting
policies&nbsp;&#151; Capitalized software development
costs.&#148;
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">53

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Interest expense</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In February and April 2002, we entered into agreements with YNK
Korea, an online game publisher in Korea listed on the KOSDAQ
Market Division of the Korea Exchange, or KOSDAQ, pursuant to
which we granted it the exclusive right to distribute Ragnarok
Online for a contractual period of three years from the date
Ragnarok Online was first commercialized. In consideration, we
received a lump sum payment in the amount of Won
7,000&nbsp;million at the inception of these agreements, which
we recorded as debt on our balance sheets beginning from such
year. Under the sales agency agreement that we entered into with
YNK Korea in April 2002 granting to it the exclusive
distribution right, YNK Korea owns the right to distribute
Ragnarok Online in Korea. However, in practice, we perform all
of the relevant marketing, advertising and selling activities,
and distribute Ragnarok Online from our websites and host it on
our servers. Sunny YNK changed its legal name to YNK Korea on
March&nbsp;27, 2006.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As there is no interest rate stated in the agreement with YNK
Korea, the interest is imputed based on the difference between
the principal amount of the loan and the total payments expected
to be made pursuant to the agreement. Accordingly, the repayment
of principal balance to YNK Korea is variable each year in
accordance with the amount of annual revenues generated from
distribution of Ragnarok Online and deduction of annual interest
expense allocated using the interest rate method. Pursuant to
the terms of these agreements, we are obligated to make payments
to YNK Korea based on a percentage of adjusted revenues (net of
value-added taxes and certain other expenses) related to
Ragnarok Online as follows:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    until the total payments to YNK Korea reach Won
    7,000&nbsp;million, 50% of our domestic and overseas adjusted
    revenues from Ragnarok Online. This amount was paid in full as
    of March 2003;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    once the total payments to YNK Korea exceed Won
    7,000&nbsp;million, 20% of our domestic adjusted revenues from
    Ragnarok Online and 10% of our overseas adjusted revenues from
    Ragnarok Online.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, the outstanding balance of our
debt payable to YNK Korea was nil as our agreement with YNK
Korea expired in July 2005. Pursuant to the expiration of our
agreement with YNK Korea in July 2005, we are no longer
obligated to make payments to YNK Korea for the period
subsequent to the date of expiration for revenues attributable
to Ragnarok Online. In accordance with such agreement, we
recognized payments in the amount of Won 7,037&nbsp;million and
Won 3,406&nbsp;million (US$3,372 thousand) for years 2004 and
2005, respectively, to YNK Korea. Of such payments, Won
2,391&nbsp;million and Won 1,150&nbsp;million (US$1,139
thousand) were allocated to principal, and Won
4,646&nbsp;million and Won 2,256&nbsp;million (US$2,234
thousand) were allocated to interest, respectively.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, pursuant to the terms of the agreement with YNK
Korea, once the cumulative royalty payments to YNK Korea reach
Won 7&nbsp;billion, YNK Korea is required to use 15% of future
royalty payments, paid by us, to fund additional marketing of
the Ragnarok Online. In March 2003, cumulative royalty payments
to YNK Korea reached Won 7&nbsp;billion. After January&nbsp;1,
2004, such marketing activities were performed by us and,
therefore, YNK Korea reimbursed us for these costs, which was
credited to advertising expenses within selling, general and
administrative expenses in the accompanying statement of
operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Foreign currency effects</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2005, 81.1% of our revenues were denominated in foreign
currencies, primarily in U.S.&nbsp;dollars and Japanese Yen. In
most of the countries in which our games are distributed, other
than the United States, Japan and European countries, the
revenues generated by our licensees are denominated in local
currencies, which include the NT dollar, the Thai Baht and the
Renminbi, and converted into the U.S.&nbsp;dollar for remittance
of monthly royalty payments to us. Depreciation of these local
currencies against the U.S.&nbsp;dollar will result in reduced
monthly royalty payments in U.S.&nbsp;dollar terms, thereby
having a negative impact on our revenues.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Although we receive our monthly royalty revenues from our
overseas licensees in foreign currencies, primarily in
U.S.&nbsp;dollar and Japanese Yen, in the case of the U.S. and
Japan and other local currencies, such as the NT dollar, the
Thai Baht and the Renminbi in our other principal markets,
substantially all of our costs are denominated in Won. We
receive monthly royalty payments from our overseas licensees
based on a
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">54

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
percentage of revenues confirmed and recorded at the end of each
month applying the foreign exchange rate applicable on such
date. We generally receive these royalty payments 20 to
30&nbsp;days after such record date (except in Europe and China,
where such payment could be received up to 60&nbsp;days after
the record date). Appreciation or depreciation of the Won
against these foreign currencies during this period will result
in foreign currency losses or gains and affect our net income in
dollar terms.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2005, we began entering into derivatives arrangements to
hedge against the risk of foreign currency fluctuations. As of
December&nbsp;31, 2005, we had no foreign currency forward
contracts outstanding. See Item&nbsp;11. &#147;Quantitative and
Qualitative Disclosures about Market Risk.&#148;
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Income tax expenses</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under Korean law and regulations, certain designated venture
companies may be entitled to enjoy preferential tax treatment
from the Korean government in the form of a 50% reduction in
corporate income tax rate during the year in which they first
generated taxable income and the following five years if such
venture companies satisfy a number of financial and
non-financial criteria (including the maintenance of their
status as designated venture companies). We have had the benefit
of the 50% reduction in corporate income tax rate in 2003, 2004
and 2005. Our current applicable corporate income tax rate
(including resident surtax) is 13.75% after applying the 50% tax
reduction rate. To become a designated venture company, among
others, a company must qualify as a small-and medium- sized
enterprise under the Framework Act on Small- and Medium-Sized
Enterprises. A company that is engaged in data processing or
computer-related business may qualify as a small- and
medium-sized enterprise under the Framework Act on Small- and
Medium-Sized Enterprises if, among other things, (i)&nbsp;it
hires less than three hundred full-time employees or
(ii)&nbsp;the total revenue of such company does not exceed Won
30&nbsp;billion. In 2004, we failed to satisfy both of these
tests. However, even if a company fails to satisfy both of the
preceding requirements, it will continue to enjoy its status as
a small-and medium-sized enterprise for the following three
years so long as that company neither (x)&nbsp;merges into, nor
consolidates with, another company nor (y)&nbsp;becomes an
affiliate of certain large enterprise. Accordingly, we believe
we will continue to qualify as a small- and medium-sized company
through 2007 if we neither merge into, nor consolidate with,
another company nor become affiliated with large enterprises
under Korean law.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In September 2005, we were designated as a venture company,
effective for two years, under the Act on Special Measures for
the Promotion of the Venture Business. However, the Act on
Special Measures for the Promotion of the Venture Business was
amended in March 2006 (effective in June 2006) and, according to
the amendment, some of the criteria to qualify as a designated
venture company were either deleted or amended, and the
effective period of designation was also reduced to one year.
Under the amendment, however, our status as a designated venture
company will remain effective until September 2007, unless our
status is otherwise revoked, and we would have the benefit of
the 50% reduction in corporate income tax rate in 2006. Based on
the new criteria, we are not sure whether we would qualify as a
designated venture company in September 2007.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To the extent we derive revenues from countries other than
Korea, we may be subject to income withholding in those
countries in which our products, including online games, are
distributed. Such withholding taxes are included under income
tax expenses. Such amounts are withheld by our overseas
licensees at the then-current withholding rates in such
countries. The effective withholding tax rates in our principal
overseas markets as of December&nbsp;31, 2005 are 10% in Japan
and China, 20% in Taiwan and 15% in Thailand. To the extent
Korea has a tax treaty with any such country, withholding rates
prescribed by such tax treaty apply. Under the Corporation Tax
Law of Korea, we are entitled to, and recognize, a tax credit
computed based on the amount of income withheld overseas when
filing our income tax return in Korea, up to a limited amount.
Accordingly, the amount of taxes withheld overseas may be offset
against taxes payable in Korea. Adverse changes in tax treaties
between Korea and the countries from which we receive license
fees and royalties or adverse changes in Korean tax law that
prevent us from recognizing tax credits for taxes withheld
overseas could materially and adversely affect our net income.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">55

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Recent Accounting Changes</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
No material change.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Critical Accounting Policies</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires us to make
estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities, contingent liabilities, and
revenue and expenses during the reporting period. We evaluate
our estimates on an ongoing basis based on historical experience
and other assumptions we believe are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. The policies
discussed below are considered by our management to be critical
because they are not only important to the portrayal of our
financial condition and results of operations but also because
application and interpretation of these policies require both
judgment and estimates of matters that are inherently uncertain
and unknown. As a result, actual results may differ materially
from our estimates.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Revenue recognition</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We derive, and expect to continue to generate, most of our
revenues from online game subscription fees paid by users in
Korea, and royalties and license fees paid by our licensees in
overseas markets. Our revenues can be classified into the
following four categories: (i)&nbsp;online games&nbsp;&#151;
subscription revenue; (ii)&nbsp;online games&nbsp;&#151;
royalties and license fees; (iii)&nbsp;mobile games; and
(iv)&nbsp;character merchandising, animation and other revenue.
For details, see &#147;&#151;&nbsp;Overview&nbsp;&#151; Revenue
recognition.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We recognize revenue in accordance with accounting principles
generally accepted in the United States, as set forth in
Securities and Exchange Commission Staff Accounting
Bulletin&nbsp;No.&nbsp;104, <I>Revenue Recognition, Statement of
Position 97-2, Software Revenue Recognition </I>and other
related pronouncements.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Allowances for doubtful accounts</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We maintain allowances for doubtful accounts receivable for
estimated losses that result from the inability of our customers
to make required payments. We base our allowances on the
likelihood of recoverability of accounts receivable based on
past experience and current collection trends. We record
allowances for doubtful accounts based on historical payment
patterns of our customers and increase our allowances as the
length of time such receivables become past due increases.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subsequent to June 2003, pursuant to agreements with various
payment gateway providers, the payment gateway providers are
responsible for remitting to us the full subscription revenues
generated in Korea after deducting their fixed service fees and
charges, which range from approximately 9% to 13% and risk of
loss or delinquencies are borne by such payment gateway
providers so that we no longer assume any collection risk.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Capitalized software development costs</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We account for capitalized software development costs in
accordance with Statement of Financial Accounting Standards
(&#147;SFAS&#148;) No.&nbsp;86, <I>Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.</I>
Software development costs incurred prior to the establishment
of technological feasibility are expensed when incurred and
treated as research and development, or R&#38;D, expenses. Once
the game has reached technological feasibility, all subsequent
software development costs for that product are capitalized
until it is released for sale. Technological feasibility is
evaluated on a product-by-product basis, but generally occurs
once the online game has a proven ability to operate on a
massively multi-player level. After the game is commercially
released, the capitalized product development costs are
amortized and expensed over the game&#146;s estimated useful
life, which is deemed to be three years. This expense is
recorded as a component of cost of revenues.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">56

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We evaluate the recoverability of capitalized software
development costs on a product-by product basis. Capitalized
costs for those products whose further development or sale is
terminated are expensed in the period of cancellation. In
addition, a charge to cost of revenues is recorded when
management&#146;s forecast for a particular game indicates that
unamortized capitalized costs exceed the net realizable value of
that asset.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Significant management judgments and estimates are required to
assess the timing of technological feasibility as well as the
ongoing recoverability of capitalized costs.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Impairment of goodwill and other intangible assets</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Goodwill represents the excess of the purchase price over the
fair value of the identifiable net assets acquired in our
acquisition of TriggerSoft and NEOCYON. As of December&nbsp;31,
2005, residual goodwill reflected on our balance sheet was Won
1,451&nbsp;million (US$1,437 thousand). At the time of such
acquisition, we estimated that Won 8,505&nbsp;million (US$8,421
thousand) of intangible assets were acquired from TriggerSoft
and NEOCYON, comprising of contract-based intangible assets. We
evaluate goodwill on an annual basis for possible impairment, in
accordance with SFAS&nbsp;No.&nbsp;142, <I>Goodwill and Other
Intangible Assets </I>(&#147;SFAS&nbsp;142&#148;), using fair
value techniques and market comparables. We assess impairment of
our definite-lived other intangible assets in accordance with
the provisions of SFAS&nbsp;No.&nbsp;144, <I>Accounting for the
Impairment or Disposal of Long-lived Assets</I>
(&#147;SFAS&nbsp;144&#148;), whenever events or changes in
circumstance indicate the carrying amount may not be recoverable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The assessment of impairments under SFAS&nbsp;142 and 144
requires significant judgment and requires estimates to assess
fair values. A percentage difference in cash flow projections or
discount rate used would not likely result in an impairment
write-down.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Income taxes</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We account for income taxes under the provisions of
SFAS&nbsp;No.&nbsp;109, <I>Accounting for Income Taxes.</I>
Under SFAS&nbsp;No.&nbsp;109, income taxes are accounted for
under the asset and liability method.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities and the extent
to which deferred tax assets can be recognized. A valuation
allowance is provided for deferred tax assets to the extent that
it is more likely than not that such deferred tax assets will
not be realized. Realization of future tax benefits related to
the deferred tax assets is dependent on many factors, including
our ability to generate taxable income within the period during
which the temporary differences reverse, the outlook for the
economic environment in which the business operates, and the
overall future industry outlook.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As described in &#147;&#151;&nbsp;Overview&nbsp;&#151; Income
tax expenses,&#148; we enjoyed in 2005 a reduced tax rate of
13.75%, which is 50% of the statutory tax rate and applied to
certain designated venture companies. As the reduced tax rate is
valid until 2006. In 2007, while we will reapply for our
designation as a venture company, it is uncertain as to whether
we will obtain this designation. However, even if we cease to
enjoy the 50% reduction in corporate income tax rate in 2007, we
will instead be entitled to a special tax exemption of 10% in
corporate income tax rate for the fiscal year 2007 by virtue of
being a small-and medium-sized company. Accordingly, deferred
income taxes as of December&nbsp;31, 2005 were calculated based
on the rate of 13.75%, 24.75% and 27.50% for the amounts
expected to be realized during the fiscal year 2006, 2007 and
2008, respectively.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">57

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Results of Operations</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>2005 Compared to 2004</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes our results of operations for the
periods indicated.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005(1)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>% Change</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>(In millions of Won and thousands of US$)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenues:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Online games&nbsp;&#151; subscription revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>11,249</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>11,138</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(30.8</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Online games&nbsp;&#151; royalties and license fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(17.1</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mobile games</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,664</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,648</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>342.6</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Character merchandising, animation and other revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,696</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,065</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14.8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,426</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53,384</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>52,856</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(17.1</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,116</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,879</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>58.5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>54,310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36,977</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(31.2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit margin(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>84.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70.0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating expenses:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling, general and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,660</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>125.4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,029</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,219</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,128</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>354.4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total operating expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,689</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40,014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>39,618</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>155.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>38,621</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,668</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,641</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(106.9</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating profit margin(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59.9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5.0</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5.0</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other income (expense):</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,822</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>495.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,732</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,158</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,137</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(54.4</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign currency gains (losses), net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(625</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(614</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(608</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1.8</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign currency forward transaction, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(853</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(845</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/M</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Others, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/M</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total net other expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,879</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(787</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(780</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(83.9</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income (loss) before income tax expenses, minority interest, and
    equity in loss of related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,455</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,421</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(110.2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income tax expenses (benefit)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(817</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(809</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(115.1</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income (loss) before minority interest and equity in loss of
    related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,336</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,612</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(109.3</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Minority interest(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(17</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/M</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Equity in loss of related joint venture(5)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>394</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>390</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>28,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(3,030</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>(3,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(110.8</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>N/ M = not meaningful</I>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    For convenience, the Won amounts are expressed in
    U.S.&nbsp;dollars at the rate of Won 1,010.0 to US$1.00.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Gross profit margin for each period is calculated by dividing
    gross profit by total revenues for each period.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Operating profit margin for each period is calculated by
    dividing operating income (loss) by total revenues for each
    period.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">58

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    In 2004, represents the minority interest in GRAVITY
    Entertainment Corporation, our Japanese subsidiary. We acquired
    the remaining 50% of voting equity interest in RO Production
    (the predecessor name of GRAVITY Entertainment Corporation) in
    October 2004, resulting in RO Production becoming our
    wholly-owned subsidiary. In 2005, represents the minority
    interest in NEOCYON, Inc., a 96.11% held subsidiary purchased in
    December 2005.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(5)&nbsp;</TD>
    <TD align="left">
    Represents the losses from our 30% equity investment in
    Animation Production Committee, a Japanese joint venture formed
    in order to produce and market Ragnarok the Animation through
    GRAVITY Entertainment Corporation, our Japanese subsidiary. This
    investment was accounted for using the equity method of
    accounting.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Revenues</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our total revenues decreased by 17.1% to Won 53,384&nbsp;million
(US$52,856 thousand) in 2005 from Won 64,426&nbsp;million in
2004, primarily due to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 17.1% decrease in royalties and license fees to Won
    37,375&nbsp;million (US$37,005 thousand) in 2005 from Won
    45,101&nbsp;million in 2004, which primarily resulted from an
    decrease in royalties and license fees due to a decrease in
    revenues from royalties and license fees attributable to our
    Ragnarok Online game resulting from increasing competition and
    as a result of the relative maturity of such game in our
    principal overseas markets. Royalties and license fees from
    Ragnarok Online decreased from Won 45,101&nbsp;million in 2004
    to Won 36,574&nbsp;million (US$36,212 thousand) in 2005; and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 30.8% decrease in subscription revenue to Won
    11,249&nbsp;million (US$11,138 thousand) in 2005 from Won
    16,253&nbsp;million in 2004. This 30.8% decrease resulted
    primarily from a 37.8% decrease in subscription revenue in Korea
    from Ragnarok Online to Won 7,913&nbsp;million (US$7,835
    thousand) in 2005 from Won 12,724&nbsp;million in 2004, and a
    24.5% decrease in the subscription revenue for Ragnarok Online
    in the United States to Won 2,665&nbsp;million (US$2,639
    thousand) in 2005 from Won 3,528&nbsp;million in 2004, due to a
    decrease in playing time by our users of Ragnarok Online
    resulting from increasing competition and as a result of the
    relative maturity of such game.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Such decreases in revenues were partially offset by:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an increase in the subscription revenue from R.O.S.E Online to
    Won 671&nbsp;million (US$664 thousand) in 2005, as such game was
    commercially launched in January 2005;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 14.8% increase in character merchandising, animation and other
    revenue to Won 3,096&nbsp;million (US$3,065 thousand) in 2005
    from Won 2,696&nbsp;million in 2004, which resulted primarily
    from a 47.78% increase in technical support revenue to Won
    467&nbsp;million (US$462 thousand) from Won 316&nbsp;million in
    2004 and 148.58% increase in animation revenue to Won
    614&nbsp;million (US$608 thousand) from Won 247&nbsp;million in
    2004;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 342.6% increase in mobile games revenue to Won
    1,664&nbsp;million (US$1,648 thousand) in 2005 from Won
    376&nbsp;million in 2004, which resulted primarily from increase
    in sales of mobile games in Taiwan, Japan, the Philippines,
    Singapore, Malaysia and Thailand and sales of Won
    429&nbsp;million resulting from the acquisition of NEOCYON, Inc.
    in November and December 2005.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Cost of revenues</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our cost of revenues increased by 58.5% to Won
16,038&nbsp;million (US$15,879 thousand) in 2005 from Won
10,116&nbsp;million in 2004, primarily due to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 53.5% increase in salaries and wages to Won 6,759&nbsp;million
    (US$6,692 thousand) in 2005 from Won 4,403&nbsp;million in 2004,
    as a result of increased hiring of game developers and overseas
    support staff from 174 as of December&nbsp;31, 2004 to 193 as of
    December&nbsp;31, 2005 and payment of incentives for the success
    of Ragnarok Online and 16% increase in average salaries paid to
    our employees which became effective as of June 2005;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">59
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 18.9% increase in fee payments to Won 2,250&nbsp;million
    (US$2,228 thousand) in 2005 from Won 1,893&nbsp;million in 2004,
    as a result of an increase in fees we pay to Korea Internet Data
    Center for server housing fees due to the commercial launch of
    R.O.S.E. Online in January 2005;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 55.4% increase in depreciation to Won 2,422&nbsp;million
    (US$2,398 thousand) in 2005 from Won 1,559&nbsp;million in 2004,
    as a result of the addition of servers and software in 2005 to
    better service Ragnarok Online and the addition of servers and
    software for the introduction of R.O.S.E Online;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 2,778.6% increase in stock option plan compensation expense to
    Won 806&nbsp;million (US$798 thousand) in 2005 from Won
    28&nbsp;million in 2004, which resulted from the increased
    amortization period to full year from 8&nbsp;days in 2004.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Gross profit and margin</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of the foregoing, our gross profit decreased by
31.2% to Won 37,346&nbsp;million (US$36,977 thousand) in 2005
from Won 54,310&nbsp;million in 2004. Our gross profit margin
decreased to 70.0% in 2005 from 84.3% in 2004.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Operating expenses</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Selling, general and administrative expenses.</I> Our
selling, general and administrative expenses increased by 125.4%
to Won 30,795&nbsp;million (US$30,490 thousand) in 2005 from Won
13,660&nbsp;million in 2004, primarily due to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 261.4% increase in fee payments to Won 9,570&nbsp;million
    (US$9,475 thousand) in 2005 from Won 2,648&nbsp;million in 2004,
    for fees and expenses incurred in connection with the
    investigation and subsequent restatement of the financial
    statements;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 36.0% increase in advertising expenses to Won
    6,273&nbsp;million (US$6,211 thousand) in 2005 from Won
    4,614&nbsp;million in 2004, as a result of our participation in
    the Tokyo Game Show in September 2005, our participation in the
    G-star Game Show in November 2005, advertising for Ragnarok
    Online&nbsp;II and increase in marketing expenses related to the
    introduction of STYLIA;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 80.4% increase in salaries and wages to Won 5,694&nbsp;million
    (US$5,638 thousand) in 2005 from Won 3,156&nbsp;million in 2004,
    primarily as a result of an increase in the number of employees
    for administrative and other support functions from 148 in 2004
    to 161 in 2005 and 16% increase in average salaries paid to our
    employees which became effective as of June 2005;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an increase in impairment on intangible assets to Won
    1,547&nbsp;million (US$1,532 thousand) in 2005 from nil in 2004,
    as a result of recognition of impairment losses for the
    remaining balance of intangible assets recognized in connection
    with the business combination with TriggerSoft in 2005;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 779.2% increase in tax and dues to Won 1,398&nbsp;million
    (US$1,384 thousand) in 2005 from Won 159&nbsp;million in 2004,
    as a result of having to pay back-taxes in the amount of Won
    1,060&nbsp;million, representing the amount of tax benefits
    granted to us in respect of the building and land at Shinsa-dong
    in July 2004 for research and development purposes.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Research and development expenses.</I> Our research and
development expenses increased 354.4% to Won 9,219&nbsp;million
(US$9,128 thousand) in 2005 from Won 2,029&nbsp;million in 2004,
primarily due to the payment of the consideration for the right
to publish STYLIA and Time N Tales upon completion of game
development, including salaries and wages, and provision for
severance indemnities, relating to the development of Requiem
and Ragnarok Online&nbsp;II, as such games were in the
pre-commercialization stage and not yet considered to be
technologically feasible.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">60
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Operating income and operating margin</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of the cumulative effects of the reasons stated
above, we recorded an operating loss of Won 2,668&nbsp;million
(US$2,641 thousand) in 2005 compared to operating income of Won
38,621&nbsp;million in 2004, and our operating margin recorded
to 59.9% in 2004 but we recorded operating loss in 2005.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Net other income (expense)</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our net other expense decreased 83.9% to Won 787&nbsp;million
(US$780 thousand) in 2005 from Won 4,879&nbsp;million in 2004
primarily due to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 54.4% decrease in interest expense from Won 4,732&nbsp;million
    in 2004 to Won 2,158&nbsp;million (US$2,137 thousand) in 2005 as
    a result of reduction in payments in connection with the loan
    from YNK Korea, due to the significant decrease in Ragnarok
    Online revenues and the expiration of the term of the contract
    with YNK Korea in July 2005;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an increase in interest income from Won 479&nbsp;million in
    2004, to Won 2,850&nbsp;million (US$2,822 thousand) in 2005
    resulting from an increase in short-term financial instruments
    in 2005;</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
which was partially offset by
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an increase in net loss on foreign currency forward transactions
    of Won 853&nbsp;million (US$845 thousand) in 2005 from nil in
    2004.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Income tax expenses (benefit)</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We recorded income tax benefit of Won 817&nbsp;million (US$809
thousand) in 2005, as compared to income tax expense of Won
5,406&nbsp;million in 2004. Income tax benefit in 2005 was due
to increase in deferred income tax assets, which resulted from
foreign tax credit carryforwards in the amount of Won
4,275&nbsp;million and tax credit carryforwards for research and
human resource development in the amount of Won
1,286&nbsp;million in connection with decrease in our taxable
income, in particular, subscription revenue and royalties and
license fees.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Minority interest</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Minority interest represents the net loss from GRAVITY
Entertainment Corporation, our Japanese subsidiary, and NEOCYON,
our 96.11%-held subsidiary acquired in December 2005,
attributable to third-party minority interest holders. We
acquired the remaining minority interest in GRAVITY
Entertainment Corporation in October 2004 and acquired 96.11% of
voting equity of NEOCYON in 2005.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Equity in loss of related joint venture</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Equity in loss of related joint venture represents the 30% of
the net loss incurred from our 30% equity investment in
Animation Production Committee, a Japanese animation joint
venture which we invested through GRAVITY Entertainment
Corporation, our Japanese subsidiary. This investment was
accounted for using the equity method of accounting.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Net income (loss)</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of the cumulative effects of the reasons stated
above, our net income recorded net loss of Won
3,030&nbsp;million (US$3,000 thousand) in 2005 as compared to
net income of Won 28,057&nbsp;million in 2004.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">61

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>2004 Compared to 2003</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes our results of operations for the
periods indicated.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="62%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>% Change</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(In millions of Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenues:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Online games&nbsp;&#151; subscription revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>18,560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12.4</TD>
    <TD align="left" valign="bottom" nowrap>)%</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Online games&nbsp;&#151; royalties and license fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>51.7</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mobile games</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/M</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Character merchandising, animation and other revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,185</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,696</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>127.5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,515</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,426</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,958</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,116</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45.4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>42,557</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>54,310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27.6</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit margin(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>85.9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>84.3</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating expenses:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling, general and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,660</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20.2</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,597</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,029</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total operating expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,957</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,689</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>38,621</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30.5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating profit margin(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59.8</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59.9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other income (expense):</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>94</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>409.6</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,465</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,732</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(26.8</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign currency gains</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>413</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>430</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4.1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign currency losses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(278</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,055</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>279.5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Others, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/M</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total net other expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,210</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,879</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(21.4</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income before income tax expenses, minority interest, and equity
    in loss of related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,390</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>44.3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income tax expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27.2</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income before minority interest and equity in loss of related
    joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,336</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48.0</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Minority interest(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(17</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/M</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Equity in loss of related joint venture(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/M</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>28,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>46.6</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>N/ M = not meaningful</I>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    Gross profit margin is calculated as gross profit divided by
    total revenues.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Operating profit margin is calculated as operating income
    divided by total revenues.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    Represents the minority interest in GRAVITY Entertainment
    Corporation, our Japanese subsidiary. We acquired the remaining
    50% of voting equity interest in RO Production in October 2004,
    resulting in RO Production becoming our wholly-owned subsidiary.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">62

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    Represents the losses from our 30% equity investment in
    Animation Production Committee, a Japanese joint venture to
    produce and market Ragnarok the Animation through GRAVITY
    Entertainment Corporation, our Japanese subsidiary. This
    investment was accounted for using the equity method of
    accounting.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Revenues</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our total revenues increased by 30.1% to Won 64,426&nbsp;million
in 2004 from Won 49,515&nbsp;million in 2003, primarily due to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an increase in royalties and license fees from Ragnarok Online
    to Won 45,101&nbsp;million in 2004 from Won 29,727&nbsp;million
    in 2003, primarily as a result of an increase in royalties and
    license fees from the overseas markets in which Ragnarok Online
    had already been commercialized and the commercialization of
    Ragnarok Online in 9 new markets in 2004 compared to 4 in 2003.
    The increase in revenue attributable to existing markets was Won
    13,795&nbsp;million and attributable to an entry into new
    markets was Won 1,579&nbsp;million;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 127.5% increase in character merchandising, animation and
    other revenue to Won 2,696&nbsp;million in 2004 from Won
    1,185&nbsp;million in 2003, which resulted primarily from a
    72.9% increase in character merchandising revenue to Won
    2,028&nbsp;million in 2004 from Won 1,173&nbsp;million in 2003,
    a 2,330.77% increase in technical support revenue to Won
    316&nbsp;million from Won 13&nbsp;million in 2003 and Won
    247&nbsp;million in revenue from animation in 2004 compared to
    none in 2003;</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
which more than offset
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 12.4% decrease in subscription revenue to Won
    16,253&nbsp;million in 2004 from Won 18,560&nbsp;million in
    2003. This 12.4% decrease resulted primarily from a 21.4%
    decrease in subscription revenue in Korea from Ragnarok Online
    to Won 12,724&nbsp;million in 2004 from Won 16,186&nbsp;million
    in 2003, mainly due to a decrease in playing time by our users
    of Ragnarok Online in Korea. This decrease was partially offset
    by a 48.7% increase in the subscription revenue in the United
    States to Won 3,528&nbsp;million in 2004 from Won
    2,373&nbsp;million in 2003.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Cost of revenues</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our cost of revenues increased by 45.4% to Won
10,116&nbsp;million in 2004 from Won 6,958&nbsp;million in 2003,
which was primarily due to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 63.4% increase in salaries and wages to Won 4,403&nbsp;million
    in 2004 from Won 2,695&nbsp;million in 2003, mainly as a result
    of an increase in hiring of game developers and overseas support
    staff from 130 as of December&nbsp;31, 2003 to 174 as of
    December&nbsp;31, 2004;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 58.4% increase in payments to Won 1,893&nbsp;million in 2004
    from Won 1,195&nbsp;million in 2003, as a result of an increase
    in fees we paid to Mr.&nbsp;Myoung-Jin Lee and server housing
    fees we paid to the KIDC; and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 41.5% increase in depreciation to Won 1,559&nbsp;million in
    2004 from Won 1,102&nbsp;million in 2003, which mainly resulted
    from the addition of servers and software in 2004 to better
    service Ragnarok Online.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Gross profit and margin</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of the foregoing, our gross profit increased by
27.6% to Won 54,310&nbsp;million in 2004 from Won
42,557&nbsp;million in 2003.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">63

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Operating expenses</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Selling, general and administrative expenses.</I> Our
selling, general and administrative expenses increased by 20.2%
to Won 13,660&nbsp;million in 2004 from Won 11,360&nbsp;million
in 2003, primarily due to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 81.6% increase in salaries and wages to Won 3,156&nbsp;million
    in 2004 from Won 1,738&nbsp;million in 2003, primarily as a
    result of an increase in the number of employees for
    administrative and other support functions from 86 in 2003 to
    148 in 2004;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 174.7% increase in depreciation expense to Won
    989&nbsp;million in 2004 from Won 360&nbsp;million in 2003,
    which mainly resulted from depreciation attributable to
    leasehold improvements in property and the addition of servers
    for the introduction of R.O.S.E. Online;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 9.0% increase in advertising expenses to Won
    4,614&nbsp;million in 2004 from Won 4,233&nbsp;million in 2003,
    which resulted from the hosting of the Ragnarok World
    Championship in August 2004, a significant increase in marketing
    expenses related to the introduction of R.O.S.E. Online and our
    participation in the Tokyo Game Show in September 2004.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Research and development expenses.</I> Our research and
development expenses increased 27.1% to Won 2,029&nbsp;million
in 2004 from Won 1,597&nbsp;million in 2003, primarily due to
expensing of all costs, including salaries and wages, and
provision for severance indemnities, relating to the development
of Requiem and Ragnarok Online&nbsp;II.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Operating income and operating margin</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of the cumulative effects of the reasons stated
above, our operating income increased 30.5% to Won
38,621&nbsp;million in 2004 from Won 29,600&nbsp;million in
2003, and our operating margin improved to 59.9% in 2004 from
59.8% in 2003.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Net other income (expense)</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our net other expense decreased 21.4% to Won 4,879&nbsp;million
in 2004 from Won 6,210&nbsp;million in 2003 primarily due to:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a 26.8% decrease in interest expense from Won 6,465&nbsp;million
    in 2003 to Won 4,732&nbsp;million in 2004 as a result of
    reduction in payment rates on the loan from YNK Korea, effective
    in March 2003, from 50% of all revenues from Ragnarok Online to
    20% for domestic adjusted revenues and to 10% for overseas
    adjusted revenues from Ragnarok Online despite the significant
    increase in such revenues;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an increase in interest income from Won 94&nbsp;million in 2003
    to W479&nbsp;million in 2004 resulting from an increase in
    short-term financial instruments in 2004 which more than offset;
    and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an increase in loss in foreign currency transaction from Won
    278&nbsp;million in 2003 to Won 1,055&nbsp;million in 2004
    resulting from the appreciation of the Won against the
    U.S.&nbsp;dollar during the period.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Income tax expenses</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We recorded income tax expenses of Won 5,406&nbsp;million in
2004, as compared to Won 4,250&nbsp;million in 2003. Our income
tax expenses increased as a result of an increase in our taxable
income, in particular, royalties and license fees from revenues
generated in overseas markets. In 2003 and 2004, we were
entitled to a reduced tax rate of 14.85% by virtue of the
Special Tax Treatment Control Law of Korea.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Minority interest</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Minority interest represents the net loss from GRAVITY
Entertainment Corporation, our Japanese subsidiary, which is
attributable to the third-party minority interest holders in
2003 and through October 2004. We acquired the remaining
minority interest in GRAVITY Entertainment Corporation in
October 2004.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">64
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Equity in loss of related joint venture</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Equity in loss of related joint venture represents the 30% of
the net loss incurred from Animation Production Committee, the
Japanese animation joint venture in which we, through GRAVITY
Entertainment Corporation, our Japanese subsidiary, made a 30%
equity investment. This investment was accounted for using the
equity method of accounting.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Net income</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As a result of the cumulative effects of the reasons stated
above, our net income increased 46.6% to Won 28,057&nbsp;million
in 2004 from Won 19,140&nbsp;million in 2003.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Impact of inflation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We believe that inflation in Korea and our other principal
markets has not had a material impact on our results of
operations. Inflation in Korea was 3.6% in 2003, 3.6% in 2004
and 2.7% in 2005.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Impact of foreign currency fluctuations</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
See Item&nbsp;11. &#147;Quantitative and Qualitative Disclosures
about Market Risk.&#148;
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Government, Economic, Fiscal, Monetary or Political
    Policies or Factors</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
See Item&nbsp;3.D. &#147;Risk Factors&nbsp;&#151; Risks Relating
to The Republic of Korea,&#148; Item&nbsp;4.B. &#147;Business
Overview&nbsp;&#151; Laws and Regulations&#148; and
Item&nbsp;10.E. &#147;Taxation.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='121'></A>
</DIV>

<!-- link1 "5.B. Liquidity and Capital Resources" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>5.B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Liquidity and Capital
Resources</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Liquidity</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth the summary of our cash flows for
the periods indicated:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="52%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>Year Ended December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005(1)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>(In millions of Won and thousands of US$)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents at beginning of period</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>16,243</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash provided by operating activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,823</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,642</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,928</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,750</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash used in investing activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10,564</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(19,007</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(79,046</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(78,263</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash provided by (used in) financing activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(414</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,635</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70,587</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>69,888</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net increase in cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,845</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,375</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents at end of period</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>25,874</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">US$</TD>
    <TD align="right" valign="bottom" nowrap>25,618</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Note:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    For convenience, the Won amounts are expressed in
    U.S.&nbsp;dollars at the rate of Won 1,010.0 to US$1.00.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prior to the commercial launch of Ragnarok Online in August
2002, our principal sources of liquidity were cash from equity
financing and incurrence of debt, including the debt we incurred
from YNK Korea. Following the commercial launch of Ragnarok
Online, our principal sources of liquidity have been cash flows
from our operating activities and equity financing and, to a
lesser extent, short-term borrowings. Net cash used in investing
activities have consisted primarily of investments in
acquisition of interests in companies which develop online games
or which provide related products and services. See Note&nbsp;6
to the notes to our consolidated financial statements included
in this annual report. However, our net property and equipment
decreased from Won 14,760&nbsp;million as of December&nbsp;31,
2004 to Won 11,863&nbsp;million (US$11,746 thousand) as of
December&nbsp;31, 2005 because land and building of total Won
8,099&nbsp;million was reclassified to asset held for sale.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">65

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In order to address short-term liquidity needs that may arise
from time to time in the course of our business, we have in the
past obtained short-term borrowings at market rates from other
game developers. In February 2003, we obtained a loan of Won
3&nbsp;billion at an annual interest rate of 18% from IAMBiz
Co., Ltd., which subsequently changed its name to Rhoceo Co.,
Ltd., to satisfy short-term liquidity needs relating to
marketing and promotional activities for Ragnarok Online and for
working capital. In September 2003, we fully repaid this loan
with cash flows generated from Ragnarok Online. In order to
address long-term liquidity needs, we have traditionally
resorted to the issuance of equity securities such as the rights
offering that we conducted in March 2003. Our cash investment
policy emphasizes liquidity and preservation of principal over
other portfolio considerations. We deposit our cash in demand
deposits, short-term financial instruments, which primarily
consist of time deposits with maturity of one year or less, and
money market funds with a rolling maturity of 90&nbsp;days or
less. Our short-term financial instruments increased from Won
1,600&nbsp;million as of December&nbsp;31, 2003 to Won
8,900&nbsp;million as of December&nbsp;31, 2004 to Won
59,900&nbsp;million (US$59,307 thousand) as of December&nbsp;31,
2005 primarily as a result of increased net cash from our
operations during the period and to cash raised from issuance of
new shares in connection with our initial public offering.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Cash received in the form of initial license fees are recognized
as revenues on a monthly basis over the life of our license
agreements as described in Item&nbsp;5.A.
&#147;&#151;&nbsp;Overview&nbsp;&#151; Revenue
recognition.&#148; The portion of initial license fees not yet
recognized as revenues are reflected in our balance sheet as
deferred income. Our total deferred income, both short-term and
long-term, increased from Won 4,258&nbsp;million as of
December&nbsp;31, 2003 to Won 7,597&nbsp;million as of
December&nbsp;31, 2004 and to Won 8,227&nbsp;million as of
December&nbsp;31, 2005 primarily due to our recognizing an
increased portion of initial license fees that we received in
2003, 2004 and 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Cash flows from operating activities.</I> Our increase in net
cash provided by operating activities from 2003 to 2004 and
decrease from 2004 to 2005 were primarily the result of our
recording net income in 2003 and 2004 compared to net losses in
2005. Our increase in net cash provided by operating activities
in 2004 compared 2003 reflected an adjustment of (i)&nbsp;Won
3,217&nbsp;million for depreciation and amortization,
(ii)&nbsp;Won 3,339&nbsp;million for deferred income from the
renewal of sales contract, and (iii)&nbsp;Won 913&nbsp;million
for provision for accrued severance benefits. This increase was
partially offset by Won 1,465&nbsp;million in deferred expenses
and Won 1,155&nbsp;million in deferred income taxes that we
recorded in 2004. Our decrease in net cash provided by operating
activities in 2005 compared 2004 reflected an adjustment of
(i)&nbsp;Won 6,232&nbsp;million (US$6,170 thousand) for deferred
income taxes, (ii)&nbsp;Won 2,288&nbsp;million (US$2,265
thousand) for payment of severance benefits. This decrease was
partially offset by Won 7,482&nbsp;million (US$7,408 thousand)
in Misappropriated funds receivable, Won 7,349&nbsp;million
(US$7,276 thousand) in accounts payable and Won
5,370&nbsp;million (US$5,317 thousand) in depreciation and
amortization that we recorded in 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Cash flows from investing activities.</I> Our increase in net
cash used in investing activities from 2003 to 2005 reflected
purchases of property and equipment in these years in connection
with the general growth of our businesses and the increase in
payment of leasehold deposits. In addition, our net cash used in
investing activities in 2004 and 2005 reflected the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our investment in short-term financial instruments in the amount
    of Won 7,300&nbsp;million in 2004 and Won 50,969&nbsp;million
    (US$50,464 thousand) in 2005;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an investment of Won 1,243&nbsp;million through our Japan
    subsidiary in the Animation Production Committee, a joint
    venture for the production and marketing of Ragnarok the
    Animation, in 2004;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an investment of Won 9,193&nbsp;million (US$9,102 thousand) in
    TriggerSoft Corporation and NEOCYON, Inc. in 2005;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our purchase of Emil Chronicle Online for Won 6,073&nbsp;million
    (US$6,013 thousand) in 2005.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Cash flows from financing activities.</I> Our net cash
provided by financing activities has been primarily affected by
the issuance of common shares in 2003 and 2005. In February
2005, we received net proceeds of Won 71,837&nbsp;million from
the sale of 1,400,000 common shares at US$13.5&nbsp;per ADS
(four ADSs are equivalent to one share of our common stock). In
March 2003, we received net proceeds of Won 3,206&nbsp;million
from the sale of 2,148,900 common shares at Won 1,500&nbsp;per
share.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">66

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Capital resources</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As our overseas operations are conducted primarily through our
subsidiaries and our overseas licensees, our ability to finance
our operations and any debt that we or our subsidiaries may
incur depends, in part, on the payment of royalties and other
fees by our overseas licensees and, to a lesser extent, the flow
of dividends from our subsidiaries.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, our primary source of liquidity
was Won 25,874&nbsp;million (US$25,618 thousand) of cash and
cash equivalents. We believe that our available cash and cash
equivalents and net cash provided by operating activities, will
be sufficient to meet our capital needs for at least the next
12&nbsp;months. However, we cannot assure you that our business
or operations will not change in a manner that would consume
available capital resources more rapidly than anticipated. We
may, however, require additional cash resources due to changed
business conditions or other future developments, including any
significant investments or acquisitions. If these sources are
insufficient to satisfy our cash requirements, we may seek to
sell additional securities either in the form of equity or debt.
In the past, we raised cash resources through the issuance of
common shares. See note&nbsp;11 to our audited consolidated
financial statements as of December&nbsp;31, 2004 and 2005 and
for the years ended December&nbsp;31, 2003, 2004 and 2005. The
sale of additional equity securities or convertible debt
securities could result in additional dilution to our
shareholders. In the past, we also raised cash by entering into
indebtedness arrangements such as the transaction entered into
with YNK Korea as described in Item&nbsp;5.A.
&#147;&#151;&nbsp;Overview&nbsp;&#151; Interest expense.&#148;
In addition, we may seek to incur indebtedness through the
issuance of debt securities or by obtaining a credit facility.
The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financial
covenants that would restrict operations. As of
December&nbsp;31, 2005, we have general borrowing facilities
with a limit of Won 1,533&nbsp;million and have an outstanding
balance of borrowing amounting to Won 1,233&nbsp;million
(US$1,221 thousand).
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We expect to have capital expenditure requirements for the
ongoing expansion into other markets, including hardware
expenditures for continuous expansions and upgrades to our
existing server equipment, and also for game development,
acquiring and publishing third party game developers or games
developed by them and continuing to invest in enhancing our
technological, marketing, distribution and service capabilities.
We believe that our internal cash flow from operations, together
with our proceeds from our initial public offering in February
2005 will be sufficient to satisfy our working capital
requirements through at least the first quarter of 2007,
including our new game development expenditures for Requiem and
Ragnarok Online&nbsp;II.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='122'></A>
</DIV>

<!-- link1 "5.C. Research and Development, Patents and Licenses, etc." -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>5.C.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and Development,
Patents and Licenses, etc.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
See Item&nbsp;5.A. &#147;Business Overview&nbsp;&#151; Game
development and publishing&#148; for our research and
development.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our intellectual property is an essential element of our
business operations. We rely on copyright, trademark, trade
secret and other intellectual property law, as well as
non-competition, confidentiality and license agreements with our
employees, suppliers, licensees, business partners and others to
protect our intellectual property rights. Our employees are
generally required to sign agreements acknowledging that all
inventions, trade secrets, works of authorship, developments and
other processes generated by them on our behalf are our
property, and assigning to us any ownership rights that they may
claim in those works. With respect to copyrights and computer
program rights created by our employees within their employment
scope and which are made public bearing our name, we are not
required to pay any additional compensation to our employees.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In developing Ragnarok Online, we obtained an exclusive license
from Mr.&nbsp;Myoung-Jin Lee to use the storyline and characters
from his cartoon titled Ragnarok for the production of online
games, animation and character merchandising. See Item&nbsp;4.B.
&#147;Business Overview&nbsp;&#151; Our products&nbsp;&#151;
Massively multiplayer online role playing games&nbsp;&#151;
Massively multiplayer online role playing games currently
offered&nbsp;&#151; Ragnarok Online&#148; above.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">67

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We are the registered owner of two registered software
copyrights to Ragnarok Online and Arcturus, a PC-based game,
each of which we have registered with the Program Deliberation
and Mediation Committee of Korea. As of December&nbsp;31, 2005,
we owned over 61 registered domain names, including our official
website and domain names registered in connection with each of
the games we offer. We also had registered trademarks and
trademark applications pending at patent and trademark offices
in 15 countries covering 12&nbsp;discrete trademarks, two design
patents and three analogous design patents, which are variations
of the 11&nbsp;design patents, registered with the Korea
Intellectual Property Office, and registered copyrights covering
11&nbsp;game characters, in each case as of December&nbsp;31,
2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='123'></A>
</DIV>

<!-- link1 "5.D. Trend Information" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>5.D.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Trend Information</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Trends, uncertainties and events which could have a material
impact on our sales, operating revenues and liquidity and
capital resources are discussed above in Item&nbsp;5.A.
&#147;&#151;&nbsp;Operating Results&#148; and Item&nbsp;5.B.
&#147;&#151;&nbsp;Liquidity and Capital Resources.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='124'></A>
</DIV>

<!-- link1 "5.E. Off-Balance Sheet Arrangements" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>5.E.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Off-Balance Sheet
Arrangements</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2005, we began entering into derivatives arrangements to
hedge against the risk of foreign currency fluctuations. As of
December&nbsp;31, 2005, we had an agreement with a financial
institution for foreign currency forward contract up to the
limit of US$5,000 thousand, although we did not have any
outstanding derivative financial instruments, off-balance sheet
guarantees, interest rate swap transactions or foreign currency
forward contracts. As of June&nbsp;26, 2006, we have foreign
currency forward contracts in the amount of US$1,000 thousand.
See Item&nbsp;11. &#147;Quantitative and Qualitative Disclosures
about Market Risk.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='125'></A>
</DIV>

<!-- link1 "5.F. Contractual Obligations" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>5.F.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Contractual Obligations</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth a summary of our contractual cash
obligations due by period as of December&nbsp;31, 2005.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="34%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>Payments Due by Period</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Between 1</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Between 3</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Beyond</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Up to 1&nbsp;Year</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>and 3&nbsp;Years</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>and 5&nbsp;Years</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>5&nbsp;Years</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="18" align="center" nowrap><B>(In millions of Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Long-term debt obligations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>572</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>419</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>273</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>205</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>1,469</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating lease obligations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,262</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,882</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,144</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Purchase obligations</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,400</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>6,234</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>3,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>273</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>205</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>10,013</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Long-term debt obligations.</I> We have financed our
operations primarily through incurrence of debt from financial
institutions, cash flows from operations as well as equity
investments by our founder and current shareholders.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Operating lease obligations.</I> With respect to our
operating lease obligations, the lease payments due by
December&nbsp;31, 2006 are Won 3,170&nbsp;million, Won
24&nbsp;million, Won 4&nbsp;million, Won 4&nbsp;million and Won
60&nbsp;million for our principal offices in Seoul, offices for
our subsidiary in the United States, offices for our subsidiary
in Japan, offices for NEOCYON and offices for Mados, Inc., a
Russian subsidiary of Cybermedia International, Inc, which is a
wholly-owned subsidiary of NEOCYON in Russia, respectively. The
lease terms expire in December 2007, April 2006, February 2006,
April 2006 and July 2006, respectively, for our principal
offices in Seoul, offices for our subsidiary in the United
States, offices for our subsidiary in Japan, offices for NEOCYON
and offices for Mados Inc., respectively. The renewal terms in
all of the leases are subject to market conditions.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Purchase obligations.</I> Our purchase obligations consist of
acquiring exclusive distribution rights of the online games. In
2005, we entered into publishing agreements to acquire exclusive
distribution rights of the online games, STYLIA and Time N Tales
which were under development by Sonnori Co., Ltd. and Ndoors
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">68

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
Corp., respectively. The purchase obligations due by
December&nbsp;31, 2005 are Won 1,000&nbsp;million and Won
1,400&nbsp;million for STYLIA and Time N Tales, respectively.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In December 2005, we entered into an agreement with Movida
Investment Inc., SOFTBANK CORP. and other eight companies to
invest in &#147;Online Game Revolution
Fund&nbsp;No.&nbsp;1&#148; amounting to Japanese Yen
1,000&nbsp;million as a limited partner with 10% interest of the
total fund and paid initial payment of Japanese Yen
100&nbsp;million. Upon 30&nbsp;days&#146; prior written notice
by general partner, Movida Investment Inc., we shall pay the
outstanding portion of contribution. At December&nbsp;31, 2005,
we do not estimate the time of notice. Therefore, the above
table does not include the investment obligation of Japanese Yen
900&nbsp;million due as of December&nbsp;31, 2005. In accordance
with the agreement, the investment term is 5&nbsp;years from the
effective date, which is January&nbsp;1, 2006.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For a description of our commercial commitments and contingent
liabilities, see note&nbsp;10 of the Notes to our consolidated
financial statements included elsewhere in this annual report.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For a description of our legal proceedings, see Item&nbsp;8.A.
&#147;Financial Information&nbsp;&#151; Legal Proceedings.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='126'></A>
</DIV>

<!-- link1 "ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;6.</B></TD>
    <TD>
    <B><I>DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<A name='127'></A>
</DIV>

<!-- link1 "6.A. Directors and Senior Management" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>6.A.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Directors and Senior
Management</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The names and positions of our directors and executive officers
are set forth below. The business address of all of our
directors and executive officers is our registered office at
14th&nbsp;floor of Meritz Tower,
<FONT style="white-space: nowrap">825-2&nbsp;</FONT>Yeoksam-Dong,
Gangnam-Gu, Seoul 135-934, Korea.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Executive Directors</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="52%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="45%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Position</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Il Young Ryu</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Chairman, President, Representative Director and Chief Executive
    Officer</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Seung Taik Baik</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Executive director and Chief Marketing Officer</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Il Young Ryu</I>, our chairman of the board of directors and
President, has served as our chief executive officer since
September&nbsp;21, 2005. Mr.&nbsp;Il Young Ryu is also currently
the chief executive officer of EZER Inc, our largest
shareholder. In 2004, he founded CJ Internet Japan and served as
its chief executive officer. In 2003, Mr.&nbsp;Ryu held
&#147;Online Game Fantasy Star&#148; event with the Softbank
group. In 2002, Mr.&nbsp;Ryu formed an alliance between Techno
Blood Inc. and Dasan Venture and managed Techno Blood&nbsp;&#38;
Dasan, the first Korea-Japan IT Fund. In 2001, he organized a
Korea/ Japan Bridging Business for Cultural Exchange between
Korea&nbsp;&#38; Japan. In 1999, Mr.&nbsp;Ryu founded Techno
Blood Inc.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Seung Taik Baik</I>, our chief marketing officer, has served
as a director since December 2005 and executive director since
March&nbsp;31, 2006. Mr.&nbsp;Baik has also served as the chief
executive officer of NEOCYON, Inc. from 2000. Mr.&nbsp;Baik
served as the local representative for Northeast Asia of
Entrepreneurs Organization in 2004, and has served as the
president of the Korea branch of Entrepreneurs Organization from
2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Independent Directors</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Nasdaq listing requirements, a majority of our board
of directors is required to consist of independent directors.
The independence standards under the Nasdaq rules exclude, among
others, any person who is a current or former employee of a
company (for the current year or the past three years) or of any
of its affiliates, as well as any immediate family member of an
executive officer of a listed company or of any of its
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">69

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
affiliates. The following individuals currently serve as members
of our board of directors who we believe satisfy the
independence requirements under the Nasdaq listing requirements.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Position</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    James Jinho Chang</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Independent director and audit committee member</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Yongho Park</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Independent director and audit committee member</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Jungil Lee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Independent director and audit committee member</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>James Jinho Chang </I>was elected as our independent director
and member of the audit committee at our shareholders&#146;
meeting in March 2006. Mr.&nbsp;Chang is currently an associate
professor at Yonsei University and has been in such position
since 2001. Mr.&nbsp;Chang has also served as an adviser of SBSi
since 2001. Mr.&nbsp;Chang has also worked as a research fellow
for corporate governance service in Korea Stock Exchange since
2001. Mr.&nbsp;Chang was the chief financial officer of SBSi
from 2000 to 2001 and an assistant professor at the Wharton
School of the University of Pennsylvania from 1998 to 2000.
Mr.&nbsp;Chang is a certified public accountant licensed in the
state of California.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Jungil Lee </I>was elected as our independent director and
member of the audit committee at our shareholders&#146; meeting
in March 2006. Mr.&nbsp;Lee is currently the managing attorney
of Daesung International Law Office. Mr.&nbsp;Lee is a member of
both the Korean and New York bar associations. Mr.&nbsp;Lee is a
member of Committee to review the Citizens&#146; Request for
Audit based on Article&nbsp;40 of Anti-Corruption Act at the
Board of Audit and Inspection of Korea since February 2006.
Mr.&nbsp;Lee was an outside director of Pyeong Hwa Automotive
Co., Ltd. from March 2002 to March 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Yongho Park </I>was elected as our independent director and
member of the audit committee at our shareholders&#146; meeting
in March 2006. Mr.&nbsp;Park has served as chairman of Valmore
Partners, a strategic management consulting firm, since 2005.
Mr.&nbsp;Park was the chief executive officer and president of
Pernod Ricard Korea from 2001 to 2004 and an executive vice
president of sales at Doosan Seagram and Seagram Korea from 1998
to 2001.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Executive Officers</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to the executive directors who are also our
executive officers, we currently have the following executive
officers.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Position</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Kyu Hyeong Lee</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Senior Executive Vice President of Human Resources and Chief
    Compliance Officer</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    James O. Kwon</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Chief Financial Officer</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Won Seok Choi</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Chief Technology Officer</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Kyu Hyeong Lee </I>has served as our senior executive vice
president of human resources since April 2005 and chief
compliance officer since February 2006. Mr.&nbsp;Lee worked as a
human resources consultant for the Interim Management Service, a
management consulting company, from August 2004 to April 2005
and as a director of human resources at Cisco Systems
Corp./Korea from June 2002 to August 2004. Mr.&nbsp;Lee also
worked at Tyco International Ltd./Asia Region from June 1999 to
April 2002.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>James Ohsung Kwon </I>has served as our chief financial
officer since January 2006. Prior to joining us, Mr.&nbsp;Kwon
served as a principal at LG Venture Investment from January 2000
to December 2005. Mr.&nbsp;Kwon also was previously a consultant
with PwC Consulting in Korea from January 1997 to December 1999.
Mr.&nbsp;Kwon has been involved in investments over 15 Korean
venture companies.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I>Won Seok Choi </I>has served as our chief technology officer
since December 2005. Prior to joining us, Mr.&nbsp;Choi was the
chief executive officer and chief technology officer of Tiz Co.,
Ltd., an online game developer, from September 2002 to February
2005. Mr.&nbsp;Choi served as chief technology officer at
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">70
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
MirionSystem Co., Ltd., an online game developer, from February
2001 to August 2002 and as team leader at Enterone Corp., an
online game developer from December 1999 to February 2001.
Having approximately ten years of experience in the online game
industry, Mr.&nbsp;Choi participated in the development of over
ten online games.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The registered address of our directors and executive officers
is 14th&nbsp;floor of Meritz Tower,
<FONT style="white-space: nowrap">825-2&nbsp;</FONT><FONT style="white-space: nowrap">Yeoksam-Dong,</FONT>
Gangnam-Gu, Seoul 135-934, Korea.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='128'></A>
</DIV>

<!-- link1 "6.B. Compensation" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>6.B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Compensation</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have not extended any loans or credit to any of our directors
or executive officers, and we have not provided guarantees for
borrowings by any of these persons. For the year ended
December&nbsp;31, 2005, the aggregate amount of compensation
paid by us to all directors and executive officers was Won
1,074&nbsp;million (US$1,063 thousand), which excludes Won
141&nbsp;million (US$140 thousand) set aside or accrued to
provide for retirement or similar benefits to our executive
officers. At our general meeting of shareholders held on
March&nbsp;31, 2006, our shareholders approved an aggregate
amount of up to Won 1.4&nbsp;billion as compensation for our
directors for 2006.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Labor Standard Act and the Employee Retirement Benefit
Security Act, we are required to pay a severance amount to
eligible employees, who voluntarily or involuntarily terminate
their employment with us, including through retirement. The
severance amount for our officers and directors equals the
monthly salary at the time of his or her departure, multiplied
by the number of continuous years of service, and further
multiplied by a discretionary number set forth in our severance
payment regulation, which depending on the position of the
officer or director ranges from two to three. As of
December&nbsp;31, 2005, we provided Won 588&nbsp;million (US$582
thousand), being 100% of our severance liability as of such date.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We maintain a directors&#146; and officers&#146; liability
insurance policy covering certain potential liabilities of our
directors and officers.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='129'></A>
</DIV>

<!-- link1 "6.C. Board Practices" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>6.C.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Board Practices</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Board of directors</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our board of directors has the ultimate responsibility for the
administration of our affairs. Our articles of incorporation, as
currently in effect, provide for a board of directors comprised
of not less than three directors and also provide for an audit
committee, a compensation committee and a director nomination
committee. We currently have 5 members serving as members of our
board of directors. The directors are elected at a
shareholders&#146; meeting by a majority vote of the
shareholders present or represented, which majority is not less
than one-fourth of all issued and outstanding shares with voting
rights, so long as not less than one third of all issued and
outstanding shares with voting rights are present at the
shareholders&#146; meeting.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Each of our directors is elected for a term of three years,
which may be extended until the close of the annual general
meeting of shareholders convened in respect to the last fiscal
year of such director&#146;s term. However, directors may serve
any number of consecutive terms and may be removed from office
at any time by a special resolution adopted at a general meeting
of shareholders.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The board of directors elects one or more representative
directors from its members. A representative director is
authorized to represent and act on behalf of such company and
has the authority to bind such company. A company may have
(i)&nbsp;one sole representative director, (ii)&nbsp;two or more
co-representative directors or (iii)&nbsp;two or more joint
representative directors. The powers and authorities of a sole
representative director and any co-representative directors are
exactly the same while the only distinction for joint
representative directors is that they must act jointly (i.e.,
all of the joint representative directors must act together in
order to bind the company while co-representative directors may
act independently). Currently our board of directors has elected
Il Young Ryu as our representative director. Under the Korean
Commercial Code and our articles of incorporation, any director
with special interest in an agenda of a board meeting may not
exercise his voting rights in such board meeting.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">71

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Independent directors</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our ADSs are listed on Nasdaq and we are subject to the Nasdaq
listing requirements applicable to
<FONT style="white-space: nowrap">non-U.S.&nbsp;</FONT>companies.
Under the Nasdaq listing requirements, we are required to
appoint a minimum of three independent directors, unless we
receive an exemption from Nasdaq to appoint a lesser number. The
independence standards under the Nasdaq rules exclude, among
others, any person who is a current or former employee of a
company (for the current year or the past three years) or of any
of its affiliates, as well as any immediate family member of an
executive officer of a listed company or of any of its
affiliates. We also intend to comply with the Nasdaq listing
requirements regarding audit committee requirements.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Committees of the board of directors</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under our articles of incorporation, we currently have three
committees that serve under our board of directors:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the audit committee;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the director nomination committee;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the compensation committee.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Audit committee</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the U.S.&nbsp;Sarbanes-Oxley Act and the Nasdaq listing
requirements,
<FONT style="white-space: nowrap">non-U.S.&nbsp;</FONT>issuers
such as ourselves are required to comply with the Nasdaq audit
committee requirements by July&nbsp;31, 2005. To comply with the
Securities and Exchange Commission rules and regulations and the
Nasdaq listing requirements regarding the need for, and
composition of, an audit committee, we established an audit
committee at our extraordinary shareholders meeting in December
2004.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The audit committee currently consists of the following
directors: James Jinho Chang, Yongho Park, Jungil Lee, all of
whom are independent as set forth in the Nasdaq listing
requirements. All of our independent directors are financially
literate and have accounting or related financial management
expertise. Our board of directors has determined that James
Jinho Chang is an &#147;audit committee financial expert,&#148;
as such term is defined by the regulations of the Securities and
Exchange Commission issued pursuant to Section&nbsp;407 of the
Sarbanes-Oxley Act. The audit committee is responsible for
examining internal transactions and potential conflicts of
interest and reviewing accounting and other relevant matters.
Under the Korean Commercial Code, if a company establishes an
audit committee, such company is not permitted to have a
statutory auditor. The audit committee is chaired by James Jinho
Chang.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Director nomination committee</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Director nomination committee consists of the following
three directors, James Jinho Chang, Yongho Park and Jungil Lee,
all of whom are independent as set forth in the Nasdaq listing
requirements. This committee will be responsible for
recommending and nominating candidates for our director
positions and related matters. The committee is currently
chaired by Jungil Lee.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Compensation committee</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Compensation committee consists of following three
directors, James Jinho Chang, Yongho Park, Jungil Lee, all of
whom are independent as set forth in the Nasdaq listing
requirements. This committee is responsible for reviewing and
approving the management&#146;s evaluation and compensation
programs. The committee is currently chaired by Yongho Park.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">72

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='130'></A>
</DIV>

<!-- link1 "6.D. Employees" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>6.D.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Employees</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, we had 507&nbsp;full-time
employees, of whom 478 were located in Korea and 29&nbsp;were
stationed overseas. The following table sets forth the number of
our employees by department as of the dates indicated.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="70%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Senior management</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Finance</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Marketing</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Game development and support</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>225</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>357</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>443</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>251</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>399</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>507</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We do not have a labor union and none of our employees are
covered by collective bargaining agreements. We have a
labor-management council as required under the Act on the
Promotion of Workers&#146; Participation and Cooperation. We
believe that we maintain a good working relationship with our
employees and we have not experienced any significant labor
disputes or work stoppages.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, GRAVITY Interactive, Inc. employed
22 employees in the United States, GRAVITY Entertainment
Corporation employed two employees in Japan, TriggerSoft
employed 32 employees and NEOCYON employed 40 employees. None of
the employees of GRAVITY Interactive, GRAVITY Entertainment,
TriggerSoft or NEOCYON are represented by a labor union or
covered by a collective bargaining agreement.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have entered into a standard annual employment contract with
most of our officers, managers and employees. These contracts
include a covenant that prohibits the officer, manager or
employee from engaging in any activities that compete with our
business during, and for six months after, the period of their
employment with our company.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Labor Standard Act and the Employee Retirement Benefit
Security Act, employees with more than one year of service with
us are entitled to receive a lump sum payment upon voluntary or
involuntary termination of their employment. The amount of the
benefit equals the employee&#146;s monthly salary, calculated by
averaging the employee&#146;s daily salary for the three months
prior to the date of the employee&#146;s departure, multiplied
by the number of continuous years of employment. In addition, we
provide our registered directors with a lump sum payment upon
voluntary or involuntary termination of their employment in the
amount of two to three times the monthly salary of the departing
registered directors at the time of termination of employment.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the Korean National Pension Law, we are required to
pay 4.5% of each employee&#146;s annual wages to the National
Pension Corporation. Our employees are also required to pay 4.5%
of their annual wages to the National Pension Corporation. Our
employees are entitled to receive an annuity in the event they
lose, in whole or in part, their wage earning capability. The
total amount of contributions we made to the National Pension
Corporation in 2003, 2004 and 2005 was Won 268&nbsp;million, Won
537&nbsp;million and Won 910&nbsp;million (US$901 thousand),
respectively.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='179'></A>
</DIV>

<!-- link1 "6.E. Share Ownership" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>6.E.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Share Ownership</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Some of our directors and officers own our common shares. See
Item&nbsp;7.A. &#147;Major Shareholders.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Stock option plan</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under our articles of incorporation and the Act on Special
Measures for the Promotion of the Venture Business, we may grant
options for the purchase of our shares to certain qualified
officers, employees and third parties. Set forth below are the
details of our stock option plan as currently contained in our
articles of incorporation.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">73

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Stock options may be granted to our officers and employees who
    have contributed or are qualified to contribute to our
    establishment, management, overseas business and technical
    innovation. Notwithstanding the foregoing, no stock options may
    be granted to any executive officer or employee who is
    (i)&nbsp;our largest shareholder, (ii)&nbsp;a holder of 10% or
    more of our shares outstanding, (iii)&nbsp;certain specially
    related persons of the person set forth in (i)&nbsp;and
    (ii)&nbsp;above, or (iv)&nbsp;a shareholder who would own 10% or
    more of our shares upon exercise of options granted under the
    stock option plan.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Stock options may be granted by a special resolution of our
    shareholders with the aggregate number of shares issuable not to
    exceed 50% of the total number of our then issued and
    outstanding common shares.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Upon exercise of stock options, we will deliver our common
    shares or pay in cash the difference between the market price of
    our shares and the option exercise price.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Stock option granted under the stock option plan, in case new
    shares are issued, will have a minimum exercise price equal to
    the higher of (i)&nbsp;the market price of our shares calculated
    pursuant to the method under the Inheritance and Gift Tax Law
    and (ii)&nbsp;the par value of our shares, and in other cases,
    will have a minimum exercise price equal to or higher than the
    market price of our shares calculated pursuant to the method
    under the Inheritance and Gift Tax Law.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Stock options can vest after two years from the stock option
    grant date and can be exercised up to five years from the
    vesting date. The stock option may be cancelled by a resolution
    of our board of directors if (i)&nbsp;the officer or employee
    who holds the option voluntarily resigns or is discharged from
    office prior to the vesting date; (ii)&nbsp;the officer or
    employee who holds the option causes material damage to us by
    willful misconduct or negligence; (iii)&nbsp;we are unable to
    deliver our shares or pay the prescribed amount due to
    bankruptcy or dissolution, or (iv)&nbsp;the occurrence of any
    cause for cancellation of stock options specified in the stock
    option agreement.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On December&nbsp;24, 2004, our shareholders approved the
implementation of our employee stock option plan and the
granting of stock options under this plan to our directors,
officers and employees.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Each stock option confers the right on the grantee to purchase
one share of our common stock at the exercise price. The
exercise price for these stock options are, in the case of some
senior employees, Won 55,431&nbsp;per share, representing the
price per share of our common shares (or ADS equivalent) offered
to the public in our initial public offering of February 2005,
and in the case of all other eligible employees, Won
45,431&nbsp;per share, representing the price per share offered
to the public less Won 10,000&nbsp;per share. A total of
197,400&nbsp;shares of stock options were outstanding,
representing 2.8% of our total number of shares issued as of
December&nbsp;31, 2005, consisting of (i)&nbsp;8,000&nbsp;shares
issued to directors and officers and
(ii)&nbsp;189,400&nbsp;shares were issued to a total of 222
eligible employees.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">74

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='131'></A>
</DIV>

<!-- link1 "ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;7.</B></TD>
    <TD>
    <B><I>MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<A name='132'></A>
</DIV>

<!-- link1 "7.A. Major Shareholders" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>7.A.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Major Shareholders</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth information known to us with
respect to the beneficial ownership of our common shares as of
June&nbsp;26, 2006, by each person known to us to own
beneficially 5% or more of our common shares based on 6,948,000
of our common shares outstanding. None of our common shares
entitles the holder to any preferential voting rights.
Beneficial ownership is determined in accordance with the rules
of the Securities Exchange Commission, and includes the power to
direct the voting or the disposition of the securities or to
receive the economic benefit of the ownership of the securities.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="65%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Number of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Percentage</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Beneficially</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Beneficially</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Owned</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Owned</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    EZER, Inc.(1)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,640,619</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>52.39%</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Moon Capital Master Fund&nbsp;LP(2)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>549,296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.90%</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Ramius Capital Group, L.L.C.(3)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>503,837</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.25%</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Government of Singapore Investment Corporation Pte Ltd(4)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>416,541</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.99%</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Notes:</I>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(1)&nbsp;</TD>
    <TD align="left">
    On August&nbsp;30, 2005, Mr.&nbsp;Jung Ryool Kim, our former
    controlling shareholder and Chairman, sold all of our shares
    that Mr.&nbsp;Kim and his family members owned to EZER Inc., a
    Japanese Company (&#147;EZER&#148;), pursuant to a stock
    purchase agreement by and among Jung Ryool Kim, Ji Young Kim,
    Young Joon Kim, Ji Yoon Kim and EZER dated August&nbsp;30, 2005.
    Pursuant to the share sale transaction, EZER became our largest
    shareholder. EZER, which is 100% owned by our Chairman and CEO,
    Il Young Ryu, is the operator of an investment fund established
    pursuant to a contractual relationship known in Japan as a
    &#147;tokumei kumiai&#148; (&#147;TK Relationship&#148;) with
    Techno Groove, Inc. a Japanese company and a wholly-owned
    subsidiary of Asian Groove, Inc., a Japanese company
    (&#147;Asian Groove&#148;). The TK Relationship, which is
    governed by the Commercial Code of Japan, is used in Japan as a
    means of making and managing investments, and under the
    investment fund agreement for the TK Relationship (the &#147;TK
    Agreement&#148;), EZER acts as the operator of a fund,
    established in Japan under the name of &#147;Asian Star
    Fund,&#148; using the capital contribution made by Techno Groove
    as an investor in the fund. Asian Star Fund was established for
    the sole purpose of investing in our shares.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">
    In accordance with a Schedule&nbsp;13/D filed by Techno Grove,
    among others, their investment in the Asian Star Fund was
    financed through a loan from Son Assets Management Inc.
    (&#147;SAM&#148;), a Japanese company, in the amount of Japanese
    Yen 40&nbsp;billion. In exchange, Asian Groove, a Japanese
    company and the parent company of Techno Groove, pledged all of
    its shares of GungHo Entertainment Online, Inc.
    (&#147;GungHo&#148;) in custody with Techno Groove, which in
    turn pledged such shares to SAM.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">
    Under the terms of the TK Agreement, EZER, as the operator of
    Asian Star Fund, exercises the sole right, with respect to
    ownership and voting right of common shares of companies
    invested in by the Asian Star Fund. Asian Star Fund&#146;s sole
    investment is in our shares. Techno Groove has no voting or
    investment power with respect to the securities held by Asian
    Star Fund. The term of the TK is one year, subject to automatic
    one-year renewals, unless terminated by either party upon three
    months prior notice. Upon such termination, the assets of Asian
    Star Fund must be distributed to Techno Groove by EZER.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">
    We have in the ordinary course of business, entered into various
    contracts with GungHo. See Item&nbsp;4.B. &#147;Information on
    the Company&nbsp;&#151; Business Overview&nbsp;&#151; Our
    Markets&nbsp;&#151; Overseas Markets&#148; and Item&nbsp;10.C.
    &#147;Additional Information&nbsp;&#151; Material
    Contracts.&#148;</TD>
</TR>

</TABLE>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    As reported in a Schedule&nbsp;13D/A filed on June&nbsp;1, 2006.
    Consists of shares beneficially owned by Moon Capital Master
    Fund&nbsp;Ltd., Moon Capital Leveraged Master Fund&nbsp;Ltd.,
    Moon Capital Management LP, JWM Capital LLC and John W. Moon.</TD>
</TR>

<TR>
    <TD style="font-size: 3.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(3)&nbsp;</TD>
    <TD align="left">
    As reported in Schedule&nbsp;13D/A filed on June&nbsp;1, 2006.
    Consists of shares beneficially owned by Starboard Value and
    Opportunity Master Fund&nbsp;Ltd., Parche LLC, RCG Ambrose
    Master Fund, Ltd., RCG</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">75
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD align="left">
    Halifax Fund, Ltd., Ramius Master Fund, Ltd., Ramius
    Fund&nbsp;III, Ltd, Admiral Advisors, LLC, Ramius Advisors, LLC,
    Ramius Capital Group, L.L.C. Safe Harbor Master Fund, L.P., Safe
    Harbor Investment Ltd., and Jeffrey M. Solomon.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(4)&nbsp;</TD>
    <TD align="left">
    As reported in Schedule&nbsp;13G/A filed on January&nbsp;18,
    2006. Consists of shares beneficially owned by Government of
    Singapore Investment Corporation Pte Ltd., Government of
    Singapore and Monetary Authority of Singapore.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To the best of our knowledge, as of March&nbsp;31, 2006,
approximately 41.6% of our common shares were held in the United
States (in the form of common shares or ADSs). Also to the best
of our knowledge, we had approximately 875 beneficial holders of
our shares (in the form of ADSs) in the United States as of
December&nbsp;29, 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='133'></A>
</DIV>

<!-- link1 "7.B. Related Party Transactions" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>7.B.&nbsp;&nbsp;Related Party Transactions</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Until December&nbsp;31, 2005, we leased our headquarters space
from Mr.&nbsp;Jung Ryool Kim, our former largest shareholder and
chairman, at a monthly rent of Won 33&nbsp;million and a monthly
management fee of approximately Won 20&nbsp;million, together
with a security deposit of Won 3.8&nbsp;billion. Under customary
practice in Korea, the security deposit refers to a lump-sum
refundable deposit, which essentially has the economics of an
interest-free loan, that the lessee gives to the lessor at the
beginning of the lease term in exchange for an elimination or
reduction of periodic rental payments. At the end of the lease
term, the security deposit is returned to the lessee. Normally,
the amount of the security deposit is significantly greater than
the monthly rent and therefore is entitled to protection under
Korean law in order for the lessee to secure refund of the
security deposit from the lessor. In order to secure the return
of the security deposit, we have obtained and registered a
security interest in the leased building under Korean law. This
lease was entered into on August&nbsp;1, 2004 and terminated on
December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon EZER&#146;s purchase of our shares owned by the former
Chairman and his family on August&nbsp;30, 2005, we no longer
consider the former Chairman to be a related party of Gravity.
We have not, in any event, entered into any material agreements
with the former Chairman or his family members subsequent to
such change of control.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='134'></A>
</DIV>

<!-- link1 "Relationship with GRAVITY Interactive, Inc." -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Relationship with GRAVITY Interactive, Inc.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In April 2003, we entered into an agreement with GRAVITY
Interactive, Inc., for the service and distribution of Ragnarok
Online in the United States and Canada pursuant to which GRAVITY
Interactive, Inc. agreed to remit dividends to us based on a
percentage of earnings.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Relationship with GRAVITY Entertainment Corporation and the
Animation Production Committee</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
From March to June 2004, we provided a series of loans in the
aggregate amount of Japanese Yen 35&nbsp;million, at an annual
interest rate of 9%, to GRAVITY Entertainment Corporation,
formerly RO Production Co., Ltd., our then 50%-owned subsidiary
in Japan, for the production and marketing of Ragnarok the
Animation and for working capital purposes. These loans have
been fully repaid. In October 2004, we purchased from GungHo
Online Entertainment Inc., which at the time owned the remaining
50% interest in GRAVITY Entertainment, their ownership interest
in GRAVITY Entertainment for a purchase price of zero, making us
the 100% shareholder of GRAVITY Entertainment. GungHo Online
Entertainment Inc. is our licensee in Japan for Ragnarok Online.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under a consortium agreement which became effective in April
2004 between GRAVITY Entertainment and other parties to
Animation Production Committee, a Japanese joint venture for the
production and marketing of Ragnarok the Animation, GRAVITY
Entertainment was obligated to contribute Japanese Yen
117&nbsp;million plus a 5% tax, amounting to Japanese Yen
123&nbsp;million, to the joint venture. As a shareholder of
GRAVITY Entertainment, we funded this contribution amount in
full in the form of additional capital injection.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">76
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On October&nbsp;1, 2004, we granted to the joint venture the
license for Ragnarok Online, in order for the joint venture to
produce animation based on Ragnarok Online.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to an arrangement between GRAVITY Entertainment and the
joint venture, GRAVITY Entertainment is required to remit 70% of
the revenues from its animation business to the joint venture.
As of December&nbsp;31, 2005, the amount due and payable to the
joint venture by GRAVITY Entertainment amounted to Japanese Yen
15&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to an export and copyright authorization agreement,
effective in April 2004, between GRAVITY Entertainment and us,
we have the exclusive license to sell Ragnarok the Animation,
produced by the joint venture in which GRAVITY Entertainment
participates, to countries in Southeast Asia, which include
Vietnam, Laos, Cambodia, Thailand, Malaysia, Singapore,
Indonesia, the Philippines, Taiwan, China and Hong Kong.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Relationship with Rhoceo Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On February&nbsp;20, 2003, IAMBiz Co., Ltd, whose name was
changed to Rhoceo Co., Ltd. in November 2004, extended a loan in
the amount of Won 3&nbsp;billion to us at an annual interest
rate of 18%, which we used to satisfy our short-term liquidity
needs. We repaid this loan in full in 2003 and no balance is
currently outstanding. In October 2003, we disposed of our
sticker photo division, together with mobile phones and digital
and other cameras, to IAMBiz for proceeds of Won
510&nbsp;million. In December 2003, we also disposed of our
license to a horse racing game to IAMBiz for proceeds of Won
20&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In August 2005, the Company paid Won 200&nbsp;million to Rhoceo
Co., Ltd. for licensing rights to a game under development by
Rhoceo Co., Ltd. and recorded the payment as research and
development expense. Rhoceo Co., Ltd., which was under the
control of the former Chairman, ceased to be our related party
on August&nbsp;30, 2005 upon the change of control by the former
Chairman.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Relationship with TriggerSoft Corporation</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On May&nbsp;2, 2005, we made a one-year loan in the amount of
Won 500&nbsp;million to TriggerSoft Corporation, the developer
of our R.O.S.E. Online game, at an annual interest rate of 9%
payable monthly in arrears. On August 26, October&nbsp;26, 2005,
April&nbsp;10, 2006, and June&nbsp;9, 2006, we made loans in the
amount of Won 300&nbsp;million, Won 500&nbsp;million, Won
40&nbsp;million and Won 60&nbsp;million, respectively, at an
annual interest of 9% payable monthly in arrears with one-year
term to TriggerSoft.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Relationship with NEOCYON, Inc.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We acquired 96.11% of the outstanding common stocks of NEOCYON
for an aggregate purchase price of Won 7,716&nbsp;million in
cash pursuant to a series of share purchase transactions which
took place in November and December 2005. Mr.&nbsp;Seung Taik
Baik, our director and chief marketing officer, has been the
chief executive officer of NEOCYON.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We extended a loan in the amount of US$1.5&nbsp;million to
Mados, Inc., a Russian subsidiary of Cybermedia International
Inc, which is a subsidiary of NEOCYON, on February&nbsp;28,
2006, at an annual interest rate of 4.9% payable monthly in
arrears.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Relationship with Rople-net</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2003, we invested Won 1,000&nbsp;million in the mobile
business of Rople-net Co., Ltd. which was a subsidiary of Rhoceo
Co., Ltd., and recovered Won 223&nbsp;million and gave up our
rights to the remainder of investment, and purchased right to
software, among other assets, totaling Won 123&nbsp;million from
Rople-net. In August 2004, we also acquired tangible assets
totaling Won 53&nbsp;million from Rople-net. Rople-net., in
turn, under the control of the former Chairman, is no longer
deemed to be our affiliate as a result of the sale of our shares
by the former Chairman to EZER.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">77

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='181'></A>
</DIV>

<!-- link1 "7.C. Interests of Experts and Counsel" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>7.C.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Interests of Experts and
Counsel</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='135'></A>
</DIV>

<!-- link1 "ITEM 8. FINANCIAL INFORMATION" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;8.</B></TD>
    <TD>
    <B><I>FINANCIAL INFORMATION</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='136'></A>
</DIV>

<!-- link1 "8.A. Consolidated Statements and Other Financial Information" -->

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>8.A.</B></TD>
    <TD>
    <B>Consolidated Statements and Other Financial Information</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Financial Statements</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
All relevant financial statements are included in
&#147;Item&nbsp;18. Financial Statements.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Legal Proceedings</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Class action complaints</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In May 2005, a number of putative class action complaints were
filed against us and certain of our directors and executive
officers in the United States District Court for the Southern
District of New York on behalf of all purchasers of our ADSs
traceable to the prospectus and registration statement prepared
and distributed in connection with our initial public offering
and/or purchasers of our ADSs in the open market during the
period from February&nbsp;7, 2005 to May&nbsp;12, 2005. Each of
the complaints alleges that certain statements made in the
prospectus and the registration statement and our subsequent
press releases were materially false and misleading in violation
of certain provisions of the federal securities laws in that we
failed to disclose and/or misrepresented: (i)&nbsp;that our core
product, Ragnarok Online, which traditionally has accounted for
approximately 95% of our revenue, was, at the time of the
initial public offering, suffering from declining customer
demand, increased competition and, contrary to the appearance of
the growth presented in the prospectus, in a material state of
decline in terms of sales; (ii)&nbsp;that our mobile animation
business was then being negatively impacted by material adverse
trends and had substantially disintegrated; and (iii)&nbsp;that
our royalties and license fees business was then being
negatively impacted by certain material adverse trends in our
operations in China, which was in a state of decline despite the
growth potential of the overall Chinese market for online games
as presented in the prospectus. The plaintiffs seek unspecified
compensatory and rescissory damages, costs and expenses from the
defendants. We believe these suits are without merit, and intend
to defend against them vigorously.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Dividend Policy</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Since our inception, we have not declared or paid any dividends
on our common shares. Any decision to pay dividends in the
future will be subject to a number of factors, including cash
requirements for future capital expenditures and investments,
and other factors our board of directors may deem relevant. We
have no intention to pay dividends in the near future.
Consequently, we cannot give any assurance that any dividends
may be declared and paid in the future.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Holders of outstanding common shares on a dividend record date
will be entitled to the full dividend declared without regard to
the date of issuance of the common shares or any subsequent
transfer of the common shares. Payment of annual dividends in
respect of a particular year, if any, will be made in the
following year after approval by our shareholders at the annual
general meeting of shareholders, and payment of interim
dividends, if any, will be made in the same year after approval
by our board of directors, in each case, subject to certain
provisions of our articles of incorporation and the Korean
Commercial Code. See Item&nbsp;10.B. &#147;Articles of
Incorporation&nbsp;&#151; Description of Capital
Stock&nbsp;&#151; Dividend Rights.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subject to the terms of the deposit agreement for the ADSs, you
will be entitled to receive dividends on common shares
represented by ADSs to the same extent as the holders of common
shares, less the fees and expenses payable under the deposit
agreement in respect of, and any Korean tax applicable to, such
dividends. See Item&nbsp;10.E. &#147;Taxation&nbsp;&#151; Korean
Taxes&nbsp;&#151; Taxation of Dividends.&#148; The depositary
will generally convert the Won it receives into
U.S.&nbsp;dollars and distribute the U.S.&nbsp;dollar amounts to
you. For a description of the U.S.&nbsp;federal income tax
consequences of dividends paid to our shareholders, see 10.E.
&#147;Taxation&nbsp;&#151; U.S.&nbsp;Federal Income Tax
Consideration for U.S.&nbsp;Persons&nbsp;&#151; Equity
Securities&nbsp;&#151; Taxation of Dividends.&#148;
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">78
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='137'></A>
</DIV>

<!-- link1 "8.B. Significant Changes" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>8.B.</B></TD>
    <TD>
    <B>Significant Changes</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not Applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='138'></A>
</DIV>

<!-- link1 "ITEM 9. THE OFFER AND LISTING" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM 9.</B></TD>
    <TD>
    <B><I>THE OFFER AND LISTING</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<A name='139'></A>
</DIV>

<!-- link1 "9.A. Offer and Listing Details" -->

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>9.A.</B></TD>
    <TD>
    <B>Offer and Listing Details</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Common Stock</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our common shares are not listed on any stock exchange or
organized trading market, including in Korea. There is no public
market for our common shares, although a small number of our
common shares are traded in off-market transactions involving
private sales primarily in Korea.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>ADSs</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Following our initial public offering on February&nbsp;8, 2005,
the ADSs have been issued by The Bank of New York as depositary
and are listed on the Nasdaq Stock Market&#146;s National Market
under the symbol &#147;GRVY.&#148; Each ADS represents
one-fourth of one share of our common stock. As of June&nbsp;29,
2006, 11,714,056 ADSs representing 2,928,514&nbsp;shares of our
common stock were outstanding.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The table below shows the high and low trading prices on the
Nasdaq for the outstanding ADSs since January&nbsp;1, 2005. Each
ADS represents one-quarter of one share of our common stock.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="71%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Price</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3" align="left" nowrap><B>Period</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>High</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Low</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(In US$)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    First Quarter</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13.77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.04</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    January</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/A</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>N/A</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    February</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13.77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.30</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    March</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11.90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.04</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Second Quarter</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.72</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.30</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    April</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.02</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    May</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.72</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.30</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    June</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.70</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.30</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Third Quarter</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.90</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    July</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.01</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    August</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12.14</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5.90</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    September</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10.95</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.70</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fourth Quarter</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.64</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.10</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    October</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.64</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.70</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    November</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.24</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    December</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.10</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    2006 (through June&nbsp;29, 2006)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    First Quarter</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    January</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.37</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.63</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    February</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.58</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.65</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    March</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Second Quarter (through June&nbsp;29, 2006)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.83</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    April</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.10</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    May</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7.50</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    June (through June&nbsp;29, 2006)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8.03</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6.83</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">79
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='140'></A>
</DIV>

<!-- link1 "9.B. Plan of Distribution" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>9.B.</B></TD>
    <TD>
    <B>Plan of Distribution</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='141'></A>
</DIV>

<!-- link1 "9.C. Markets" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>9.C.</B></TD>
    <TD>
    <B>Markets</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
See Item&nbsp;9.A. &#147;Offering and Listing Details.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='142'></A>
</DIV>

<!-- link1 "9.D. Selling Shareholders" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>9.D.</B></TD>
    <TD>
    <B>Selling Shareholders</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='143'></A>
</DIV>

<!-- link1 "9.E. Dilution" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>9.E.</B></TD>
    <TD>
    <B>Dilution</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='144'></A>
</DIV>

<!-- link1 "9.F. Expenses of the Issue" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>9.F.</B></TD>
    <TD>
    <B>Expenses of the Issue</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='145'></A>
</DIV>

<!-- link1 "ITEM 10. ADDITIONAL INFORMATION" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;10.</B></TD>
    <TD>
    <B><I>ADDITIONAL INFORMATION</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<A name='146'></A>
</DIV>

<!-- link1 "10.A. Share Capital" -->

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.A.</B></TD>
    <TD>
    <B>Share Capital</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
See Item&nbsp;10.B. &#147;Articles of Incorporation.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='147'></A>
</DIV>

<!-- link1 "10.B. Articles of Incorporation" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.B.</B></TD>
    <TD>
    <B>Articles of Incorporation</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The section below provides summary information relating to the
material terms of our capital stock and our articles of
incorporation. It also includes a brief summary of certain
provisions of the Korean Commercial Code and related Korean law,
all as currently in effect.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>General</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our total authorized share capital is 40,000,000&nbsp;shares,
which consists of common shares and non-voting preferred shares,
each with a par value of Won 500&nbsp;per share. Under our
articles of incorporation, holders of non-voting preferred
shares are entitled to dividends of not less than 1% and up to
15% of the par value of such shares, the exact rate to be
determined by our board of directors at the time of issuance,
provided that the holders of preferred shares shall be entitled
to receive dividends at a rate not lower than that determined
for holders of common shares. Under our articles of
incorporation, we may not issue any class of shares which are
redeemable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under our articles of incorporation, we are authorized to issue
non-voting preferred shares up to 2,000,000&nbsp;shares.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of June&nbsp;29, 2006, 6,948,900 common shares were issued
and outstanding. We have not issued any equity securities other
than common shares. All of the issued and outstanding shares are
fully paid and non-assessable and are in registered form.
Pursuant to our articles of incorporation, we may issue
additional common shares without further shareholder approval.
The unissued shares remain authorized until an amendment to our
articles of incorporation changes the status of the authorized
shares to unauthorized shares.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Dividends</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may pay dividends to our shareholders in proportion to the
number of shares owned by each shareholder. The common shares
represented by the ADSs have the same dividend rights as our
other common shares.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may declare dividends at the annual general meeting of
shareholders which is held within three months after the end of
each fiscal year. We pay the annual dividend shortly after the
annual general meeting
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">80

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
declaring such dividends. We may distribute the annual dividend
in cash or in shares. However, a dividend in shares must be
distributed at par value, and dividends in shares may not exceed
one-half of the annual dividends.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Korean Commercial Code, we may pay an annual dividend
only out of the excess of our net assets, on a non-consolidated
basis, over the sum of (i)&nbsp;our stated capital,
(ii)&nbsp;the total amount of our capital surplus reserve and
legal reserve accumulated up to the end of the relevant dividend
period and (iii)&nbsp;the legal reserve to be set aside for the
annual dividend. We may not pay an annual dividend unless we
have set aside as legal reserve an amount equal to at least 10%
of the cash portion of the annual dividend, or unless we have an
accumulated legal reserve of not less than one-half of our
stated capital. We may not use our legal reserves to pay cash
dividends but may transfer amounts from our legal reserves to
capital stock or use our legal reserves to reduce an accumulated
deficit.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to annual dividends, under the Korean Commercial
Code and our articles of incorporation, we may pay interim
dividends once during each fiscal year in case we earn more
retained earning as of the end of the first half of such year
than the retained earning not disposed of at the time of the
general shareholder meeting with respect to the immediately
preceding fiscal year. Unlike annual dividends, the decision to
pay interim dividends can be made by a resolution of the board
of directors and is not subject to shareholder approval. Any
interim dividends must be paid in cash to the shareholders of
record as of June&nbsp;30 of the relevant fiscal year.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The total amount of interim dividends payable in a fiscal year
shall not be more than the net assets on the balance sheet of
the immediately preceding fiscal year, after deducting
(i)&nbsp;our capital in the immediately preceding fiscal year,
(ii)&nbsp;the aggregate amount of our capital reserves and legal
reserves accumulated up to the immediately preceding fiscal
year, (iii)&nbsp;the amount of earnings for dividend payments
confirmed at the general meeting of shareholders with respect to
the immediately preceding fiscal year, (iv)&nbsp;the amount of
voluntary reserves accumulated up to the immediately preceding
fiscal year for special purposes pursuant to our articles of
incorporation or a resolution by our shareholders and
(v)&nbsp;the amount of legal reserves that should be set aside
for the current fiscal year following the interim dividend
payment. Furthermore, the rate of interim dividends for
non-voting preferred shares must be the same as that for our
common shares.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have no obligation to pay any dividend unclaimed for five
years from the dividend payment date.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Since our inception, we have not declared or paid any dividends
on our common shares. Any decision to pay dividends in the
future will be subject to a number of factors, including cash
requirements for future capital expenditures and investments,
and other factors our board of directors may deem relevant. We
currently have no intention to pay dividends in the near future.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Distribution of free shares</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition to paying dividends in shares out of our retained or
current earnings, we may also distribute to our shareholders an
amount transferred from our capital surplus or legal reserve to
our stated capital in the form of bonus shares issued free of
charge, or free shares. We must distribute such free shares to
all our shareholders in proportion to their existing
shareholdings. Since our inception, we have not distributed any
free shares. We currently have no intention to make such
distribution in the near future.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Preemptive rights and issuance of additional shares</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may issue authorized but unissued shares at the times and,
unless otherwise provided in the Korean Commercial Code, on such
terms as our board of directors may determine. We must offer new
shares on uniform terms to all shareholders who have preemptive
rights and are listed on our shareholders&#146; register as of
the relevant record date.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">81

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may issue new shares pursuant to a board resolution to
persons other than existing shareholders, who in these
circumstances will not have preemptive rights if the new shares
are issued:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    through a general public offering pursuant to a resolution of
    the board of directors of no more than 50% of the total number
    issued and outstanding shares;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    to the members of the employee stock ownership association;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    upon exercise of a stock option in accordance with our articles
    of incorporation;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    in the form of depositary receipts of no more than 50% of the
    total number issued and outstanding shares;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    to induce foreign direct investment necessary for business in
    accordance with the Foreign Investment Promotion Act of no more
    than 50% of the total number issued and outstanding shares;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    to domestic or overseas financial institutions, corporations or
    individuals for the purpose of raising funds on an emergency
    basis;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    as necessary for the inducement of technology, to certain
    companies under an alliance arrangement with us;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    by a public offering or subscribed for by the underwriters for
    the purpose of listing on the Stock Market Division or KOSDAQ
    Market Division of the Korea Exchange of no more than 50% of the
    total number issued and outstanding shares.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We must give public notice of preemptive rights regarding new
shares and their transferability at least two weeks before the
relevant record date. We will notify the shareholders who are
entitled to subscribe for newly issued shares of the deadline
for subscription at least two weeks prior to such deadline. If a
shareholder fails to subscribe by the deadline, the
shareholder&#146;s preemptive rights lapse. Our board of
directors may determine how to distribute fractional shares or
shares for which preemptive rights have not been exercised.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the case of ADS holders, the depositary will be treated as
the shareholder entitled to preemptive rights.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>General meeting of shareholders</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We hold the annual general meeting of shareholders within three
months after the end of each fiscal year. Subject to a board
resolution or court approval, we may hold an extraordinary
general meeting of shareholders:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    as necessary,</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    at the request of shareholders holding an aggregate of 3% or
    more of our outstanding shares,&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    at the request of our audit committee.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We must give shareholders written notice or electronic document
setting out the date, place and agenda of the meeting at least
two weeks prior to the general meeting of shareholders. The
agenda of the general meeting of shareholders is determined at
the meeting of the board of directors. In addition, a
shareholder holding an aggregate of 3% or more of the
outstanding shares may propose an agenda for the general meeting
of shareholders. Such proposal should be made in writing at
least six weeks prior to the meeting. The board of directors may
decline such proposal if it is in violation of the relevant law
and regulations or our articles of incorporation. Shareholders
not on the shareholders&#146; register as of the record date are
not entitled to receive notice of the general meeting of
shareholders or attend or vote at the meeting. Holders of
non-voting preferred shares, unless enfranchised, are not
entitled to receive notice of or vote at general meeting of
shareholders.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our shareholders&#146; meetings are held in Seoul, Korea or
other adjacent areas as deemed necessary.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Voting rights</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Holders of our common shares are entitled to one vote for each
common share. However, common shares held by us (i.e., treasury
shares) or by any corporate entity in which we have, directly or
indirectly, greater
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">82

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
than a 10% interest, do not have voting rights. Unless the
articles of incorporation explicitly state otherwise, the Korean
Commercial Code permits cumulative voting pursuant to which each
common share entitles the holder thereof to multiple voting
rights equal to the number of directors to be elected at such
time. A holder of common shares may exercise all voting rights
with respect to his or her shares cumulatively to elect one
director. However, our shareholders have decided not to adopt
cumulative voting.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our shareholders may adopt resolutions at a general meeting by
an affirmative majority vote of the voting shares present or
represented at the meeting, where the affirmative votes also
represent at least one-third of our total voting shares then
issued and outstanding. However, under the Korean Commercial
Code and our articles of incorporation, the following matters
require approval by the holders of at least two-thirds of the
voting shares present or represented at the meeting, where the
affirmative votes also represent at least one-third of our total
voting shares then issued and outstanding:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    amending our articles of incorporation;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    removing a director;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    effecting a capital reduction;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    effecting any dissolution, merger or consolidation with respect
    to us;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    transferring all or any significant part of our business;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    acquiring all of the business of any other company or a part of
    the business of any other company having a material effect on
    our business;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    issuing new shares at a price below the par value;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any other matters for which such resolution is required under
    relevant law and regulations.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In general, holders of non-voting preferred shares (other than
enfranchised non-voting preferred shares) are not entitled to
vote on any resolution or receive notice of any general meeting
of shareholders. However, in the case of amendments to our
articles of incorporation, any merger or consolidation, capital
reductions or in some other cases that affect the rights or
interests of the non-voting preferred shares, approval of the
holders of such class of shares is required. We must obtain the
approval, by a resolution, of holders of at least two-thirds of
the non-voting preferred shares present or represented at a
class meeting of the holders of such class of shares, where the
affirmative votes also represent at least one-third of the total
issued and outstanding shares of such class. In addition, if we
are unable to pay dividends on non-voting preferred shares as
provided in our articles of incorporation, the holders of
non-voting preferred shares will become enfranchised and will be
entitled to exercise voting rights until the dividends are paid.
The holders of enfranchised non-voting preferred shares have the
same rights as holders of voting shares to request, receive
notice of, attend and vote at a general meeting of shareholders.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Shareholders may exercise their voting rights by proxy. Under
our articles of incorporation, the person exercising the proxy
does not have to be a shareholder. A person with a proxy must
present a document evidencing its power of attorney in order to
exercise voting rights.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Holders of ADSs will exercise their voting rights through the
ADS depositary. Subject to the provisions of the deposit
agreement, holders of ADSs will be entitled to instruct the
depositary how to vote the common shares underlying their ADSs.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Rights of dissenting shareholders</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In some limited circumstances, including the transfer of all or
any significant part of our business and our merger or
consolidation with another company, dissenting shareholders have
the right to require us to purchase their shares. To exercise
this right, shareholders must submit to us a written notice of
their intention to dissent before the applicable general meeting
of shareholders. Within 20&nbsp;days after the relevant
resolution is passed, the dissenting shareholders must request
us in writing to purchase their shares. We are obligated to
purchase the shares of dissenting shareholders within two months
after receiving such request. The purchase
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">83

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
price for the shares is required to be determined through
negotiations between the dissenting shareholders and us. If an
agreement is not attained within 30&nbsp;days since the receipt
of the request, we or the shareholder requesting the purchase of
shares may request the court to determine the purchase price.
Holders of ADSs will not be able to exercise dissenter&#146;s
rights unless they withdraw the underlying common shares and
become our direct shareholders.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Register of shareholders and record dates</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our transfer agent, Hana Bank, maintains the register of our
shareholders at its office in Seoul, Korea. It registers
transfers of shares on the register of shareholders on
presentation of the share certificates.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The record date for annual dividends is December&nbsp;31 of each
year. For the purpose of determining shareholders entitled to
annual dividends, the register of shareholders will be closed
for the period from January 1 to January 31 of each year.
Further, for the purpose of determining the shareholders
entitled to some other rights pertaining to the shares, we may,
on at least two weeks&#146; public notice, set a record date
and/or close the register of shareholders for not more than
three months. The trading of shares and the delivery of share
certificates may continue while the register of shareholders is
closed.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Annual report</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
At least one week before the annual general meeting of
shareholders, we must make our annual business report,
auditor&#146;s report and audited non-consolidated financial
statements available for inspection at our principal office and
at all of our branch offices. In addition, copies of such
reports, financial statements and any resolutions adopted at the
general meeting of shareholders will be available to our
shareholders.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Transfer of shares</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Except for the procedural requirements which obligate a
non-citizen or non-residents of Korea to file a report to the
relevant government authority of Korea at the time of
acquisition or transfer of the Company&#146;s shares, there is
no restriction on transfer or sale of our shares applicable to
our shareholders or holders of ADSs under our articles of
incorporation and the relevant laws.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Korean Commercial Code, the transfer of shares is
effected by delivery of share certificates. However, to assert
shareholders&#146; rights against us, the transferee must have
his name and address registered on our register of shareholders.
For this purpose, a shareholder is required to file his name,
address and seal with our transfer agent. A non-Korean
shareholder may file a specimen signature in place of a seal,
unless he is a citizen of a country with a sealing system
similar to that of Korea. In addition, a non-resident
shareholder must appoint an agent authorized to receive notices
on his or her behalf in Korea and file a mailing address in
Korea. The above requirement does not apply to the holders of
ADSs.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under current Korean regulations, Korean securities companies
and banks, including licensed branches of non-Korean securities
companies and banks, investment trust companies, futures trading
companies, internationally recognized foreign custodians and the
Korea Securities Depository may act as agents and provide
related services for foreign shareholders. Certain foreign
exchange controls and securities regulations apply to the
transfer of shares by non-residents or non-Koreans. See
Item&nbsp;10.D. &#147;Exchange Controls.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our transfer agent is Hana Bank, located at 101-1, Euljiro 1-ga,
Jung-gu, Seoul, Korea.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Acquisition of our shares</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may not acquire our own common shares except in limited
circumstances, such as reduction of capital and acquisition of
our own common shares for the purpose of granting stock options
to our officers and employees. Under the Korean Commercial Code,
except in the case of a capital reduction (in which case we must
retire the common shares immediately), we must resell any common
shares acquired by us to a third party (including to a stock
option holder who exercised his or her stock option) within a
reasonable time. Except in limited circumstances, corporate
entities in which we own a 50% or greater equity interest may
not acquire our common shares.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">84

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Except for the procedural requirements which obligate a
non-citizen or non-residents of Korea to file a report to the
relevant government authority of Korea at the time of
acquisition or transfer of the Company&#146;s shares, there
exists no provision which limits the rights to own our shares or
exercise voting rights on our shares due to their status as a
non-resident or non-Korean under our articles of incorporation
and the applicable Korean laws.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Liquidation rights</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the event of our liquidation, after payment of all debts,
liquidation expenses and taxes, our remaining assets will be
distributed among shareholders in proportion to their
shareholdings.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Other provisions</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under our articles of incorporation, there exists no provision
(i)&nbsp;which may delay or prevent a change in control of us
and that is triggered only in the event of a merger, acquisition
or corporate restructuring, (ii)&nbsp;which requires disclosure
of ownership above a certain threshold or (iii)&nbsp;that
governs the change in capital that is more stringent than
required by the applicable laws in Korea.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='148'></A>
</DIV>

<!-- link1 "10.C. Material Contracts" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.C.</B></TD>
    <TD>
    <B>Material Contracts</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have not entered into any material contracts other than in
the ordinary course of business and other than those described
below or otherwise as described in Item&nbsp;4.
&#147;Information About the Company&#148; or elsewhere in this
annual report.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Agreement, dated October&nbsp;7, 2004, between Myoung-Jin Lee
and GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On October&nbsp;7, 2004, we entered into an agreement with
Myoung-Jin Lee, under which the royalty payment schedule set
forth in the Agreement on Ragnarok Game Services and Related
Matters, dated January&nbsp;22, 2003, between Mr.&nbsp;Lee and
us, was amended, among others, to reduce the rates of royalty
payable to Mr.&nbsp;Lee as percentages of the revenues we derive
from the sale or licensing of Ragnarok-related products.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Share Purchase Agreement between Moon Kyu Kim and GRAVITY
Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On May&nbsp;3, 2005, we entered into an agreement with each of
three shareholders of TriggerSoft Corporation, including
Mr.&nbsp;Moon Kyu Kim, a 45.5% shareholder of TriggerSoft
Corporation, to purchase from such shareholders an aggregate of
75% of the equity interest in TriggerSoft for Won
1.36&nbsp;billion in cash. On May&nbsp;12, 2005, we entered into
agreements with two other shareholders of TriggerSoft to acquire
an additional 13% equity interest in TriggerSoft for Won
254&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Amendment to Ragnarok License and Distribution Agreement
between GungHo Online Entertainment&nbsp;Inc. and GRAVITY Co.,
Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On September&nbsp;23, 2004, we entered into an amendment
agreement with GungHo Online Entertainment Inc., our licensee in
Japan, under which the term of the Ragnarok License and
Distribution Agreement, dated July&nbsp;24, 2002, between GungHo
Online Entertainment Inc., formerly ONSALE Japan K.K, and us was
extended until August&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Fourth Amendment to the Exclusive Ragnarok Online License and
Distribution Agreement between Soft-World International
Corporation and GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On October&nbsp;19, 2004, we entered into an amendment agreement
with Soft-World International Corporation, our licensee in
Taiwan and Hong Kong, under which the term of the Ragnarok
Exclusive License and Distribution Agreement, dated May&nbsp;20,
2002, between Soft-World International Corporation and us was
extended until October&nbsp;22, 2006. The amendment agreement
also provided for an extension fee of US$2,300,000 and an
increase in monthly royalty payments from 30% to 33% of the
licensee&#146;s monthly revenue from the Ragnarok Online
subscription.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">85

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Fourth Amendment to the Exclusive Ragnarok License and
Distribution Agreement among Soft-World International
Corporation, Value Central Corporation and GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On May&nbsp;18, 2005, we entered into an amendment agreement
with Value Central Corporation, our licensee in China, and
Soft-World International Corporation, the parent of Value
Central, under which the term of the Exclusive Ragnarok License
and Distribution Agreement with Soft-World and Value Central was
extended for three months until August&nbsp;18, 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Amendment to the Exclusive Ragnarok Online License and
Distribution Agreement between Asiasoft International Co., Ltd.
and GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On October&nbsp;27, 2004, we entered into an amendment agreement
with Asiasoft International Co., Ltd., our licensee in Thailand,
under which the term of the Ragnarok License and Distribution
Agreement, dated June&nbsp;13, 2002, between Asiasoft and us was
extended until March&nbsp;4, 2007. The amendment agreement also
provided for an extension fee of US$1,000,000 and an increase in
monthly royalty payments from 30% to 35% of the licensee&#146;s
revenue from the Ragnarok Online subscription beginning March
2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Third Amendment to the Exclusive Ragnarok Online License and
Distribution Agreement between Level&nbsp;Up! Inc. and GRAVITY
Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On February&nbsp;18, 2005, we entered an amendment agreement
with Level&nbsp;Up! Inc., our licensee in the Philippines, to
extend the term of the Exclusive Ragnarok License and
Distribution Agreement, dated March&nbsp;25, 2003, between
Level&nbsp;Up! Inc. for one year until August&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Amendment to the Exclusive Ragnarok Online License and
Distribution Agreement between PT. Lyto Datarindo Fortuna
(licensee in Indonesia) and GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On October&nbsp;29, 2004, we entered into an amendment agreement
with PT. Lyto Datarindo Fortuna, our licensee in Indonesia,
under which the term of the Exclusive Ragnarok License and
Distribution Agreement, dated April&nbsp;2, 2004, PT. Lyto
Datarindo Fortuna and us was extended until February&nbsp;26,
2007. The amendment agreement also provided for an extension fee
of US$250,000 and an increase in monthly royalty payments from
30% to 32% of the licensee&#146;s revenue from the Ragnarok
Online subscription.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Second Amendment to the Exclusive Ragnarok License and
Distribution Agreement between Burda Holding International GmbH
(licensee in Germany, Austria, Switzerland, Italy and Turkey)
and GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On November&nbsp;18, 2004, we entered into an amendment
agreement with Burda Holding International GmbH, under which the
Exclusive Ragnarok License and Distribution Agreement, dated
November&nbsp;26, 2003, between Burda Holding and us was amended
to reduce the initial license fee from US$250,000 to US$150,000
and the monthly royalty payment from 33% to 30% of Burda
Holding&#146;s monthly revenue from the Ragnarok Online
subscription.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Exclusive Ragnarok License and Distribution Agreement between
Ongamenet PTY Ltd. and GRAVITY&nbsp;Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On July&nbsp;16, 2004, we entered into an agreement with
Ongamenet PTY Ltd., our licensee in Australia and New Zealand,
under which we granted Ongamenet an exclusive right to license
from us, and sublicense to parties approved by us, the
distribution rights for Ragnarok Online in Australia and New
Zealand for an initial license fee of US$250,000 payable and a
monthly royalty payment, payable in U.S.&nbsp;dollars, equal to
30% of the licensee&#146;s monthly revenue from Ragnarok Online
subscription. The term of the agreement is for two years from
the date of commercialization of Ragnarok Online, subject to
renewal on a yearly basis. The agreement may be terminated in
the event of bankruptcy of or a material breach by either party,
including the licensee&#146;s failure to pay licensing fee in a
timely manner.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">86

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Exclusive Ragnarok License and Distribution Agreement between
Level&nbsp;Up! Interactive S.A. and GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On August&nbsp;15, 2004, we entered into an agreement with
Level&nbsp;Up! Interactive SA, our licensee in Brazil, under
which we granted Level&nbsp;Up! Interactive S.A. an exclusive
right to license from us, and sublicense to third parties
approved by us, the distribution rights for Ragnarok Online in
Brazil for an initial license fee of US$250,000 payable and a
monthly royalty payment, payable in U.S.&nbsp;dollars, equal to
25% of the licensee&#146;s monthly revenue from Ragnarok Online
subscription. The term of the agreement is for two years from
the date of commercialization of Ragnarok Online in Brazil,
subject to renewal on a yearly basis. The agreement may be
terminated in the event of bankruptcy of or a material breach by
either party, including the licensee&#146;s failure to pay
licensing fee in a timely manner.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Exclusive Ragnarok Software License Agreement Level&nbsp;Up!
Network India Pvt. Ltd. and GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On May&nbsp;24, 2004, we entered into an agreement with
Level&nbsp;Up! Network India Pvt. Ltd., our licensee in India,
under which we granted Level&nbsp;Up! Network India Pvt. Ltd. an
exclusive right to license from us, and sublicense to third
parties approved by us, the distribution rights for Ragnarok
Online in India for an initial license fee of US$250,000 payable
and a monthly royalty payment, payable in U.S.&nbsp;dollars,
equal to 25% of the licensee&#146;s monthly revenue from
Ragnarok Online subscription. The term of the agreement is for
two years from the date of commercialization of Ragnarok Online
in India, subject to renewal on a yearly basis. The agreement
may be terminated in the event of bankruptcy of or a material
breach by either party, including the licensee&#146;s failure to
pay licensing fee in a timely manner.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Lease Agreement, dated August&nbsp;1, 2004, between Jung
Ryool Kim and GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On August&nbsp;1, 2004, we entered into a lease agreement with
Jung Ryool Kim, our chairman and largest shareholder, under
which we lease our headquarters space at a monthly rent of Won
33&nbsp;million and a monthly management fee of approximately
Won 20&nbsp;million, together with a security deposit of Won
3.8&nbsp;billion. The lease agreement expired on
December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Software Licensing Agreement, dated December&nbsp;22, 2005,
and Software Purchase Agreement, dated December&nbsp;22, 2005,
between GungHo Online Entertainment, Inc. and GRAVITY Co.,
Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On December&nbsp;22, 2005, we entered into with GungHo Online
Entertainment, Inc. (i)&nbsp;a Software Licensing Agreement
(&#147;Software Licensing Agreement&#148;) for the exclusive
right to publish Emil Chronicle Online outside of Japan for a
term of three years, and (ii)&nbsp;a Software Purchase Agreement
(&#147;Software Purchase Agreement&#148;) for the purchase of
all rights to Emil Chronicle Online. We made a payment of Won
6,073&nbsp;million (US$6,013 thousand) to GungHo in connection
with the Software Purchase Agreement.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Limited Partnership Agreement of Online Game Revolution
Fund&nbsp;No.&nbsp;1, dated December&nbsp;26, 2005.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On December&nbsp;26, 2005, we entered into a Limited Partnership
Agreement of Online Game Revolution Fund&nbsp;No.&nbsp;1, a fund
with a total proposed investment size of Japanese Yen
10&nbsp;billion, which has an investment objective of investing
in companies which develop online games in Japan. Movida
Investment Inc., a Japanese company and an affiliate of SOFTBANK
CORP., will operate the fund as the general partner of the fund.
The fund as a term of five years, and we have agreed to
contribute a total of Japanese Yen 1,000&nbsp;million, which
represents 10% of the total capital commitment in the fund by
limited partners. As of December&nbsp;31, 2005, we have made a
capital contribution of Japanese Yen 100&nbsp;million to the
fund.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Series&nbsp;D Preferred Stock Purchase Agreement dated
May&nbsp;11, 2006 by and between Perpetual Entertainment, Inc.
and Gravity Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On May&nbsp;11, 2006, we entered into a stock purchase agreement
with Perpetual Entertainment, Inc. (&#147;Perpetual&#148;), an
online game developer based in the United States, whereby we
agreed to purchase Series&nbsp;D Preferred Stock issued by
Perpetual for US$9&nbsp;million. Pursuant to the agreement, we
were granted the right to appoint one member to the board of
directors of Perpetual.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">87
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Lease Agreement dated October&nbsp;9, 2005 by and between
Meritz Marine&nbsp;&#38; Fire Insurance Co., Ltd. and Gravity
Co., Ltd., as amended by Amendment dated November&nbsp;17,
2005</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On October&nbsp;9, 2005, we entered into a lease agreement with
Meritz Marine&nbsp;&#38; Fire Insurance Co., Ltd
(&#147;Meritz&#148;) for our principal executive and
administrative offices, located on five floors of Meritz Tower,
825-2, Yeoksam-Dong, Gangnam-Gu, Seoul 135-934, Korea. The term
of the lease commenced on December&nbsp;5, 2005 and expires on
December&nbsp;4, 2007, with an option to renew for additional
term of one year. The lease may be terminated upon 6&nbsp;months
prior written notice by either party. The monthly rent is Won
176&nbsp;million (US$174 thousand), with a monthly maintenance
fee of Won 82&nbsp;million (US$82 thousand) and we have paid a
security deposit in the amount of Won 1,786&nbsp;million
(US$1,768 thousand).
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Real Estate Sale Agreement dated May&nbsp;22, 2006 by and
between Yahoh Communication and Gravity Co., Ltd. for the sale
of the Gravity Building</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On May&nbsp;22, 2006, we entered into a real estate sale
agreement with Yahoh Communication, a Korean company, to sell
our building located at 619-4 Shinsa-Dong, Gangnam-Gu, Seoul,
Korea. We received Won 9.5&nbsp;billion (US$9.4&nbsp;million) as
the proceeds of sale from the transaction.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='149'></A>
</DIV>

<!-- link1 "10.D. Exchange Controls" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.D.</B></TD>
    <TD>
    <B>Exchange Controls</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>General</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Foreign Exchange Transaction Law and the Presidential Decree
and regulations under such Law and Decree, or the Foreign
Exchange Transaction Laws, regulate investment in Korean
securities by non-residents and issuance of securities outside
Korea by Korean companies. Under the Foreign Exchange
Transaction Laws, non-residents may invest in Korean securities
only to the extent specifically allowed by such laws or
otherwise permitted by the Foreign Exchange authorities,
including the Minister of Finance and Economy, or the MOFE. The
Financial Supervisory Commission, or FSC, has also adopted,
pursuant to its authority under the Korean Securities and
Exchange Act, regulations that restrict investment by foreigners
in Korean securities and regulate issuance of securities outside
Korea by Korean companies.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Foreign Exchange Transaction Laws, (i)&nbsp;if the
Korean government deems that it is inevitable due to the
outbreak of natural calamities, wars, conflict of arms or grave
and sudden changes in domestic or foreign economic circumstances
or other situations equivalent thereto, the MOFE may temporarily
suspend payment, receipt or the whole or part of transactions to
which the Foreign Exchange Transaction Laws apply, or impose an
obligation to safe-keep, deposit or sell means of payment in or
to certain Korean governmental agencies or financial
institutions; and (ii)&nbsp;if the Korean government deems that
the international balance of payments and international finance
are confronted or are likely to be confronted with serious
difficulty or the movement of capital between Korea and abroad
brings or is likely to bring on serious obstacles in carrying
out currency policies, exchange rate policies and other
macroeconomic policies, the MOFE may take measures to require
any person who intends to perform capital transactions to obtain
permission or to require any person who performs capital
transactions to deposit part of the means of payment acquired in
such transactions in certain Korean governmental agencies or
financial institutions, in each case subject to certain
limitations thereunder.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Filing with the Korean government in connection with the
issuance of ADSs</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In order for us to issue common shares represented by ADSs in an
amount exceeding US$30&nbsp;million, we are required to file a
prior report of the issuance with the MOFE through the
designated foreign exchange bank. No further Korean governmental
approval is necessary for the initial offering and issuance of
the ADSs.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under current Korean law and regulations, the depositary is
required to obtain our prior consent for the number of common
shares to be deposited in any given proposed deposit which
exceeds the difference between (i)&nbsp;the aggregate number of
common shares deposited by us for the issuance of ADSs
(including deposits in connection with the initial and all
subsequent offerings of ADSs and stock dividends or other
distributions related to these ADSs), and (ii)&nbsp;the number
of common shares on deposit with the depositary at
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">88

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
the time of such proposed deposit. We have agreed to consent to
any deposit so long as the deposit would not violate our
articles of incorporation or applicable Korean law and the total
number of our common shares on deposit with the depositary would
not exceed.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Furthermore, prior to making an investment of 10% or more of the
outstanding voting shares of a Korean company, foreign investors
are generally required under the Foreign Investment Promotion
Law to submit a report to a Korean bank (including a Korean
branch of a foreign bank). Subsequent sales of such shares by
foreign investors will also require a prior report to such
Korean bank.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Certificates of the shares must be kept in custody with an
eligible custodian</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under Korean law, certificates evidencing shares of Korean
companies must be kept in custody with an eligible custodian in
Korea, which certificates may in turn be required to be
deposited with the Korea Securities Depository, or KSD, if they
are designated as being eligible for deposit with the KSD. Only
the KSD, foreign exchange banks (including domestic branches of
foreign banks), securities companies (including domestic
branches of foreign securities companies), asset management
companies established under the Indirect Investment Asset
Management Business Act (&#147;IIAMBA&#148;), futures trading
companies and internationally recognized foreign custodians are
eligible to act as a custodian of shares for a non-resident or
foreign investor. However, a foreign investor may be exempted
from complying with this deposit requirement with the approval
of the Governor of the Financial Supervisory Service in
circumstances where such compliance is made impracticable,
including cases where such compliance would contravene the laws
of the home country of such foreign investor.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A foreign investor may appoint one or more standing proxies from
among the Korea Securities Depository, foreign exchange banks
(including domestic branches of foreign banks), securities
companies (including domestic branches of foreign securities
companies), asset management companies established under
the&nbsp;IIAMBA, futures trading companies and internationally
recognized foreign custodians, which have obtained a license to
act as a standing proxy to exercise shareholders&#146; rights or
perform any matters related thereto if the foreign investor does
not perform these activities himself. However, a foreign
investor may be exempted from complying with these standing
proxy rules with the approval of the Governor of the Financial
Supervisory Service in circumstances where such compliance is
made impracticable, including cases where such compliance would
contravene the laws of the home country of such foreign investor.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Restrictions on ADSs and shares</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Once the report to the MOFE is filed in connection with the
issuance of ADSs, no further Korean governmental approval is
necessary for the sale and purchase of ADSs in the secondary
market outside Korea or for the withdrawal of shares underlying
ADSs and the delivery inside Korea of shares in connection with
such withdrawal. In addition, persons who have acquired shares
as a result of the withdrawal of shares underlying the ADSs may
exercise their preemptive rights for new shares, participate in
free distributions and receive dividends on shares without any
further governmental approval.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A foreign investor may receive dividends on the shares and remit
the proceeds of the sale of the shares through a foreign
currency account and a Won account exclusively for stock
investments by the foreign investor which are opened at a
foreign exchange bank designated by the foreign investor without
being subject to any procedural restrictions under the Foreign
Exchange Transaction Laws. No approval is required for
remittance into Korea and deposit of foreign currency funds in
the foreign currency account. Foreign currency funds may be
transferred from the foreign currency account at the time
required to place a deposit for, or settle the purchase price
of, a stock purchase transaction to a Won account opened at a
securities company. Funds in the foreign currency account may be
remitted abroad without any governmental approval.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Dividends on shares are paid in Won. No Korean governmental
approval is required for foreign investors to receive dividends
on, or the Won proceeds of the sale of, any such shares to be
paid, received and retained in Korea. Dividends paid on, and the
Won proceeds of the sale of, any such shares held by a
non-resident of Korea must be deposited either in a Won account
with the investor&#146;s securities company or his Won account.
Funds in the investor&#146;s Won account may be transferred to
his foreign currency account or withdrawn for local
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">89

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
living expenses up to certain limitations. Funds in the
investor&#146;s Won account may also be used for future
investment in shares or for payment of the subscription price of
new shares obtained through the exercise of preemptive right.
See Item&nbsp;12.D. &#147;American Depositary Shares&nbsp;&#151;
Dividends and other distributions.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Securities companies are allowed to open foreign currency
accounts with foreign exchange banks exclusively for
accommodating foreign investors&#146; securities investments in
Korea. Through such accounts, these securities companies may
enter into foreign exchange transactions on a limited basis,
such as conversion of foreign currency funds and Won funds,
either as a counterparty to or on behalf of foreign investors,
without such investors having to open their own Won and foreign
currency accounts with foreign exchange banks.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='150'></A>
</DIV>

<!-- link1 "10.E. Taxation" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.E.</B></TD>
    <TD>
    <B>Taxation</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Korean taxation</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following is a discussion of material Korean tax
consequences to owners of our ADSs and common shares that are
non-resident individuals or non-Korean corporations without a
permanent establishment in Korea to which the relevant income is
attributable. Such non-resident individuals or non-Korean
corporations will be referred to as non-resident holders below.
The statements regarding Korean tax laws set forth below are
based on the laws in force and as interpreted by the Korean
taxation authorities as of the date hereof. This discussion is
not exhaustive of all possible tax considerations which may
apply to a particular investor, and prospective investors are
advised to satisfy themselves as to the overall tax consequences
of the acquisition, ownership and disposition of our common
shares, including specifically the tax consequences under Korean
law, the laws of the jurisdiction of which they are resident,
and any tax treaty between Korea and their country of residence,
by consulting their own tax advisors.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Dividends on the shares or ADSs</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We will deduct Korean withholding tax from dividends paid to you
(whether in cash or in shares) at a rate of 27.5% (including
resident surtax). If you are a resident of a country that has
entered into a tax treaty with Korea, you may qualify for an
exemption or a reduced rate of Korean withholding tax according
to the tax treaty. If we distribute to you free distributions of
shares representing a capitalization of certain capital surplus
reserves or asset revaluation reserves, such distribution may be
subject to Korean withholding taxes.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In order to obtain a reduced rate of withholding tax pursuant to
an applicable tax treaty, you must submit to us, prior to the
dividend payment date, such evidence of tax residence as the
Korean tax authorities may require in order to establish your
entitlement to the benefits of the applicable tax treaty. See
Item&nbsp;12.D. &#147;American Depositary Shares&nbsp;&#151;
Payment of taxes.&#148; If you hold ADSs, evidence of tax
residence may be submitted to us through the depositary. Please
see the discussion under &#147;&#151;&nbsp;Tax treaties&#148;
below for discussion on treaty benefits.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Taxation of capital gains</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In general, capital gains earned by you upon the transfer of our
common shares or ADSs are subject to Korean withholding tax at
the lower of (i)&nbsp;11% (including resident surtax) of the
gross proceeds realized and (ii)&nbsp;27.5% (including resident
surtax) of the net realized gains (subject to the production of
satisfactory evidence of the acquisition costs and the
transaction costs), unless you are exempt from Korean income
taxation under the applicable Korean tax treaty with your
country of tax residence. Please see &#147;&#151;&nbsp;Tax
treaties&#148; below for a discussion on treaty benefits. Even
if you do not qualify for any exemption under a tax treaty, you
will not be subject to the foregoing withholding tax on capital
gains if you qualify for the relevant Korean domestic tax law
exemptions discussed in the following paragraphs.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
With respect to our common shares, you will not be subject to
Korean income taxation on capital gains realized upon the
transfer of such common shares, (i)&nbsp;if our common shares
are listed on either the Market Division of the Korea Exchange
or the KOSDAQ Division of the Korea Exchange, (ii)&nbsp;if you
have no permanent establishment in Korea and (iii)&nbsp;if you
did not own or have not owned (together with any shares owned by
any entity which you have a certain special relationship with
and possibly including the shares
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">90

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
represented by the ADSs) 25% or more of our total issued and
outstanding shares at any time during the calendar year in which
the sale occurs and during the five calendar years prior to the
calendar year in which the sale occurs.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
With respect to ADSs, there are uncertainties as to whether they
should be viewed as securities separate from our common shares
underlying such ADSs or as the underlying shares themselves for
capital gains tax purposes, as discussed in more detail in the
following paragraph. However, in either case, you will be
eligible for exemptions for capital gains available under Korean
domestic tax law (in addition to the exemption afforded under
income tax treaties) if certain conditions discussed below are
satisfied. Under a tax ruling issued by the Korean tax authority
in 1995 (the &#147;1995 tax ruling&#148;), ADSs are treated as
securities separate from the underlying shares represented by
such ADSs and, based on such ruling (i)&nbsp;capital gains
earned by you from the transfer of ADSs to another non-resident
(other than to such transferees&#146; permanent establishment in
Korea) have not been subject to Korean income taxation and
(ii)&nbsp;capital gains earned by you (regardless whether you
have a permanent establishment in Korea) from the transfer of
ADSs outside Korea have been exempt from Korean income taxation
by virtue of the Special Tax Treatment Control Law of Korea, or
the STTCL, provided that the issuance of the ADSs is deemed to
be an overseas issuance under the STTCL.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
However, according to a recent tax ruling issued in 2004 by the
Korean tax authorities regarding the securities transaction tax
(the &#147;2004 tax ruling&#148;), depositary receipts
constitute share certificates the transfer of which is subject
to the securities transaction tax. Even though the 2004 tax
ruling addresses the securities transaction tax and not the
income tax on capital gains, it gives rise to a question as to
whether depositary shares (such as ADSs) should be viewed as the
underlying shares for capital gains tax purposes. In that case,
exemptions afforded under domestic Korean tax law to capital
gains from transfers of ADSs based on the treatment of ADSs as
securities separate from the underlying shares would no longer
apply (including those referred to in the 1995 tax ruling), but,
instead, exemptions for capital gains from transfers of
underlying shares would apply. Under such an exemption relevant
to this case, capital gains from transfers of ADSs should be
exempt from Korean income tax under the STTCL if (i)&nbsp;the
ADSs are listed on an overseas securities market that is similar
to the Market Division of the Korea Exchange or the KOSDAQ
Division of the Korea Exchange and (ii)&nbsp;the transfer of
ADSs is made through such securities market. We believe that
Nasdaq would satisfy the condition described in (i)&nbsp;above.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If you are subject to tax on capital gains with respect to the
sale of ADSs, or of our common shares which you acquired as a
result of a withdrawal, the purchaser or, in the case of the
sale of common shares on the KRX or through a licensed
securities company in Korea, the licensed securities company, is
required to withhold Korean tax from the sales price in an
amount at the lower of (i)&nbsp;11% (including resident surtax)
of the gross realization proceeds and (ii)&nbsp;27.5% (including
resident surtax) of the net realized gains (subject to the
production of satisfactory evidence of acquisition costs and the
transaction costs for the common shares or the ADSs) and to make
payment of these amounts to the Korean tax authority, unless you
establish your entitlement to an exemption under an applicable
tax treaty or domestic tax law. To obtain the benefit of an
exemption from tax pursuant to a tax treaty, you must submit to
the purchaser or the securities company, or through the ADS
depositary, as the case may be, prior to or at the time of
payment, such evidence of your tax residence as the Korean tax
authorities may require in support of your claim for treaty
benefits. Please see the discussion under &#147;&#151;&nbsp;Tax
treaties&#148; below for an additional explanation on claiming
treaty benefits.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Tax treaties</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Korea has entered into a number of income tax treaties with
other countries (including the United&nbsp;States), which would
reduce or exempt Korean withholding tax on dividends on, and
capital gains on transfer of, our common shares or ADSs. For
example, under the Korea-United States income tax treaty,
reduced rates of Korean withholding tax of 16.5% or 11.0%
(respectively, including resident surtax, depending on your
shareholding ratio) on dividends and an exemption from Korean
withholding tax on capital gains are available to residents of
the United States that are beneficial owners of the relevant
dividend income or capital gains. However, under Article&nbsp;17
(Investment or Holding Companies) of the Korea-United States
income tax treaty, such reduced rates and exemption do not apply
if (i)&nbsp;you are a United States corporation, (ii)&nbsp;by
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">91

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
reason of any special measures, the tax imposed on you by the
United States with respect to such dividends or capital gains is
substantially less than the tax generally imposed by the United
States on corporate profits, <I>and</I> (iii)&nbsp;25% or more
of your capital is held of record or is otherwise determined,
after consultation between competent authorities of the United
States and Korea, to be owned directly or indirectly by one or
more persons who are not individual residents of the United
States. Also, under Article&nbsp;16 (Capital Gains) of the
Korea-United States income tax treaty, the exemption on capital
gains does not apply if you are an individual, and (a)&nbsp;you
maintain a fixed base in Korea for a period or periods
aggregating 183&nbsp;days or more during the taxable year and
your ADSs or common shares giving rise to capital gains are
effectively connected with such fixed base or (b)&nbsp;you are
present in Korea for a period or periods of 183&nbsp;days or
more during the taxable year.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
You should inquire for yourself whether you are entitled to the
benefit of an income tax treaty with Korea. It is the
responsibility of the party claiming the benefits of an income
tax treaty in respect of dividend payments or capital gains to
submit to us, the purchaser or the securities company, as
applicable, a certificate as to its tax residence. In the
absence of sufficient proof, we, the purchaser or the securities
company, as applicable, must withhold tax at the normal rates.
Further, effective from July&nbsp;1, 2002, in order for you to
obtain the benefit of a tax exemption on certain Korean source
income (e.g., dividends and capital gains) under an applicable
tax treaty, Korean tax law requires you (or your agent) to
submit the application for tax exemption along with a
certificate of your tax residency issued by a competent
authority of your country of tax residence. Such application
should be submitted to the relevant district tax office by the
ninth day of the month following the date of the first payment
of such income.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Furthermore, with the amendments of Article&nbsp;2-2 of the
International Tax Adjustment Law, Article&nbsp;98-5 of the
Corporate Tax Law and Article&nbsp;156-4 of the Personal Income
Tax Law, Korea adopted the New Anti-Treaty Shopping Rules
(&#147;New Rules&#148;), which will take effect on July&nbsp;1,
2006. According to the New Rules, even if a tax treaty provides
for either an exemption from or reduction of the applicable
income tax, the company or person paying dividends, interest,
royalty or consideration for share purchase to an offshore
entity established in a tax haven jurisdiction designated by the
Minister of Finance and Economy, or MOFE, must initially
withhold the applicable tax on such income under the applicable
tax law. If, however, the National Tax Service of Korea has
granted prior approval upon application for an exemption or
reduction of tax pursuant to a relevant tax treaty, the
withholding requirement under the New Rules will not apply. So
far, the MOFE has not designated the tax haven jurisdictions
under the New Rules.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Inheritance tax and gift tax</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Korean inheritance tax is imposed upon (i)&nbsp;all assets
(wherever located) of the deceased if he or she was domiciled in
Korea at the time of his or her death and (ii)&nbsp;all property
located in Korea which passes on death (irrespective of the
domicile of the deceased). Gift tax is imposed in similar
circumstances to the above (based on the donee&#146;s place of
domicile in the case of (i)&nbsp;above). The taxes are imposed
if the value of the relevant property is above a limit and vary
from 10% to 50% at sliding scale rate according to the value of
the relevant property and the identity of the parties involved.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Under the Korean inheritance and gift tax laws, shares issued by
Korean corporations are deemed located in Korea irrespective of
where the share certificates are physically located or by whom
they are owned. If the tax authority&#146;s interpretation of
treating depositary receipts as the underlying share
certificates under the 2004 tax ruling applies in the context of
inheritance and gift taxes as well, you may be treated as the
owner of the common shares underlying the ADSs.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
At present, Korea has not entered into any tax treaty relating
to inheritance or gift taxes.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Securities transaction tax</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If you transfer the common shares and the common shares are
listed on neither the Market Division of the Korea Exchange or
the KOSDAQ Division of the Korea Exchange, you will be subject
to securities transaction tax at the rate of 0.5%.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">92

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
With respect to transfers of ADSs, depositary receipts (which
the ADSs fall under) constitute share certificates subject to
the securities transaction tax according to the 2004 tax ruling;
provided that, under the Securities Transaction Tax Law, the
transfer of depositary receipts listed on, among others, the New
York Stock Exchange or Nasdaq is exempt from the securities
transaction tax.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
According to tax rulings issued by the Korean tax authorities in
2000 and 2002, foreign stockholders are not subject to
securities transaction tax upon the deposit of underlying share
and receipt of depositary securities or upon the surrender of
depositary securities and withdrawal of the originally deposited
underlying share, but there remained uncertainties as to whether
holders of ADSs other than initial holders will not be subject
to securities transaction tax when they withdraw common shares
upon surrendering the ADSs. However, the holding of the 2004 tax
ruling referred to above seems to view the ADSs as the
underlying shares at least for the purpose of the securities
transaction tax and, though not specifically stated, could be
read to imply that the securities transaction tax should not
apply to deposits of common shares in exchange of ADSs or
withdrawals of common shares upon surrender of the ADSs
regardless of whether the holder is the initial holder because
the transfer of ADSs by the initial holder to a subsequent
holder would have already been subject to securities transaction
tax under such tax ruling.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In principle, the securities transaction tax, if applicable,
must be paid by the transferor of the shares or the rights to
subscribe to such shares. When the transfer is effected through
a securities settlement company, such settlement company is
generally required to withhold and pay the tax to the tax
authorities. When such transfer is made through a securities
company only, such securities company is required to withhold
and pay the tax. Where the transfer is effected by a
non-resident without a permanent establishment in Korea, other
than through a securities settlement company or a securities
company, the transferee is required to withhold and pay the
securities transaction tax.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>U.S.&nbsp;federal income tax considerations</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following summary describes certain U.S.&nbsp;federal income
tax consequences of the purchase, ownership or disposition of
our common shares and ADSs as of the date hereof. The discussion
set forth below is applicable to U.S.&nbsp;Holders (as defined
below) (i)&nbsp;who are residents of the United States for
purposes of the current United States/Korea Income Tax Treaty,
(ii)&nbsp;whose common shares or ADSs are not, for purposes of
the treaty, effectively connected with a permanent establishment
in Korea and (iii)&nbsp;who otherwise qualify for the full
benefits of the treaty. Except where noted, it deals only with
our common shares and ADSs held as capital assets and does not
deal with special situations, such as those of:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    dealers in securities or currencies;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    financial institutions;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    regulated investment companies;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    real estate investment trusts;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    tax-exempt entities;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    insurance companies;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    traders in securities that elect to use the
    <FONT style="white-space: nowrap">mark-to</FONT>-market method
    of accounting for their securities;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    persons holding our common shares or ADSs as part of a hedging,
    integrated, conversion or constructive sale transaction or a
    straddle;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    persons owning (or treated as owning) 10% or more of our voting
    stock;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    persons liable for alternative minimum tax;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    investors in pass-through entities;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    persons whose &#147;functional currency&#148; is not the United
    States dollar.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">93
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The discussion below is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the
&#147;Code&#148;), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities
may be repealed, revoked or modified so as to result in
U.S.&nbsp;federal income tax consequences different from those
discussed below. In addition, this summary assumes that the
deposit agreement, and all other related agreements, will be
performed in accordance with their terms.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Persons considering the purchase, ownership or disposition of
our common shares or ADSs should consult their own tax advisors
concerning U.S.&nbsp;federal income tax consequences in light of
their particular situation as well as any other tax consequences
arising under the laws of any taxing jurisdiction.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As used herein, the term &#147;U.S.&nbsp;Holder&#148; means a
beneficial holder of our common share or ADS that is for
U.S.&nbsp;federal income tax purposes:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an individual citizen or resident of the United States;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a corporation (or other entity treated as a corporation for
    U.S.&nbsp;federal income tax purposes) created or organized in
    or under the laws of the United States, any state thereof or the
    District of Columbia;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an estate the income of which is subject to U.S.&nbsp;federal
    income taxation regardless of its source;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a trust:</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="1%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    that is subject to the primary supervision of a court within the
    United States and the control of one or more United States
    persons as described in section&nbsp;7701(a)(30) of the
    Code,&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    that has a valid election in effect under applicable
    U.S.&nbsp;Treasury regulations to be treated as a United States
    person.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If a partnership holds our common shares or ADSs, the tax
treatment of a partner will generally depend upon the status and
the activities of the partner and the partnership. If you are a
partner of a partnership holding our common shares or ADSs, you
should consult your tax advisors.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>ADSs</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If you hold our ADSs, for U.S.&nbsp;federal income tax purposes,
you generally will be treated as the owner of the underlying
common shares that are represented by such ADSs. Accordingly,
deposits or withdrawals of our common shares for ADSs generally
will not be subject to U.S.&nbsp;federal income tax.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Taxation of dividends</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subject to the passive foreign investment company rules
described below, the gross amount of distributions on our ADSs
or common shares (including amounts withheld to reflect Korean
withholding taxes) will be taxable as dividends, to the extent
paid out of our current or accumulated earnings and profits, as
determined under U.S.&nbsp;federal income tax principles. Such
income (including withheld taxes) will be includable in your
gross income as ordinary income on the day actually or
constructively received by you, in the case of our common
shares, or by the depositary, in the case of our ADSs. Such
dividends will not be eligible for the dividends received
deduction allowed to corporations under the Code. With respect
to non-corporate U.S.&nbsp;Holders, certain dividends received
in taxable years beginning before January&nbsp;1, 2011 from a
qualified foreign corporation may be subject to reduced rates of
taxation. A qualified foreign corporation includes a foreign
corporation (other than a passive foreign investment company)
that is eligible for the benefits of a comprehensive income tax
treaty with the United States which the United States Treasury
Department determines to be satisfactory for these purposes and
which includes an exchange of information provision. The United
States Treasury Department has determined that the current
income tax treaty between the United States and Korea meets
these requirements. A foreign corporation (other than a foreign
passive investment company) is also treated as a qualified
foreign corporation with respect to dividends paid by that
corporation on shares (or ADSs backed by such shares) that are
readily tradable on an established securities market in the
United States. Our common shares generally will not be
considered readily tradable for these purposes. United States
Treasury Department guidance indicates that our ADSs, which will
be listed on
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">94

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
Nasdaq, are readily tradable on an established securities market
in the United States. There can be no assurance that our ADSs
will be considered readily tradable on an established securities
market in later years. Non-corporate holders that do not meet a
minimum holding period requirement during which they are not
protected from the risk of loss or that elect to treat the
dividend income as &#147;investment income&#148; pursuant to
section&nbsp;163(d)(4) of the Code will not be eligible for the
reduced rates of taxation regardless of our status as a
qualified foreign corporation. In addition, the rate reduction
will not apply to dividends if the recipient of a dividend is
obligated to make related payments with respect to positions in
substantially similar or related property. This disallowance
applies even if the minimum holding period has been met.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The amount of any dividend paid in Won will equal the United
States dollar value of the Won received calculated by reference
to the exchange rate in effect on the date the dividend is
received by you, in the case of our common shares, or by the
Depositary, in the case of our ADSs, regardless of whether the
Won are converted into United States dollars. If the Won
received as a dividend are not converted into United States
dollars on the date of receipt, you will have a basis in the Won
equal to their United States dollar value on the date of
receipt. Any gain or loss realized on a subsequent conversion or
other disposition of the Won generally will be treated as
U.S.&nbsp;source ordinary income or loss.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subject to certain conditions and limitations, Korean
withholding taxes on dividends may be treated as foreign taxes
eligible for credit against your U.S.&nbsp;federal income tax
liability. Instead of claiming a credit, you may, at your
election, deduct such otherwise creditable Korean taxes in
computing your taxable income, subject to generally applicable
limitations under U.S.&nbsp;federal income tax law. For purposes
of calculating the foreign tax credit, dividends paid on our
ADSs or common shares generally will be treated as income from
sources outside the United States and generally will constitute
&#147;passive income&#148; (or, for taxable years beginning
after December&nbsp;31, 2006, &#147;passive category
income&#148;). Further, in certain circumstances, if you:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    have held our ADSs or common shares for less than a specified
    minimum period during which you are not protected from risk of
    loss; or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    are obligated to make payments related to the dividends;</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
you will not be allowed a foreign tax credit for foreign taxes
imposed on dividends paid on our ADSs or common shares. The
rules governing the foreign tax credit are complex. You are
urged to consult your tax advisors regarding the availability of
the foreign tax credit under your particular circumstances.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
To the extent that the amount of any distribution exceeds our
current and accumulated earnings and profits for a taxable year,
as determined under U.S.&nbsp;federal income tax principles, the
distribution will first be treated as a tax-free return of
capital, causing a reduction in the adjusted basis of our ADSs
or common shares (thereby increasing the amount of gain, or
decreasing the amount of loss, to be recognized by you on a
subsequent disposition of our ADSs or common shares), and the
balance in excess of adjusted basis will be taxed as capital
gain recognized on a sale or exchange. Consequently, such
distributions in excess of our current and accumulated earnings
and profits would generally not give rise to foreign source
income and you would generally not be able to use the foreign
tax credit arising from any Korean withholding tax imposed on
such distribution unless such credit can be applied (subject to
applicable limitations) against U.S.&nbsp;federal income tax due
on other foreign source income in the appropriate category for
foreign tax credit purposes.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Distributions of our ADSs, common shares or preemptive rights to
subscribe for our common shares that are received as part of a
pro rata distribution to all of our common shareholders
generally will not be subject to U.S.&nbsp;federal income tax.
Consequently such distributions will not give rise to foreign
source income, and you will not be able to use the foreign tax
credit arising from any Korean withholding tax imposed on such
distributions unless such credit can be applied (subject to
applicable limitations) against U.S.&nbsp;federal income tax due
on other income derived from foreign sources. The basis of our
new ADSs, common shares or rights so received will generally be
determined by allocating your adjusted basis in our old ADSs or
common shares between our old ADSs or common shares and our new
ADSs, common shares or rights received, based on
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">95
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
their relative fair market values on the date of distribution.
However, the basis of the rights to subscribe our common shares
generally will be zero if:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the fair market of such rights is less than 15&nbsp;percent of
    the fair market value of our old ADSs or common shares at the
    time of distribution, unless you elect to determine the basis of
    our old ADSs or common shares and of such rights by allocating
    your adjusted basis of our old ADSs or common shares between our
    old ADSs or common shares and such rights, based on their
    relative fair market values on the date of distribution;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    such rights are not exercised and thus expire.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Taxation of capital gains</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subject to the passive foreign investment company rules
described below, for U.S.&nbsp;federal income tax purposes, you
will recognize taxable gain or loss on any sale or other
disposition of our ADSs or common shares in an amount equal to
the difference between the amount realized for our ADSs or
common shares and your tax basis in our ADSs or common shares.
Such gain or loss will generally be capital gain or loss.
Capital gains of individuals derived with respect to capital
assets held for more than one year are eligible for reduced
rates of taxation. The deductibility of capital losses is
subject to limitations. Any gain or loss recognized by you will
generally be treated as United States source gain or loss.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Any Korean securities transaction tax imposed on the sale or
other disposition of our common shares or ADSs will not be
treated as a creditable foreign tax for U.S.&nbsp;federal income
tax purposes, although you may be entitled to deduct such tax,
subject to applicable limitations under the Code.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Passive foreign investment companies</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In general, we will be a passive foreign investment company
(&#147;PFIC&#148;) for U.S.&nbsp;federal income tax purposes for
any taxable year in which:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    at least 75% of our gross income is passive income;&nbsp;or</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    on average at least 50% of the value (determined on a quarterly
    basis) of our assets is attributable to assets that produce or
    are held for the production of passive income.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
For this purpose, passive income generally includes dividends,
interest, royalties, rents (other than rents and royalties
derived in the active conduct of a trade or business and not
derived from a related person). If we own, directly or
indirectly, at least 25% by value of the stock of another
corporation, we will be treated, for purposes of the PFIC tests,
as owning our proportionate share of the other
corporation&#146;s assets and receiving our proportionate share
of the other corporation&#146;s income.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The determination of whether we are a PFIC is made annually at
the end of each taxable year and is dependent upon a number of
factors, some of which are uncertain or beyond our control,
including the value of our assets, ADSs and common shares and
the amount and type of our income. In light of the nature of our
business activities and our holding of a significant amount of
cash, short-term investments and other passive assets after our
initial public offering in 2005, we may have been in 2005, and
may be in subsequent years, a PFIC. If we are a PFIC for any
taxable year during which you hold our ADSs or our common
shares, you could be subject to adverse U.S.&nbsp;federal income
tax consequences as discussed below.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If we are a PFIC for any taxable year during which you hold our
ADSs or common shares, you will be subject to special tax rules
with respect to any &#147;excess distribution&#148; received and
any gain realized from a sale or other disposition (including a
pledge) of our ADSs or common shares. Distributions received in
a taxable year that are greater than 125% of the average annual
distributions received during the shorter of the three preceding
taxable years or your holding period for our ADSs or common
shares will be treated as excess distributions. Under these
special tax rules:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the excess distribution or gain will be allocated ratably over
    your holding period for our ADSs or common shares;</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">96

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the amount allocated to the current taxable year, and any
    taxable year prior to the first taxable year in which we were a
    PFIC, will be treated as ordinary income;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the amount allocated to each other year will be subject to tax
    at the highest tax rate in effect for that year and the interest
    charge generally applicable to underpayments of tax will be
    imposed on the resulting tax attributable to each such year.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In addition, non-corporate U.S.&nbsp;Holders will not be
eligible for reduced rates of taxation on any dividends received
from us prior to January&nbsp;1, 2011, if we are a PFIC in the
taxable year in which such dividends are paid or in the
preceding taxable year. If we are a PFIC, you will be required
to file Internal Revenue Service Form&nbsp;8621 for each taxable
year in which, among other circumstances, you receive a
distribution from, or recognize gain from a sale or other
disposition of, our ADSs or common shares.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In certain circumstances, in lieu of being subject to the excess
distribution rules discussed above, a shareholder may make an
election to include gain on the stock of a PFIC as ordinary
income under a
<FONT style="white-space: nowrap">mark-to</FONT>-market method
provided that such stock is regularly traded on a qualified
exchange. Under current law, the
<FONT style="white-space: nowrap">mark-to</FONT>-market election
may be available for holders of our ADSs because our ADSs will
be listed on Nasdaq which constitutes a qualified exchange as
designated in the Internal Revenue Code, although there can be
no assurance that our ADSs will be &#147;regularly traded&#148;
for purposes of the
<FONT style="white-space: nowrap">mark-to</FONT>-market
election. The
<FONT style="white-space: nowrap">mark-to</FONT>-market election
may not be available for holders of our common shares.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If you make an effective
<FONT style="white-space: nowrap">mark-to</FONT>-market
election, you will include in each year as ordinary income the
excess of the fair market value of our ADSs or common shares at
the end of the year over your adjusted tax basis in our ADSs or
common shares. You will be entitled to deduct as an ordinary
loss each year the excess of your adjusted tax basis in our ADSs
or common shares over their fair market value at the end of the
year, but only to the extent of the net amount previously
included in income as a result of the
<FONT style="white-space: nowrap">mark-to</FONT>-market
election. In addition, any gain or (subject to the foregoing
limitation) loss from a sale or other disposition of our ADSs or
common shares generally will be ordinary rather than capital.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Your adjusted tax basis in our ADSs or common shares will be
increased by the amount of any income inclusion and decreased by
the amount of any deductions under the
<FONT style="white-space: nowrap">mark-to</FONT>-market rules.
If you make a
<FONT style="white-space: nowrap">mark-to</FONT>-market election
it will be effective for the taxable year for which the election
is made and all subsequent taxable years unless our ADSs or
common shares are no longer regularly traded on a qualified
exchange or the Internal Revenue Service consents to the
revocation of the election. You are urged to consult your tax
advisor about the availability of the
<FONT style="white-space: nowrap">mark-to</FONT>-market
election, and whether making the election would be advisable in
your particular circumstances.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Alternatively, the rules described above could be avoided if an
election to treat us as a &#147;qualified electing fund&#148;
under section&nbsp;1295 of the Code were available. This option
is not available to you because we do not intend to comply with
the requirements necessary to permit you to make this election.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
You are urged to consult your own tax advisors concerning the
U.S.&nbsp;federal income tax consequences of holding our ADSs or
common shares if we are considered a PFIC in any taxable year.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Information reporting and backup withholding</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In general, information reporting will apply to dividends
(including distributions of interest on shareholders&#146;
equity) in respect of our ADSs or common shares and the proceeds
from the sale, exchange or redemption of our ADSs or common
shares that are paid to you within the United States (and in
certain cases, outside the United States), unless you are an
exempt recipient such as a corporation. A backup withholding tax
may apply to such payments if you fail to provide a taxpayer
identification number or certification of exempt status or fail
to report in full dividend and interest income. Any amounts
withheld under the backup withholding rules will be allowed as a
refund or a credit against your U.S.&nbsp;federal income tax
liability provided the required information is furnished to the
Internal Revenue Service.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">97

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='151'></A>
</DIV>

<!-- link1 "10.F. Dividends and Paying Agents" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.F.</B></TD>
    <TD>
    <B>Dividends and Paying Agents</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
See Item&nbsp;8.A. &#147;Consolidated Statements and Other
Financial Information&nbsp;&#151; Dividend Policy,&#148;
Item&nbsp;10.B. &#147;Articles of Incorporation&nbsp;&#151;
Description of Capital Stock&nbsp;&#151; Dividend rights&#148;
and Item&nbsp;12.D. &#147;American Depositary Shares&nbsp;&#151;
Dividends and other distributions.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Bank of New York, as depositary of the ADSs, has agreed to
pay to the holders of ADSs the cash dividends or other
distributions it or the custodian receives on shares or other
deposited securities, after deducting its fees and expenses. See
Item&nbsp;12.D. &#147;American Depositary Shares&nbsp;&#151;
Dividends and other distributions.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='152'></A>
</DIV>

<!-- link1 "10.G. Statement by Experts" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.G.</B></TD>
    <TD>
    <B>Statement by Experts</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='153'></A>
</DIV>

<!-- link1 "10.H. Documents on Display" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.H.</B></TD>
    <TD>
    <B>Documents on Display</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have filed this annual report on
Form&nbsp;<FONT style="white-space: nowrap">20-F,</FONT>
including exhibits, with the Securities and Exchange Commission.
As allowed by the Securities and Exchange Commission, in
Item&nbsp;19 of this annual report, we incorporate by reference
certain information we filed with the Securities and Exchange
Commission. This means that we can disclose important
information to you by referring you to another document filed
separately with the Securities and Exchange Commission. The
information incorporated by reference is considered to be part
of this annual report. You may inspect and copy this annual
report, including exhibits, and documents that are incorporated
by reference in this annual report at the Public Reference Room
maintained by the Securities and Exchange Commission at 100 F
Street, N.E., Washington,&nbsp;D.C. 20549. Please call the
Securities and Exchange Commission at
<FONT style="white-space: nowrap">1-800-SEC-0330</FONT> for
further information on the operation of the Public Reference
Room. Any filings we make electronically will be available to
the public over the Internet at the website of the Securities
and Exchange Commission at http://www.sec.gov.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='154'></A>
</DIV>

<!-- link1 "10.I. Subsidiary Information" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.I.</B></TD>
    <TD>
    <B>Subsidiary Information</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='155'></A>
</DIV>

<!-- link1 "ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM 11.</B></TD>
    <TD>
    <B><I>QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<A name='156'></A>
</DIV>

<!-- link1 "11.A. Quantitative Information about Market Risk" -->

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>11.A.</B></TD>
    <TD>
    <B>Quantitative Information about Market Risk</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the normal course of our business, we are subject to market
risk associated with currency movements on non-Won denominated
assets and liabilities and license and royalty revenues and
interest rate movements.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Foreign currency risk</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We conduct our business primarily in Won, which is also our
functional and reporting currency. However, we have exposure to
some foreign currency exchange-rate fluctuations on cash flows
from our overseas licensees. The primary foreign currencies to
which we are exposed are the U.S.&nbsp;dollar, the Japanese Yen,
and the NT dollar. Fluctuations in these exchange rates may
affect our revenues from license fees and royalties and result
in exchange losses and increased costs in Won terms.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, we had Japanese Yen denominated
accounts receivable of Won 1,464&nbsp;million, which represented
30% of our total consolidated accounts receivable balance, and
U.S.&nbsp;dollar denominated accounts receivable of Won
1,642&nbsp;million, which represented 34% of our total
consolidated accounts receivable balance. We also had Japanese
Yen denominated accounts payable of Won 407&nbsp;million, which
represented 4% of our total consolidated accounts payable
balance, and U.S.&nbsp;dollar denominated accounts payable of
Won 1,928&nbsp;million, which represented 17% of our total
consolidated accounts payable balance. As these balances all
have short maturities, exposure to foreign currency fluctuations
on these balances is not significant. For example, a
hypothetical 10% appreciation of the Won against the Japanese
Yen, the U.S.&nbsp;dollar and the NT dollar, in the aggregate,
would reduce our cash flows by Won 77&nbsp;million.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">98

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2005, Won 43,291&nbsp;million of our revenue was derived from
currencies other than the Won: primarily the Japanese Yen, Won
17,246&nbsp;million; the NT dollar, Won 10,582&nbsp;million; the
Thai Baht, Won 4,933&nbsp;million; and the U.S.&nbsp;dollar, Won
2,701&nbsp;million. A hypothetical 10% depreciation in the
exchange rates of these foreign currencies against the Won in
2005 would have reduced our revenue by Won 3,546&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Since 2005, we have begun entering into derivatives arrangements
to hedge against the risk of foreign currency fluctuation. As of
December&nbsp;31, 2005, we had no outstanding foreign currency
forward contracts. As of June&nbsp;26, 2006, we have foreign
currency forward contracts outstanding in the amount of US$1,000
thousand. We may in the future continue to enter into hedging
transactions in an effort to reduce our exposure to foreign
currency exchange risks, but we may not be able to successfully
hedge our exposure at all. In addition, our currency exchange
losses may be magnified by Korean exchange control regulations
that restrict our ability to convert the Won into
U.S.&nbsp;dollars, Japanese Yen or the Euro under certain
emergency circumstances.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Interest rate risk</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our exposure to risk for changes in interest rates relates
primarily to our investments in short-term financial instruments
and other investments. Investments in both fixed rate and
floating rate interest earning instruments carry some interest
rate risk. The fair value of fixed rate securities may fall due
to a rise in interest rates, while floating rate securities may
produce less income than expected if interest rates fall. As
substantially all of our cash equivalents consist of bank
deposits and short-term money market instruments, we do not
expect any material change with respect to our net income as a
result of a 10% hypothetical interest rate change. We do not
believe that we are subject to any material market risk exposure
on our short-term financial instruments, as they are readily
convertible to cash and have short maturities. We do not have
any derivative financial instruments.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The above discussion and the estimated amounts generated from
the sensitivity analyses referred to above include
&#147;forward-looking statements,&#148; which assume for
analytical purposes that certain market conditions may occur.
Accordingly, such forward-looking statements should not be
considered projections by us of future events or losses.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='157'></A>
</DIV>

<!-- link1 "11.B. Qualitative Information about Market Risk" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>11.B.</B></TD>
    <TD>
    <B>Qualitative Information about Market Risk</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
See Item&nbsp;11.A. &#147;Quantitative Information about Market
Risk.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='158'></A>
</DIV>

<!-- link1 "11.C. Interim Periods" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>11.C.</B></TD>
    <TD>
    <B>Interim Periods</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='159'></A>
</DIV>

<!-- link1 "ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;12.</B></TD>
    <TD>
    <B><I>DESCRIPTION OF SECURITIES OTHER THAN EQUITY
    SECURITIES</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<A name='160'></A>
</DIV>

<!-- link1 "12.A. Debt Securities" -->

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>12.A.</B></TD>
    <TD>
    <B>Debt Securities</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='161'></A>
</DIV>

<!-- link1 "12.B. Warrants and Rights" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>12.B.</B></TD>
    <TD>
    <B>Warrants and Rights</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='162'></A>
</DIV>

<!-- link1 "12.C. Other Securities" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>12.C.</B></TD>
    <TD>
    <B>Other Securities</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='163'></A>
</DIV>

<!-- link1 "12.D. American Depositary Shares" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="7%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD><B>12.D.</B></TD>
    <TD>
    <B>American Depositary Shares</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Bank of New York, as depositary, executes and delivers the
American Depositary Receipts, or ADRs. Each ADR is a certificate
evidencing a specific number of American Depositary Shares, also
referred to as ADSs. Each ADS will represent one fourth of one
common share (or a right to receive one fourth of one
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">99

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
common share) deposited with Korea Securities Depository, as
custodian for the depositary in Korea. Each ADS will also
represent any other securities, cash or other property which may
be held by the depositary under the deposit agreement referred
to below. The depositary&#146;s office at which the ADRs will be
administered is located at 101 Barclay Street, New York, New
York 10286.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A holder of ADSs may hold ADSs either directly (by having an ADR
registered in its name) or indirectly through its broker or
other financial institution. If a holder of ADSs holds ADSs
directly, it is an ADS holder. This description assumes the
holders of ADSs hold their ADSs directly. If the holders of ADSs
hold the ADSs indirectly, they must rely on the procedures of
their broker or other financial institution to assert the rights
of ADS holders described in this section. The holders of ADSs
should consult with their broker or financial institution to
find out what those procedures are.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We will not treat the holders of ADSs as one of our shareholders
and they will not have shareholder rights. Korean law governs
shareholder rights. The depositary will be the holder of the
shares underlying the ADSs. A holder of ADSs will have ADS
holder rights. A deposit agreement among us, the depositary, ADS
holders and the beneficial owners of ADSs set out ADS holder
rights as well as the rights and obligations of the depositary.
New York law governs the deposit agreement and the ADSs.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following is a summary of the material provisions of the
deposit agreement. For more complete information, holders of
ADSs should read the entire deposit agreement and the form of
ADR. Directions on how to obtain copies of those documents are
provided elsewhere in this annual report under the caption
&#147;Where You Can Find More Information.&#148;
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Dividends and other distributions</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>How will a holder of ADSs receive dividends and other
    distributions on the shares?</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The depositary has agreed to pay to holders of ADSs the cash
dividends or other distributions it or the custodian receives on
shares or other deposited securities, after deducting its fees
and expenses. Holders of ADSs will receive these distributions
in proportion to the number of shares their ADSs represent.
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Cash.</I> The depositary will convert any cash dividend or
    other cash distribution we pay on the shares into
    U.S.&nbsp;dollars, if it can do so on a reasonable basis and can
    transfer the U.S.&nbsp;dollars to the United&nbsp;States. If
    that is not possible or if any government approval is needed and
    cannot be obtained, the deposit agreement allows the depositary
    to distribute the foreign currency only to those ADS holders to
    whom it is possible to do so. It will hold the foreign currency
    it cannot convert for the account of the ADS holders who have
    not been paid. It will not invest the foreign currency and it
    will not be liable for any interest.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Before making a distribution, the depositary will deduct any
withholding taxes that must be paid. See Item&nbsp;10.E.
&#147;Taxation&nbsp;&#151; Korean taxation.&#148; It will
distribute only whole U.S.&nbsp;dollars and cents and will round
fractional cents to the nearest whole cent. If the exchange
rates fluctuate during a time when the depositary cannot convert
the foreign currency, holders of ADSs may lose some or all of
the value of the distribution.
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Shares.</I> The depositary may distribute additional ADSs
    representing any shares we distribute as a dividend or free
    distribution. The depositary will only distribute whole ADSs. It
    will try to sell shares which would require it to deliver a
    fractional ADS and distribute the net proceeds in the same way
    as it does with cash. If the depositary does not distribute
    additional ADRs, the outstanding ADSs will also represent the
    new shares.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Rights to purchase additional shares.</I> If we offer holders
    of our securities any rights to subscribe for additional shares
    or any other rights, the depositary may make these rights
    available to holders of ADSs. If the depositary decides it is
    not legal and practical to make the rights available but that it
    is practical to sell the rights, the depositary may sell the
    rights and distribute the proceeds in the same way as it does
    with cash. The depositary will allow rights that are not
    distributed or sold to lapse. In that case, holders of ADSs will
    receive no value for them.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">100

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If the depositary makes rights available to holders of ADSs, it
will exercise the rights and purchase the shares on their
behalf. The depositary will then deposit the shares and deliver
ADSs to holders of ADSs. It will only exercise rights if holders
of ADSs pay it the exercise price and any other charges the
rights require them to pay.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
U.S.&nbsp;securities laws may restrict transfers and
cancellation of the ADSs represented by shares purchased upon
exercise of rights. For example, holders of ADSs may not be able
to trade these ADSs freely in the United States. In this case,
the depositary may deliver restricted depositary shares that
have the same terms as the ADRs described in this section except
for changes needed to put the necessary restrictions in place.
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Other Distributions.</I> The depositary will send to holders
    of ADSs anything else we distribute on deposited securities by
    any means it thinks is legal, fair and practical. If it cannot
    make the distribution in that way, the depositary has a choice.
    It may decide to sell what we distributed and distribute the net
    proceeds, in the same way as it does with cash. Or, it may
    decide to hold what we distributed, in which case ADSs will also
    represent the newly distributed property. However, the
    depositary is not required to distribute any securities (other
    than ADSs) to holders of ADSs unless it receives satisfactory
    evidence from us that it is legal to make that distribution.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The depositary is not responsible if it decides that it is
unlawful or impractical to make a distribution available to any
ADS holders. We have no obligation to register ADSs, shares,
rights or other securities under the Securities Act. We also
have no obligation to take any other action to permit the
distribution of ADRs, shares, rights or anything else to ADS
holders. This means that holders of ADSs may not receive the
distributions we make on our shares or any value for them if it
is illegal or impractical for us to make them available to
holders of ADSs.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Deposit and withdrawal</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>How are ADSs issued?</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The depositary will deliver ADSs if holders of ADSs or their
brokers deposit shares or evidence of rights to receive shares
with the custodian. Upon payment of its fees and expenses and of
any taxes or charges, such as stamp taxes or stock transfer
taxes or fees, the depositary will register the appropriate
number of ADSs in the names holders of ADSs request and will
deliver the ADRs at its office to the persons holders of ADSs
request.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Holders of ADSs may deposit common shares with the custodian for
the depositary and obtain ADSs, and may surrender ADSs to the
depositary and receive common shares, subject in each case to
certain conditions. However, under current Korean laws and
regulations, the depositary is required to obtain our prior
consent for a deposit to the extent that, after giving effect to
the deposit, the total number of common shares on deposit would
exceed the maximum amount previously approved by us. As of the
date of this annual report, such maximum amount approved by us
is the total number of common shares representing the ADSs
issued in the initial public offering.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>How do ADS holders cancel an ADR and obtain shares?</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Holders of ADSs may surrender their ADRs at the
depositary&#146;s office. Upon payment of its fees and expenses
and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, the depositary will deliver the shares
and any other deposited securities underlying the ADR to holders
of ADSs or persons holders of ADSs designate at the office of
the custodian. Or, at the request, risk and expense of holders
of ADSs, the depositary will deliver the deposited securities at
its office, if feasible.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Voting rights</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>How do holders of ADSs vote?</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Upon receipt of the necessary voting materials, holders of ADSs
may instruct the depositary to vote the number of shares their
ADSs represent. The depositary will notify holders of ADSs of
shareholders&#146; meetings
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">101

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
and arrange to deliver our voting materials to holders of ADSs
when we deliver them to the depositary with sufficient time
under the terms of the deposit agreement. Those materials will
describe the matters to be voted on and explain how holders of
ADSs may instruct the depositary how to vote. For instructions
to be valid, they much reach the depositary by a date set by the
depositary.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The depositary will try, as far as practical, subject to Korean
law and the provisions of our constitutive documents, to vote
the number of shares or other deposited securities represented
by the ADSs of their holders as they instruct. The depositary
will only vote or attempt to vote as holders of ADSs instruct.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
If there is a delay, we cannot ensure that holders of ADSs will
receive voting materials or otherwise learn of an upcoming
shareholders&#146; meeting in time to ensure that they can
instruct the depositary to vote their shares. In addition, the
depositary and its agents are not responsible for failing to
carry out voting instructions or for the manner of carrying out
voting instructions.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Payment of taxes</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The depositary may deduct the amount of any taxes owed from any
payments to holders of ADSs. It may also sell deposited
securities, by public or private sale, to pay any taxes owed.
Holders of ADSs will remain liable if the proceeds of the sale
are not enough to pay the taxes. If the depositary sells
deposited securities, it will, if appropriate, reduce the number
of ADSs to reflect the sale and pay to holders of ADSs any
proceeds, or send to them any property, remaining after it has
paid the taxes.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Reclassifications, recapitalizations and mergers</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="49%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="48%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>If We:</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Then:</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    &#149;&nbsp;Change the nominal or par value of our shares<BR>
    &#149;&nbsp;Reclassify, split up or consolidate any of the
    deposited securities</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    The cash, shares or other securities received by the depositary
    will become deposited securities. Each ADS will automatically
    represent its equal share of the new deposited securities.</TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    &#149;&nbsp;Distribute securities on the shares that are not
    distributed to holders &nbsp;&nbsp;&nbsp;&nbsp;of ADSs<BR>
    &#149;&nbsp;Recapitalize, reorganize, merge, liquidate, sell all
    or substantially all &nbsp;&nbsp;&nbsp;&nbsp;of our assets, or
    take any similar action</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    The depositary may distribute some or all of the cash, shares or
    other securities it received. It may also deliver new ADRs or
    ask holders of ADSs to surrender their outstanding ADRs in
    exchange for new ADRs identifying the new deposited securities.</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Fees and expenses</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="49%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="42%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Persons Depositing Shares or ADR Holders Must Pay:</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="5" align="center" nowrap><B>For:</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="5" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;&#149;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Issuance of ADSs, including issuances resulting from a
    distribution of shares or rights or other property</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;&#149;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Cancellation of ADSs for the purpose of withdrawal, including if
    the deposit agreement terminates</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    US$.02 (or less) per ADS</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;&#149;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Any cash distribution to holders of ADSs</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    A fee equivalent to the fee that would be payable if securities
    distributed to holders of ADSs had been shares and the shares
    had been deposited for issuance of ADSs</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;&#149;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Distribution of securities distributed to holders of deposited
    securities which are distributed by the depositary to ADR holders</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    US$.02 (or less) per ADSs per calendar year (if the depositary
    has not collected any cash distribution fee during that year)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;&#149;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Depositary services (The depositary may collect these fees at
    the sole discretion of the depositary, by billing the holders of
    ADSs for such charge or by deducting such charge from one or
    more cash dividends or other cash distributions.)</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">102
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; ">

<TR style="font-size: 1pt;">
    <TD width="49%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="42%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Persons Depositing Shares or ADR Holders Must Pay:</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="5" align="center" nowrap><B>For:</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="5" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Registration or transfer fees<BR>
    <BR>
    Expenses of the depositary in converting foreign currency to
    U.S.&nbsp;dollars</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;&#149;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Transfer and registration of shares on our share register to or
    from the name of the depositary or its agent when holders of
    ADSs deposit or withdraw shares</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Expenses of the depositary<BR>
    <BR>
    Taxes and other governmental charges the depositary or the
    custodian have to pay on any ADR or share underlying an ADR, for
    example, stock transfer taxes, stamp duty or withholding taxes</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;&#149;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Cable, telex and facsimile transmissions (when expressly
    provided in the deposit agreement)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    Any charges incurred by the depositary or its agents for
    servicing the deposited securities</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;&#149;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    No charges of this type are currently made in the Korean market
    (The depositary may collect these fees at the sole discretion of
    the depositary, by billing the holders of ADSs for such charge
    or by deducting such charge from one or more cash dividends or
    other cash distributions.)</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Amendment and termination</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>How may the deposit agreement be amended?</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We may agree with the depositary to amend the deposit agreement
and the ADRs without consent of holders of ADSs for any reason.
If an amendment adds or increases fees or charges, except for
taxes and other governmental charges or expenses of the
depositary for registration fees, facsimile costs, delivery
charges or similar items, or prejudices a substantial right of
ADR holders, it will not become effective for outstanding ADRs
until 30&nbsp;days after the depositary notifies ADR holders of
the amendment. <I>At the time an amendment becomes effective,
holders of ADSs are considered, by continuing to hold their
ADSs, to agree to the amendment and to be bound by the ADRs and
the deposit agreement as amended.</I>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>How may the deposit agreement be terminated?</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The depositary will terminate the deposit agreement if we ask it
to do so. The depositary may also terminate the deposit
agreement if the depositary has told us that it would like to
resign and we have not appointed a new depositary bank within
60&nbsp;days. In either case, the depositary must notify holders
of ADSs at least 30&nbsp;days before termination.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
After termination, the depositary and its agents will do the
following under the deposit agreement but nothing else:
(1)&nbsp;advise holders of ADSs that the deposit agreement is
terminated, (2)&nbsp;collect distributions on the deposited
securities, (3)&nbsp;sell rights and other property, and
(4)&nbsp;deliver shares and other deposited securities upon
surrender of ADRs. One year or more after termination, the
depositary may sell any remaining deposited securities by public
or private sale. After that, the depositary will hold the money
it received on the sale, as well as any other cash it is holding
under the deposit agreement for the <I>pro rata </I>benefit of
the ADR holders that have not surrendered their ADRs. It will
not invest the money and has no liability for interest. The
depositary&#146;s only obligations will be to account for the
money and other cash. After termination our only obligations
will be to indemnify the depositary and to pay fees and expenses
of the depositary that we agreed to pay.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">103

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Limitations on obligations and liability</B>
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Limits on our obligations and the obligations of the
    depositary; limits on liability to holders of ADSs</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The deposit agreement expressly limits our obligations and the
obligations of the depositary. It also limits our liability and
the liability of the depositary. We and the depositary:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    are only obligated to take the actions specifically set forth in
    the deposit agreement without negligence or bad faith;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    are not liable if we or the depositary is prevented or delayed
    by law or circumstances beyond our or its control from
    performing our or its obligations under the deposit agreement;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    are not liable if we or the depositary exercises discretion
    permitted under the deposit agreement;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    have no obligation to become involved in a lawsuit or other
    proceeding related to the ADRs or the deposit agreement on
    behalf of holders of ADSs or on behalf of any other person;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    may rely upon any documents we or the depositary believes in
    good faith to be genuine and to have been signed or presented by
    the proper party.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In the deposit agreement, we agree to indemnify the depositary
for acting as depositary, except for losses caused by the
depositary&#146;s own negligence or bad faith, and the
depositary agrees to indemnify us for losses resulting from its
negligence or bad faith.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Requirements for depositary actions</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Before the depositary will deliver or register a transfer of an
ADR, make a distribution on an ADR, or permit withdrawal of
shares or other property, the depositary may require:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    payment of stock transfer or other taxes or other governmental
    charges and transfer or registration fees charged by third
    parties for the transfer of any shares or other deposited
    securities;</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    satisfactory proof of the identity and genuineness of any
    signature or other information it deems necessary;&nbsp;and</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    compliance with regulations it may establish, from time to time,
    consistent with the deposit agreement, including presentation of
    transfer documents.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The depositary may refuse to deliver ADRs or register transfers
of ADRs generally when the transfer books of the depositary or
our transfer books are closed or at any time if the depositary
or we think it advisable to do so.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>ADS holder&#146;s right to receive the shares underlying its
ADSs</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Holders of ADSs have the right to cancel their ADSs and withdraw
the underlying shares at any time except:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    When temporary delays arise because: (i)&nbsp;the depositary has
    closed its transfer books or we have closed our transfer books;
    (ii)&nbsp;the transfer of shares is blocked to permit voting at
    a shareholders&#146; meeting; or (iii)&nbsp;we are paying a
    dividend on our shares.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    When holders of ADSs seeking to withdraw shares owe money to pay
    fees, taxes and similar charges.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    When it is necessary to prohibit withdrawals in order to comply
    with any laws or governmental regulations that apply to ADSs or
    to the withdrawal of shares or other deposited securities.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This right of withdrawal may not be limited by any other
provision of the deposit agreement.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">104

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Pre-release of ADRs</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The deposit agreement permits the depositary to deliver ADRs
before deposit of the underlying shares. This is called a
pre-release of the ADR. The depositary may also deliver shares
upon surrender of pre-released ADRs (even if the ADRs are
surrendered before the pre-release transaction has been closed
out). A pre-release is closed out as soon as the underlying
shares are delivered to the depositary. The depositary may
receive ADRs instead of shares to close out a pre-release. The
depositary may pre-release ADRs only under the following
conditions: (1)&nbsp;before or at the time of the pre-release,
the person to whom the pre-release is being made represents to
the depositary in writing that it or its customer (a)&nbsp;owns
the shares or ADRs to be deposited, (b)&nbsp;assigns all
beneficial right, title and interest in such shares or ADRs to
the depositary for the benefit of the owners and (c)&nbsp;will
not take any action with respect to such shares or ADRs that is
inconsistent with the transfer of beneficial ownership;
(2)&nbsp;the pre-release is fully collateralized with cash or
other collateral that the depositary considers appropriate; and
(3)&nbsp;the depositary must be able to close out the pre-
release on not more than five business days&#146; notice. In
addition, the depositary will limit the number of ADSs that may
be outstanding at any time as a result of pre-release, although
the depositary may disregard the limit from time to time, if it
thinks it is appropriate to do so.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='164'></A>
</DIV>

<!-- link1 "PART II" -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>PART&nbsp;II</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='165'></A>
</DIV>

<!-- link1 "ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;13.</B></TD>
    <TD>
    <B><I>DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='166'></A>
</DIV>

<!-- link1 "ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;14.</B></TD>
    <TD>
    <B><I>MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
    AND USE OF PROCEEDS</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='167'></A>
</DIV>

<!-- link1 "ITEM 15. CONTROLS AND PROCEDURES" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;15.</B></TD>
    <TD>
    <B><I>CONTROLS AND PROCEDURES</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
At the time of the filing of our Annual Report on
Form&nbsp;<FONT style="white-space: nowrap">20-F</FONT> for the
year ended December&nbsp;31, 2004, our then Chief Executive and
Chief Financial Officers concluded that the design and operation
of our disclosure controls and procedures as of
December&nbsp;31, 2004 were effective. In connection with the
preparation of the restated financial statements as of and for
the years ended December&nbsp;31, 2002, 2003 and 2004, and the
preparation and filing of Amendment No.&nbsp;1 to our Annual
Report on
Form&nbsp;<FONT style="white-space: nowrap">20-F</FONT> for the
year ended December&nbsp;31, 2004, the Company, under the
supervision and with the participation of the Company&#146;s
current management, including the Company&#146;s Chief Executive
Officer (the &#147;CEO&#148;) and Chief Financial Officer (the
&#147;CFO&#148;) (the CEO and the CFO, collectively, &#147;the
Certifying Officers&#148;) in consultation with the
Company&#146;s accounting and other management team, carried out
an evaluation of the effectiveness of its &#147;disclosure
controls and procedures&#148; (as the term is defined in the
Exchange Act
Rules&nbsp;<FONT style="white-space: nowrap">13a-15(e)</FONT>
and <FONT style="white-space: nowrap">15d-15(e))</FONT> as those
controls existed as of December&nbsp;31, 2004. As defined under
Rules&nbsp;<FONT style="white-space: nowrap">13a-15(e)</FONT>
and <FONT style="white-space: nowrap">15d-15(e)</FONT>
promulgated under the Exchange Act, as amended, the term
&#147;disclosure controls and procedures&#148; means controls
and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and
Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure
that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer&#146;s management,
including its principal executive officer or officers and
principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions
regarding required disclosure. Based on this evaluation, the CEO
and the CFO concluded that the Company&#146;s disclosure
controls and procedures were not effective.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">105

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Material Weaknesses in Internal Control Over Financial
Reporting</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term
is defined in Exchange Act
Rule&nbsp;<FONT style="white-space: nowrap">13a-15(f).</FONT>
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements.
A material weakness as defined under the Standards of the Public
Accounting Oversight Board (United States) is a control
deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented
or detected. Management identified the material weaknesses set
forth below in our internal control over financial reporting (as
defined under Standards of the Public Accounting Oversight
Standard Board (United States) as of December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We did not maintain an effective control environment.
Specifically, the Company did not maintain a control environment
adequate to encourage the prevention or detection of the
override of our controls or intentional misconduct, including
the embezzlement of revenues due to the Company, improper
payment for assets not otherwise purchased for the benefit of
the Company, the intentional and inappropriate early recognition
of revenue and the preparation of false management reports,
accounting records, financial statements and documents together
with forged invoices. The absence of effective control
environment allowed the former Chairman to take inappropriate
actions that resulted in certain transactions not being properly
reflected in our consolidated financial statements for the years
ended December&nbsp;31, 2002, 2003 and 2004. Such intentional
misconduct by the former Chairman included the preparation of
false accounting records and documents to deceive accounting
personnel under his supervision, other members of senior
management, our Board of Directors and our independent
registered public accountants. Additionally, the lack of an
effective control environment allowed our lines of communication
among, and our monitoring of, our operations and accounting
personnel, including the former Chairman, to be ineffective in
preventing or detecting these instances of intentional
misconduct. Taken as a whole, our control environment did not
adequately emphasize appropriate judgment, skepticism and
objectivity, which the Company believes contributed to the
events which necessitated the restatements.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
This control environment material weakness contributed to the
fraudulent activity described above, which in turn resulted in
the restatement of our consolidated financial statements for the
years ended December&nbsp;31, 2004, 2003 and 2002 and
adjustments to our 2005 consolidated financial statements.
Additionally, this control environment material weakness could
result in misstatements of any of our financial statement
accounts that would result in a material misstatement to the
annual consolidated financial statements that would not be
prevented or detected. Accordingly, our management has
determined that this control deficiency constitutes a material
weakness. This material weakness in our control environment
contributed to the existence of the following additional
material weaknesses:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Lack of independent oversight and supervision controls.</I>
    The Company&#146;s Audit Committee and the system of internal
    control over financial reporting established by the Audit
    Committee failed to recognize and detect the fraudulent
    activities by the former Chairman and certain member of the
    senior management. The Company did not have adequate controls
    related to the prevention and detection of fraud, for example,
    corporate compliance programs and whistleblower hotlines.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Lack of controls over the reported revenues from our overseas
    licensees.</I> The Company did not have controls designed to
    detect under-reporting of amounts due to the Company by overseas
    licensees.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Lack of controls over bank accounts.</I> The former Chairman
    was able to open overseas bank accounts, with the help of a
    Company employee without appropriate monitoring, which
    contributed to the former Chairman&#146;s ability to carry on
    fraudulent activities without being detected. In addition, the
    former Chairman had access to the Company&#146;s accounts
    without oversight, which allowed him to use Company accounts and
    transfer funds out of such accounts without proper authorization.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Lack of sufficient complement of personnel.</I> The Company
    did not maintain a sufficient complement of personnel with an
    appropriate level of accounting knowledge, experience and
    training in the selection, application and implementation of
    U.S.&nbsp;GAAP commensurate with the Company&#146;s financial
    reporting requirements under the Exchange Act.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">106

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Lack of controls over the purchase and accounting for fixed
    assets.</I> The Company did not have adequate authorization
    controls to ensure that assets purchased and paid for by the
    Company were in fact for the benefit of the Company and did not
    have adequate controls to verify and ensure that assets recorded
    in the Company&#146;s balance sheet were in fact in possession
    of the Company.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Lack of controls over the financial close and reporting
    process.</I> We did not maintain effective controls, including
    monitoring, over our financial close and reporting process.
    Specifically, we do not have adequately designed controls to
    ensure the completeness, accuracy and restricted access to
    spreadsheets used in the period-end financial closing process.
    This control deficiency could result in errors in the
    performance of consolidations and the preparation of
    U.S.&nbsp;GAAP financial statements and allow our employees
    manipulate financial results and override controls.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The control deficiencies described above resulted in the
restatement of the Company&#146;s consolidated financial
statements for the years ended December&nbsp;31, 2004, 2003 and
2002 and adjustments to our 2005 consolidated financial
statements. Accordingly, the Company&#146;s management has
determined that each of these control deficiencies constitute
material weaknesses.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Remediation of Material Weaknesses</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company&#146;s management is committed to addressing the
material weaknesses identified above by implementing various
remedial measures to the Company&#146;s internal control over
financial reporting. During the year ended December&nbsp;31,
2005 and to the date of the filing of this annual report, our
management, including the Certifying Officers and the Audit
Committee, have executed a range of actions to address the
material weaknesses in our internal control over financial
reporting, including implementing the following:
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Change in oversight.</I> We have, since the discovery of the
    events which led to the Investigation, replaced the members of
    the Audit Committee in its entirety with three new independent
    directors and have terminated or removed from office those
    individuals the Company believes were responsible for the
    actions which led to the Investigation. In addition, we have
    created a new position of chief compliance officer, whose
    mandate is to ensure that the Company&#146;s policies regarding
    ethics is strictly enforced and to put in place a culture of
    accountability and independent monitoring to address any
    potential for such failures happening in the future, including
    for example the audit and review of database entries of the
    Company&#146;s major licensees. The chief compliance officer
    (CCO)&nbsp;reports to both the CEO and to the Audit Committee.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Retain outside consulting firm.</I> We retained the
    consulting services of a Korean affiliate of a major
    international accounting firm in June 2005 to enhance our
    internal control system and to develop an evaluation system to
    enable our management to evaluate the effectiveness of our
    internal control over financial reporting (as defined under
    Rules&nbsp;<FONT style="white-space: nowrap">13a-15(c)</FONT>
    and <FONT style="white-space: nowrap">15d-15(c)</FONT> under the
    Exchange Act) and to assist the Company in the preparation of
    its financial statement under U.S.&nbsp;GAAP. The accounting
    firm has recommended various remedial measures and the Company
    along with our senior management and accounting team are in the
    process of implementing such recommendations.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Software and systems upgrade.</I> We are in the process of
    implementing an enterprise resource program, or ERP, with the
    ultimate aim to provide to senior management integrated and
    timely reporting of the Company&#146;s financial results and
    financial condition while minimizing the ability to override
    established protocols. In addition, the aim of the ERP system
    will be to segregate duties of various persons and departments
    to help minimize unauthorized actions and to provide a check to
    ensure that any irregularities are detected and reported in a
    timely manner. Also, the Company believes that such a system
    will minimize errors which were more likely when the Company
    relied on spreadsheet programs. The Company is in the process of
    implementing such system and expects to have the system
    operational by the end of 2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6.0pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Code of ethics.</I> The Company has recently amended its code
    of ethics to emphasize the need for senior management and all of
    the employees of the Company to comply with the ethics standards
    as set forth in the Company&#146;s code of ethics. All new
    employees are to receive training on the code of ethics.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">107

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    Also, the code of ethics includes a whistle blower process,
    whereby employees can communicate on an anonymous basis with the
    CCO or CEO, who are to report such matters to any member of the
    Audit Committee regarding fraudulent or suspicious activities.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company&#146;s management, in particular, its CEO and CFO
along with the Audit Committee, is in the process of addressing
the material weaknesses and will seek to put in place a system
of internal control over financial reporting which will
remediate such material weaknesses as expeditiously as possible.
All disclosure controls and procedures, no matter how well
designed, however, have inherent limitations including the
possibility of human error and the circumvention or overriding
of the controls and procedures. A company&#146;s internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company&#146;s internal control over
financial reporting includes those policies and procedures that
(i)&nbsp;pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii)&nbsp;provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii)&nbsp;provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company&#146;s assets that could have a material effect on the
financial statements. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect all misstatements.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Changes In Internal Control Over Financial Reporting</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
There were no changes in the Company&#146;s &#147;internal
control over financial reporting,&#148; as that term is defined
in Rules&nbsp;<FONT style="white-space: nowrap">13a-15(f)</FONT>
and <FONT style="white-space: nowrap">15d-15(f)</FONT>
promulgated under the Exchange Act that occurred during the year
ended December&nbsp;31, 2005 that has materially affected or is
reasonably likely to materially affect the Company&#146;s
internal control over financial reporting. However, in
connection with the material weaknesses in internal control over
financial reporting discussed above, the Company is currently in
the process of taking remedial measures described above to
address the material weaknesses.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='168'></A>
</DIV>

<!-- link1 "ITEM 16." -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>ITEM 16.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='169'></A>
</DIV>

<!-- link1 "16.A. Audit Committee Financial Expert" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>16.A.&nbsp;&nbsp;Audit Committee Financial Expert</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Our board of directors has determined that Mr.&nbsp;James Jinho
Chang, our outside director and the chairman of our Audit
Committee, is an &#147;audit committee financial expert,&#148;
as such term is defined by the regulations of the Securities and
Exchange Commission issued pursuant to Section&nbsp;407 of the
Sarbanes-Oxley Act. Mr.&nbsp;Chang is an independent director as
such term is defined under Section&nbsp;301 of the
Sarbanes-Oxley Act.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='170'></A>
</DIV>

<!-- link1 "16.B. Code of Ethics" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>16.B.&nbsp;&nbsp;Code of Ethics</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Pursuant to the requirements of the Sarbanes-Oxley Act, we have
previously adopted a Code of Ethics applicable to all our
employees, including our chief executive officer, chief
financial officer and all other directors and executive
officers. We have recently adopted an amended Code of Ethics,
applicable to all our directors and officers and employees,
which is being filed as Exhibit&nbsp;8.1 to this annual report.
The amendment was made to more clearly set forth the principles
underlying the Code in order to assist our directors, officers
and employees in connection with their adherence to the
guideline for ethical behavior described in the Code.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">108

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='171'></A>
</DIV>

<!-- link1 "16.C. Principal Accountant Fees and Services" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>16.C.&nbsp;&nbsp;Principal Accountant Fees and Services</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table sets forth the aggregate fees billed for
each of the years ended December&nbsp;31, 2005 for professional
services rendered by our principal accountants Samil
PricewaterhouseCoopers, the Korean member firm of
PricewaterhouseCoopers, depending on the various types of
services and a brief description of the nature of such services.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="38%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Aggregate Fees</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Billed During</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>the Year Ended</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>December&nbsp;31,</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2" align="left" nowrap><B>Type of Services</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Nature of Services</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(In millions of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Won)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Audit Fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>853</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,913</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Audit service for Company and its subsidiaries, including
    restatement audit.</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Audit-Related Fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Accounting advisory service.</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax Fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Tax return and consulting advisory service.</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    All Other Fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    All other services which do not meet the three categories above.</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>859</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,188</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
United States law and regulations in effect since May&nbsp;6,
2003 generally require all engagements of the principal
accountants be pre-approved by an independent audit committee
or, if no such committee exists with respect to an issuer, by
the entire board of directors. Our Board of Directors has
adopted the following policies and procedures for consideration
and approval of requests to engage our principal accountants to
perform audit and non-audit services. Engagement requests of
audit and non-audit services for us and our subsidiaries must in
the first instance be submitted to our Treasury Department
subject to reporting to our Chief Financial Officer. If the
request relates to services that would impair the independence
of our principal accountants, the request must be rejected. If
the engagement request relates to audit and permitted non-audit
services, it must be forwarded to our Board of Directors for
consideration.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Additionally, United States law and regulations in effect since
May&nbsp;6, 2003 permit the pre-approval requirement to be
waived with respect to engagements for non-audit services
aggregating no more than five percent of the total amount of
revenues we paid to our principal accountants, if such
engagements were not recognized by us at the time of engagement
and were promptly brought to the attention of our Board of
Directors or a designated member thereof and approved prior to
the completion of the audit. In 2005, the percentage of the
total amount of revenue we paid to our principal accountants
represented by non-audit services in each category that were
subject to such a waiver was less than 5%.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='172'></A>
</DIV>

<!-- link1 "16.D. Exemptions from the Listing Standards for Audit Committee" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>16.D.&nbsp;&nbsp;Exemptions from the Listing Standards for
Audit Committee</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Not applicable.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='173'></A>
</DIV>

<!-- link1 "16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>16.E.&nbsp;&nbsp;Purchases of Equity Securities by the Issuer
and Affiliated Purchasers</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Neither we nor any &#147;affiliated purchaser,&#148; as defined
in
Rule&nbsp;<FONT style="white-space: nowrap">10b-18(a)(3)</FONT>
of the Exchange Act, purchased any of our equity securities
during the period covered by this annual report.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">109

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='174'></A>
</DIV>

<!-- link1 "PART III" -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>PART&nbsp;III</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='175'></A>
</DIV>

<!-- link1 "ITEM 17. FINANCIAL STATEMENTS" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;17.</B></TD>
    <TD>
    <B><I>FINANCIAL STATEMENTS</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
We have responded to Item&nbsp;18 in lieu of responding to this
item.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='176'></A>
</DIV>

<!-- link1 "ITEM 18. FINANCIAL STATEMENTS" -->

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD><B>ITEM&nbsp;18.</B></TD>
    <TD>
    <B><I>FINANCIAL STATEMENTS</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Reference is made to Item&nbsp;19 &#147;Exhibits&#148; for a
list of all financial statements and schedules filed as part of
this annual report.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='177'></A>
</DIV>

<!-- link1 "ITEM 19. EXHIBITS" -->

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>ITEM 19.&nbsp;&nbsp;<I>EXHIBITS</I></B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>(a)&nbsp;Financial Statements filed as part of this annual
report</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following financial statements and related schedules,
together with the reports of independent accountants thereon,
are filed as part of this annual report:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Page</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Index to Financial Statements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Report of Independent Registered Public Accounting Firm</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-2</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Consolidated balance sheets as of December&nbsp;31, 2004 and 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Consolidated statements of income for the years ended
    December&nbsp;31, 2003, 2004 and 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Consolidated statements of changes in shareholders&#146; equity
    for the years ended December&nbsp;31, 2003, 2004 and 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Consolidated statements of cash flows for the years ended
    December&nbsp;31, 2003, 2004 and 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-7</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Notes to the consolidated financial statements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-8</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B>(b)&nbsp;Exhibits filed as part of this annual report</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>1</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Articles of Incorporation (English translation)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>2</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Stock Certificate of Registrant&#146;s common stock, par
    value Won 500&nbsp;per share</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>2</TD>
    <TD align="left" valign="top" nowrap>.1**</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Form of Deposit Agreement among Registrant, The Bank of New
    York, as depositary, and all holders and beneficial owners of
    American depositary shares evidenced by American depositary
    receipts, including the form of American depositary receipt**</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.1*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Agreement on the Development of RAGNAROK Online, dated
    June&nbsp;26, 2000, between Myoung-Jin Lee and Registrant
    (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.2*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Agreement on the Exclusive License of Copyright Regarding
    Ragnarok Game Services, dated June&nbsp;26, 2000, between
    Myoung-Jin Lee and Registrant (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.3*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Cooperation Agreement on Ragnarok Game Services, dated
    May&nbsp;31, 2002, between Myoung-Jin Lee and Registrant
    (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.4*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Agreement on Factual Matters, dated November&nbsp;19, 2002,
    between Myoung-Jin Lee and Registrant (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.5*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Agreement on Ragnarok Game Services and Related Matters, dated
    January&nbsp;22, 2003, between Myoung-Jin Lee and Registrant
    (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.6*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Agreement, dated June&nbsp;3, 2003, between Myoung-Jin Lee and
    Registrant (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.7*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Agreement, dated October&nbsp;27, 2004, between Myoung-Jin Lee
    and Registrant (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.8*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Investment Agreement, dated February&nbsp;19, 2002, between
    Sunny YNK Inc. and Registrant (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.9*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Agreement, dated February&nbsp;21, 2002, between Sunny YNK Inc.
    and Registrant (translation in English)</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">110

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; ">

<TR style="font-size: 1pt;">
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.10&#134;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Share Purchase Agreement, dated May&nbsp;3, 2005, between
    Mr.&nbsp;Moon Kyu Kim and Registrant (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.11*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Ragnarok License and Distribution Agreement, dated July&nbsp;24,
    2002, between GungHo Online Entertainment Inc. (formerly ONSALE
    Japan K.K.) (licensee in Japan) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.12*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment to Ragnarok License and Distribution Agreement, dated
    September&nbsp;23, 2004, between GungHo Online Entertainment
    Inc. (licensee in Japan) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.13*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Ragnarok Exclusive License and Distribution Agreement, dated
    May&nbsp;20, 2002, between Soft-World International Corporation
    (licensee in Taiwan and Hong Kong) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.14*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Fourth Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated October&nbsp;19, 2004, between
    Soft-World International Corporation (licensee in Taiwan and
    Hong Kong) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.15*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Exclusive Ragnarok License and Distribution Agreement, dated
    October&nbsp;21, 2002, among Soft-World International
    Corporation, Value Central Corporation (licensee in China) and
    Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.16&#134;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Fourth Amendment to the Exclusive Ragnarok License and
    Distribution Agreement, dated May&nbsp;18, 2005, among
    Soft-World International Corporation, Value Central Corporation
    (licensee in China) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.17*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Ragnarok License and Distribution Agreement, dated June&nbsp;13,
    2002, between Asiasoft International Co., Ltd. (licensee in
    Thailand) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.18*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated October&nbsp;27, 2004, between
    Asiasoft International Co., Ltd. (licensee in Thailand) and
    Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.19*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Exclusive Ragnarok License and Distribution Agreement, dated
    May&nbsp;12, 2003, among Soft-World International Corporation,
    Value Central Corporation (licensee in Malaysia and Singapore)
    and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.20*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Exclusive Ragnarok License and Distribution Agreement, dated
    March&nbsp;25, 2003, between Level&nbsp;Up! Inc. (licensee in
    the Philippines) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.21&#134;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Third Amendment to the Exclusive Ragnarok License and
    Distribution Agreement, dated February&nbsp;18, 2005, between
    Level&nbsp;Up! Inc. (licensee in the Philippines) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.22*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Exclusive Ragnarok License and Distribution Agreement, dated
    April&nbsp;2, 2004, between PT. Lyto Datarindo Fortuna (licensee
    in Indonesia) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.23*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated October&nbsp;29, 2004, between PT.
    Lyto Datarindo Fortuna (licensee in Indonesia) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.24*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Exclusive Ragnarok Online License and Distribution Agreement,
    dated November&nbsp;26, 2003, between Burda Holding
    International GmbH (licensee in Germany, Austria, Switzerland,
    Italy and Turkey) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.25*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated December&nbsp;2, 2003, between
    Burda Holding International GmbH (licensee in Germany, Austria,
    Switzerland, Italy and Turkey) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.26*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Second Amendment to the Exclusive Ragnarok License and
    Distribution Agreement, dated November&nbsp;18, 2004, between
    Burda Holding International GmbH (licensee in Germany, Austria,
    Switzerland, Italy and Turkey) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.27&#134;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Exclusive Ragnarok License and Distribution Agreement, dated
    July&nbsp;16, 2004, between Ongamenet PTY Ltd. (licensee in
    Australia and New Zealand) and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.28&#134;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Exclusive Ragnarok License and Distribution Agreement, dated
    August&nbsp;15, 2004, between Level&nbsp;Up! Interactive SA
    (licensee in Brazil) and GRAVITY Co., Ltd.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.29*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Exclusive Ragnarok Software License Agreement, dated
    May&nbsp;24, 2004, between Level&nbsp;Up Network India Pvt. Ltd.
    (licensee in India) and GRAVITY Co., Ltd.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.30*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement, dated August&nbsp;1, 2004, between Jung Ryool
    Kim and Registrant (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.31*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Equipment Sales Agreement, dated December&nbsp;1, 2003, between
    GRAVITY Interactive LLC and Registrant</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">111

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; ">

<TR style="font-size: 1pt;">
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.32*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Service and Distribution of Earnings and Profit Agreement, dated
    April&nbsp;1, 2003, between GRAVITY Interactive, LLC and
    Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.33*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Loan Agreement, dated January&nbsp;1, 2004, between GRAVITY
    Entertainment Corporation, formerly RO Production Ltd., and
    Registrant (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.34*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Share <I>(syusshi-mochiban) </I>Assignment Agreement, dated
    October&nbsp;25, 2004, between GungHo Online Entertainment Inc.
    and Registrant</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.35*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Joint Project Agreement for TV Animation &#147;Ragnarok,&#148;
    dated October&nbsp;1, 2004, among GRAVITY Entertainment
    Corporation, formerly RO Production Ltd., GDH Co., Ltd., TV
    Tokyo Medianet Co., Ltd., Amuse Soft Entertainment Co., Ltd. and
    GNG Entertainment Inc (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.36*</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Ragnarok Sales Agency Agreement, dated April&nbsp;10, 2002,
    between Sunny YNK Inc. and Registrant (translation in English)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.37</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Lease Agreement, dated October&nbsp;19, 2005, between GRAVITY
    Co., Ltd. and Meritz Fire &#38; Marine Insurance Co., Ltd.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.38</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Real Estate Sale Agreement, dated May&nbsp;22, 2006, between
    GRAVITY Co., Ltd. and Yahoh Communication Ltd.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.39</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Global Publishing Agreement, dated November&nbsp;7, 2005,
    between GRAVITY Co., Ltd. and Ndoors Corporation.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>4</TD>
    <TD align="left" valign="top" nowrap>.40</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Global Publishing Agreement, dated November&nbsp;15, 2005,
    between GRAVITY Co., Ltd. and Sonnori Co., Ltd.</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>8</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    List of Registrant&#146;s subsidiaries</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>11</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    Registrant&#146;s Code of Ethics (amended)</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>12</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    CEO Certification Pursuant to Section&nbsp;302 of the
    Sarbanes-Oxley Act of 2002</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>12</TD>
    <TD align="left" valign="top" nowrap>.2</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    CFO Certification Pursuant to Section&nbsp;302 of the
    Sarbanes-Oxley Act of 2002</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>13</TD>
    <TD align="left" valign="top" nowrap>.1</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    CEO Certification Pursuant to Section&nbsp;906 of the
    Sarbanes-Oxley Act of 2002</TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>13</TD>
    <TD align="left" valign="top" nowrap>.2</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    CFO Certification Pursuant to Section&nbsp;906 of the
    Sarbanes-Oxley Act of 2002</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 3pt; ">

<TR style="font-size: 1pt;">
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="92%">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    *</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Incorporated by reference to Registrant&#146;s Registration
    Statement on Form&nbsp;F-1 (File No.&nbsp;333-122159)</TD>
</TR>

<TR>
    <TD align="right" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    **</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Incorporated by reference to Registrant&#146;s Registration
    Statement on Form&nbsp;F-6 (File No.&nbsp;333-122160)</TD>
</TR>

<TR>
    <TD align="right" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &#134;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    Previously filed as exhibits to our annual report on Form 20-F
    filed on June&nbsp;30, 2005.</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">112
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>SIGNATURES</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The registrant hereby certifies that it meets all of the
requirements for filing on
Form&nbsp;<FONT style="white-space: nowrap">20-F</FONT> and that
it has duly caused and authorized the undersigned to sign this
annual report on its behalf.
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    GRAVITY CO., LTD</TD>
</TR>

</TABLE>

<DIV style="margin-top: 48pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="2%"></TD>
    <TD width="58%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>By:&nbsp;</TD>
    <TD align="left">
    /s/ Il Young Ryu</TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 3.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <DIV style="width: 47%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="8%"></TD>
    <TD width="52%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>Name:&nbsp;</TD>
    <TD align="left">
    Il Young Ryu</TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="8%"></TD>
    <TD width="52%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>Title:</TD>
    <TD align="left">
    Representative Director and Chief <BR>
     Executive Officer</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Date: June&nbsp;30, 2006
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">113
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='178'></A>
</DIV>

<!-- link1 "INDEX TO FINANCIAL STATEMENTS" -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>INDEX TO FINANCIAL STATEMENTS</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="90%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Page</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Index to Financial Statements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#301'>Report of Independent Registered Public
    Accounting Firm</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-2</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#302'>Consolidated balance sheets as of December
    31, 2004 and 2005</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#303'>Consolidated statements of income for the
    years ended December 31, 2003, 2004 and 2005</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#304'>Consolidated statements of changes in
    shareholders&#146; equity for the years ended December 31, 2003,
    2004 and 2005</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-5</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#305'>Consolidated statements of cash flows for
    the years ended December 31, 2003, 2004 and 2005</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-7</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    &nbsp;<A HREF='#306'>Notes to Consolidated Financial
    Statements</A></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>F-8</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-1
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='301'></A>
</DIV>

<!-- link1 "Report of Independent Registered Public Accounting Firm" -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Report of Independent Registered Public Accounting Firm</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
To the Board of Directors and the Shareholders of <BR>
 GRAVITY Co., Ltd.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of changes in
shareholders&#146; equity and of cash flows present fairly, in
all material respects, the financial position of GRAVITY Co.,
Ltd. and its subsidiaries (the &#147;Company&#148;) as of
December&nbsp;31, 2004 and 2005 and the results of their
operations and their cash flows for the years ended
December&nbsp;31, 2003, 2004 and 2005 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Company&#146;s management. Our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    /s/ Samil PricewaterhouseCoopers</TD>
</TR>

<TR valign="top"  style="font-size: 2.5pt;color: #000000; background: #ffffff;">
    <TD>&nbsp;</TD>
    <TD align="left">
    <DIV style="border-top: 1pt solid black; font-size: 1pt; margin-top: 2pt" align="left">&nbsp;</DIV></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    Samil PricewaterhouseCoopers</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Seoul, KOREA
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
June&nbsp;28, 2006
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-2

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<A name='302'></A>
</DIV>

<!-- link1 "Consolidated Balance Sheets December 31, 2004 and 2005" -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>Consolidated Balance Sheets</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>December&nbsp;31, 2004 and 2005</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9.0pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="58%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Note&nbsp;3)</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(In millions of Korean Won and</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>in thousands of US dollars,</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>except share and per share data)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="15" align="center" valign="top">
    <B>ASSETS</B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>25,874</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>25,618</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Short-term financial instruments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>59,307</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts receivable, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,377</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,784</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,737</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,588</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Misappropriated funds receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Assets held for sale</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,099</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,019</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,116</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,770</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,663</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>46,868</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>109,428</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>108,345</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Property and equipment, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,863</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,746</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Leasehold and other deposits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,402</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,368</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Intangible assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>549</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,624</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Goodwill</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,451</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,437</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other non-current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,275</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,963</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,903</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>68,644</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>144,857</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>143,423</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="15">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="15" align="center" valign="top">
    <B>LIABILITIES AND SHAREHOLDERS&#146; EQUITY</B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>3,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>11,279</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>11,167</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,639</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,233</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,181</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income tax payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>552</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>547</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current portion of long-term debt</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax withholdings</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,198</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,186</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,174</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,221</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,448</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,255</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Long-term deferred income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,958</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,994</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,964</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Leasehold deposit received</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued severance benefits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>588</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>582</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Long-term accounts payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,063</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>135</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>134</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other non-current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>908</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>900</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18,209</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24,073</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,835</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Commitments and contingencies</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Minority interest</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Shareholders&#146; equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Preferred shares, W500&nbsp;par value, 2,000,000&nbsp;shares
    authorized, and no shares issued and outstanding at
    December&nbsp;31, 2004 and 2005, respectively</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Common shares, W500&nbsp;par value, 38,000,000&nbsp;shares
    authorized, and 5,548,900 and 6,948,900&nbsp;shares issued and
    outstanding at December&nbsp;31, 2004 and 2005, respectively</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,774</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,474</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,440</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Additional paid-in capital</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>74,902</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>74,160</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Retained earnings</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,617</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>42,587</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>42,165</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accumulated other comprehensive income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(137</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(201</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(199</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total shareholders&#146; equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50,435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>120,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>119,566</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total liabilities and shareholders&#146; equity</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>68,644</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>144,857</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>143,423</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The accompanying notes are an integral part of these financial
statements.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-3

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='303'></A>
</DIV>

<!-- link1 "GRAVITY Co., Ltd." -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Consolidated Statements of Operations</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>Years Ended December&nbsp;31, 2003, 2004 and 2005</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Note&nbsp;3)</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>(In millions of Korean Won and in thousands of</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>US dollars, except share and per share data)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Online games-subscription revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>18,560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>11,249</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>11,138</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Online games-royalties and license fees</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,375</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,005</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mobile games</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,664</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,648</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Character merchandising, animation and other revenue</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,185</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,696</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,065</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total net revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49,515</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>64,426</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53,384</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>52,856</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cost of revenues</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,958</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,116</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,879</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Gross profit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>42,557</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>54,310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>37,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>36,977</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating expenses</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Selling, general and administrative</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,360</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>13,660</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30,490</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Research and development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,597</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,029</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,219</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,128</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>38,621</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,668</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,641</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other income (expenses)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>94</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,822</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,465</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,732</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,158</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,137</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign currency gains (losses), net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>135</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(625</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(614</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(608</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign currency forward transaction, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(853</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(845</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Others, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income (loss) before income tax expenses, minority interest and
    equity in loss of related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,390</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,455</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,421</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income tax expenses (benefit)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(817</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(809</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income (loss) before minority interest and Equity in loss of
    related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,336</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,638</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,612</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Minority interest</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(17</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Equity in loss of related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>394</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>390</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>28,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(3,030</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(3,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Earnings (losses) per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>3,730</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,056</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(445</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(0.44</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted average number of shares outstanding</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,130,895</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,548,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,803,147</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,803,147</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The accompanying notes are an integral part of these financial
statements.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-4

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='304'></A>
</DIV>

<!-- link1 "GRAVITY Co., Ltd." -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Consolidated Statements of Changes in Shareholders&#146;
Equity</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>Years Ended December&nbsp;31, 2003, 2004 and 2005</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="26%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Accumulated</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Retained</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Other</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No. of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Additional</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Earnings</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Comprehensive</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Common</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Common</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Paid-In</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Accumulated</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Income</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Capital</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Deficit)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Loss)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>(In millions of Korean Won and in thousands of US dollars, except number of shares)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance at January&nbsp;1, 2003</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,400,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>1,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>-</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(1,580</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(210</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(90</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of common shares</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,148,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,074</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,206</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Comprehensive income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unrealized gains on available-for-sale securities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>218</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>218</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cumulative effect of foreign currency translation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(10</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total comprehensive income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,348</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance at December&nbsp;31, 2003</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,548,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,774</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22,464</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of deferred stock compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Comprehensive income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unrealized losses on available-for-sale securities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(11</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(11</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cumulative effect of foreign currency translation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(124</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(124</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28,057</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total comprehensive income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>27,922</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance at December&nbsp;31, 2004</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,548,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,774</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>45,617</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(137</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>50,435</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of common shares, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,400,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71,137</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71,837</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of deferred stock compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,584</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Comprehensive income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unrealized gains on available-for-sale securities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cumulative effect of foreign currency translation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(67</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(67</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,030</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,030</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total comprehensive loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,094</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance at December&nbsp;31, 2005</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,948,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>3,474</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>74,902</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>42,587</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(201</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>120,762</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-5
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Consolidated Statements of Changes in Shareholders&#146;
Equity</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>Years Ended December&nbsp;31, 2003, 2004 and 2005</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="30%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Accumulated</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Other</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>No. of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Additional</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Comprehensive</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2" align="left" nowrap><B>(Note&nbsp;3)</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Common</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Common</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Paid-In</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Retained</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Income</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2" align="left" nowrap><B>(Unaudited)</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Shares</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Capital</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Earnings</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Loss)</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Total</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>(In millions of Korean Won and in thousands of</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="22" align="center" nowrap><B>US dollars, except number of shares)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance at December&nbsp;31, 2004</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,548,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,747</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>2,160</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>45,165</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(136</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>49,936</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of common shares, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,400,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>693</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70,432</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71,125</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amortization of deferred stock compensation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,568</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,568</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Comprehensive income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unrealized gains on available-for-sale securities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cumulative effect of foreign currency translation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(66</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(66</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total comprehensive loss</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,063</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Balance at December&nbsp;31, 2005</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,948,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>3,440</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>74,160</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>42,165</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(199</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>119,566</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The accompanying notes are an integral part of these financial
statements.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-6
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='305'></A>
</DIV>

<!-- link1 "GRAVITY Co., Ltd." -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Consolidated Statements of Cash Flows</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>December&nbsp;31, 2003, 2004 and 2005</B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 9.0pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="42%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Note&nbsp;3)</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>(Unaudited)</B></TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>(In millions of Korean Won and in thousands of</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="center" nowrap><B>US&nbsp;dollars)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Cash flows from operating activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>28,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(3,030</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(3,000</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Adjustments to reconcile net income (loss) to net cash provided
    by operating activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Depreciation and amortization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,619</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,217</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,370</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,317</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss from impairment on investment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>777</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loss on impairment of intangible asset</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,547</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,532</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Provision for accrued severance benefits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>363</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>913</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,464</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,450</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock compensation expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>49</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,584</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,568</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Equity in loss of related joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>296</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>394</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>390</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(912</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,155</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,232</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,170</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>256</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>387</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>383</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Changes in operating assets and liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,251</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(498</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,035</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,005</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>122</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,465</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,592</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,566</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from joint venture</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>397</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Misappropriated funds receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,050</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(28</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,408</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,248</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(973</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,231</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,209</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accounts payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>553</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,221</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,349</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,276</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,508</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,339</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>867</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>858</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued interest</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(310</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(417</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(318</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(315</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income tax payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>898</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(619</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(613</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Long-term accounts payable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>434</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(928</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(919</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Payment of severance benefits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(114</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(144</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,288</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,265</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,102</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,091</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash provided by operating activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>15,823</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>32,642</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,928</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,750</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Cash flows from investing activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Increase in short-term financial instruments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,600</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(7,300</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(50,969</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(50,464</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Decrease (increase) of available-for-sale and other investments,
    net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,793</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>151</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>495</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Purchase of equity investments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,243</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Purchase of property and equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4,749</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(12,324</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(8,459</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(8,375</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Disposal of property and equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>510</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>22</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>78</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>77</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash paid for acquisition of subsidiaries, net of cash acquired</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(9,193</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(9,102</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Purchase of intangible asset</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(78</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(35</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,134</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(6,073</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Payment of leasehold deposits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,527</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(279</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,089</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,039</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from leasehold deposits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>710</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>212</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>210</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Others, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(37</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash used in investing activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(10,564</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(19,007</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(79,046</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>(78,263</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Cash flows from financing activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Issuance of common stock, net</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>3,206</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>71,837</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>71,125</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Repayment of capital lease liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(500</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(104</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Proceeds from borrowings</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,615</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>39</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>39</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Repayment of long-term debt</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,135</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,527</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,150</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,138</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Repayment of borrowings</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(8,600</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(4</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(139</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(138</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash provided by (used in)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Financing activities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(414</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,635</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70,587</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>69,888</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net increase in cash and cash equivalents</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,845</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,469</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,375</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Cash and cash equivalents</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Beginning of year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>16,243</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    End of the year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>25,874</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">$</TD>
    <TD align="right" valign="bottom" nowrap>25,618</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The accompanying notes are an integral part of these financial
statements.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-7

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<A name='306'></A>
</DIV>

<!-- link1 "GRAVITY Co., Ltd. Notes to Consolidated Financial Statements" -->

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial Statements</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>December&nbsp;31, 2004 and 2005</B>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>1.</B></TD>
    <TD>
    <B>Description of Business</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
GRAVITY Co., Ltd. (&#147;GRAVITY&#148;) was incorporated on
April&nbsp;4, 2000 and is engaged in developing and distributing
online games and other related businesses principally in the
Republic of Korea and in other countries within Asia, America
and Europe. GRAVITY&#146;s principal product, a multi-player
online role playing game, &#147;Ragnarok&#148;, was commercially
launched in August 2002. In addition, &#147;R.O.S.E.
Online&#148; game was commercially launched in January 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
GRAVITY founded GRAVITY Interactive, LLC, a limited liability
company incorporated in the State of California
(&#147;Interactive&#148;), as a wholly owned subsidiary, on
March&nbsp;14, 2003. On January&nbsp;20, 2004, GRAVITY acquired
50% of the voting shares of RO Production Co., Ltd., a company
incorporated under the laws of Japan. On October&nbsp;25, 2004,
the Company acquired the remaining 50% of the voting shares of
RO&nbsp;Production Co., Ltd. The Company changed its corporate
name to GRAVITY Entertainment Corp. on February&nbsp;5, 2005. In
April and May, 2005, GRAVITY acquired an aggregate of 88.15% of
the voting shares of TriggerSoft Corp., a game developer of
&#147;R.O.S.E. Online&#148; which was serviced by GRAVITY from
January&nbsp;20, 2005. In November and December, 2005, GRAVITY
acquired an aggregate of 96.11% of the voting shares of NEOCYON,
Inc. which provides mobile multimedia and online game
distribution services in Korea and Russia.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
GRAVITY registered 8,000,000&nbsp;shares of American Depository
Shares (&#147;ADS&#148;) on the NASDAQ National Market in the
United States of America on February&nbsp;8, 2005. Of the total
shares registered, the Company sold 5,600,000&nbsp;shares of
ADSs, and the existing shareholders sold 2,400,000&nbsp;shares
of ADSs. The total cash proceeds to GRAVITY after the issuance
cost was W71,837&nbsp;million. Four ADS are equivalent to one
common share.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On August&nbsp;30, 2005, EZER, Inc. (&#147;EZER&#148;) acquired
52.39% ownership of GRAVITY from Mr.&nbsp;Jung-Ryool Kim, the
former Chairman, and four other shareholders through a stock
purchase agreement.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In connection with this acquisition, EZER entered into an
investment fund agreement, or &#147;Tokumei Kumiai
Agreement&#148; (&#147;TK Agreement&#148;) with Techno Groove,
Co., Ltd. (&#147;Techno Groove&#148;). The acquisition by EZER
of 52.39% of GRAVITY was made through Asian Star Fund
(&#147;Asian Star&#148;) which is an investment fund for which
EZER is the management company. EZER exercises all exclusive
rights with respect to ownership and voting related to
EZER&#146;s 52.39% ownership in GRAVITY. The funds used by Asian
Star to acquire EZER&#146;s shareholding in GRAVITY were
provided to Asian Star by Techno Groove, a subsidiary of Asian
Groove, Inc. (&#147;Asian Groove&#148;) and the sole investor in
Asian Star. Asian Groove is an affiliate of GungHo Online
Entertainment, Inc. (&#147;GungHo&#148;), a licensee of the
Company&#146;s online game, Ragnarok and from whom the Company
has purchased the rights to an online game, &#147;Emil Chronicle
Online&#148; (see Notes&nbsp;2 and 10).
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
GRAVITY conducts its business within one industry
segment&nbsp;&#151; the business of developing and distributing
online game, software licensing and other related services.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>2.</B></TD>
    <TD>
    <B>Significant Accounting Policies</B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Basis of presentation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (&#147;US GAAP&#148;).
Significant accounting policies followed by the Company in the
preparation of the accompanying consolidated financial
statements are summarized below.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-8

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Principles of consolidation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The accompanying consolidated financial statements include the
accounts of GRAVITY and the following subsidiaries (collectively
referred to as &#147;the Company&#148;). All significant
intercompany transactions and balances have been eliminated in
the consolidation.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="55%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="11%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="12%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Year of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Year of</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Obtaining</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Ownership</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Subsidiary</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Establishment</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Control</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Percentage (%)</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    GRAVITY Interactive, LLC</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    GRAVITY Entertainment Corp.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2003</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    TriggerSoft Corp.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1997</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>88.15</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    NEOCYON, Inc.&nbsp;</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>96.11</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cybermedia International Inc.(*)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Mados, Inc.(**)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>100.00</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="1%"></TD>
    <TD width="2%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>*&nbsp;</TD>
    <TD align="left">
    Cybermedia International Inc. is a subsidiary of NEOCYON, Inc.,
    which was incorporated as a holding company of Mados, Inc.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>**&nbsp;</TD>
    <TD align="left">
    Mados, Inc. is a subsidiary of Cybermedia International Inc.,
    which was incorporated in Russia to provide online game
    distribution services.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Investments in entities where the Company holds more than a 20%
but less than a 50% ownership interest and have the ability to
significantly influence the operations of the investee are
accounted for using the equity method of accounting and our
share of the investee&#146;s operation is included in equity
method investee. The Company follows the equity method of
accounting for investment in its joint venture of Animation
Production Committee. The Company records its initial investment
at cost and records its pro rata share of the earnings in or
losses in the results of operations of the joint venture.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Stock split</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On November&nbsp;22, 2003, the Company&#146;s shareholders
approved a <FONT style="white-space: nowrap">10-for-1</FONT>
stock split, which became effective on December&nbsp;25, 2003.
The accompanying consolidated financial statements, including
all share and per share data, have been restated as if the stock
split had occurred as of the earliest period presented.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Use of estimates</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates
and assumptions that affect the amounts reported in the
accompanying consolidated financial statements and related
disclosures. Although these estimates are based on
management&#146;s best knowledge of current events and actions
that the Company may undertake in the future, actual results may
differ from these estimates.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Risks and Uncertainties</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The industry in which the Company operates is subject to a
number of industry-specific risks, including, but not limited
to, rapidly changing technologies; significant numbers of new
competitive entrants; dependence on key individuals; competition
from similar products from larger companies; customer
preferences; the need for the continued successful development,
marketing, and selling of its products and services; and the
need for positive cash flows from operations. The Company
depends on one key product, Ragnarok and has a limited operating
history and as a result, the Company is subject to risks
associated with early stage companies in new and rapidly
evolving markets.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-9

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During the years ended December&nbsp;31, 2003, 2004 and 2005,
the Company generated 95%, 94% and 91% of its revenues from
countries in Asia, respectively. Any economic downturn or crisis
in Asia would have a significant negative impact on the Company.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes licensees representing 10% or
more of the total accounts receivable at December&nbsp;31, 2004
and 2005, and total revenues for the years ended
December&nbsp;31, 2003, 2004, and 2005, respectively:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="28%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="16%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Accounts</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Accounts</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD align="left" nowrap><B>Country</B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B>Licensee</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Revenues</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Receivable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Revenues</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Receivable</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Revenues</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Japan</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    GungHo(*)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>21%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>29%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>31%</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Taiwan and Honkong</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    Soft-world International Corporation</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>24%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>30%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20%</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Korea</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    YNK Korea,&nbsp;Inc. (formerly known as &#147;Sunny YNK
    Inc.&#148;)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>28%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9%</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 3.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 18%; border-top: 1.0pt solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV style="margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>(*)&nbsp;</TD>
    <TD align="left">
    At December&nbsp;31, 2005, Asian Groove owns directly and
    indirectly 24.5% of the common stock of GungHo and exercises
    significant influence. The Company&#146;s accounts receivable
    relating to GungHo was W1,513&nbsp;million and
    W1,343&nbsp;million as of December&nbsp;31, 2004 and 2005,
    respectively.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Revenue recognition</I></B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Online games-subscription revenue</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Prepaid online game subscriptions are deferred and recognized
when actually used.
</DIV>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I>Online games-royalties and license fees</I></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company licenses the right to sell and distribute its games
in exchange for an initial prepaid license fee and guaranteed
minimum royalty payments. The prepaid license fee revenues are
deferred and recognized ratably over the license period. The
guaranteed minimum royalty payments are deferred and recognized
as the royalties are earned. In addition, the Company receives a
royalty payment based on a specified percentage of the
licensees&#146; sales. These royalties, that exceed the
guaranteed minimum royalty, are recognized on a monthly basis,
as the related revenues are earned by the licensees.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In February and April 2002, the Company entered into agreements
with YNK Korea, Inc. (&#147;YNK&nbsp;Korea&#148;) pursuant to
which the Company granted it the exclusive right to distribute
Ragnarok in Korea for a contractual period of three years from
the date Ragnarok was first commercialized. The Company acts as
the primary obligor with the end-user, and in the majority of
situations the end-user is not aware of the existence of YNK
Korea. The game is marketed and branded by the Company, and it
takes full responsibility for any customer complaints,
questions, support and is responsible to fix any bugs that are
identified. The Company develops content and maintains legal
ownership of the copyrights to the games. It hosts the delivery
of the games on its servers and can refuse end-users from
participating in game play. The Company has the right to stop
providing services to support the game at any time. In
accordance with Emerging Issues Task Force (&#147;EITF&#148;)
No.&nbsp;99-19, <I>Reporting Revenue Gross versus Net</I>, the
Company presents the entire revenue derived from the YNK Korea
license arrangement in its statement of operations.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The related agreements with YNK Korea expired in July 2005.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-10

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Cash and cash equivalents</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Cash equivalents consist of highly liquid investments with an
original maturity date of three months or less.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Short-term financial instruments</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Short-term financial instruments include time deposits, with
maturities greater than three months but less than a year.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Available-for-sale investments</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Available-for-sale securities are carried at fair value, with
the unrealized gains and losses, net of tax, reported as a
separate component of comprehensive income in shareholders&#146;
equity.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Allowance for doubtful accounts</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company maintains allowances for doubtful accounts
receivable based upon the following information: an aging
analysis of its accounts receivable balances, historical bad
debt rates, repayment patterns and creditworthiness of its
customers, and industry trend analysis.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Subsequent to June 2003, pursuant to agreements with various
payment gateway providers, the payment gateway providers are
responsible for remitting to the Company the full subscription
revenues generated in Korea after deducting their fixed service
fees and charges, which range from approximately 9% to 13% and
risk of loss or delinquencies are borne by such payment gateway
providers.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Property and equipment</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation for property and equipment is
computed using the straight-line method over the following
estimated useful lives:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="86%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Building</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>40 years</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Computer and equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4 years</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Furniture and fixtures</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4 years</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Software</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3 years</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Vehicles</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4 years</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Leasehold improvements are depreciated on a straight-line basis
over the estimated useful life of the assets or the lease term,
whichever is shorter.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Routine maintenance and repairs are charged to expense as
incurred. Expenditures which enhance the value or extend the
useful lives of the related assets are capitalized.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Accounting for the impairment of long-lived assets</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Long-lived assets and intangible assets that do not have
indefinite lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. When the aggregate of future
cash flows (undiscounted and without interest charges) is less
than the carrying value of the asset, an impairment loss is
recognized based on the fair value of the asset.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Capitalized software development costs</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company capitalizes certain software development costs
relating to online games that will be distributed through
subscriptions or licenses. The Company accounts for software
development in accordance
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-11

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
with Statements of Financial Accounting Standards
(&#147;SFAS&#148;) No.&nbsp;86, <I>Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.</I>
Software development costs incurred prior to the establishment
of technological feasibility are expensed when incurred and are
included in research and development expense. Once a software
product has reached technological feasibility, then all
subsequent software development costs for that product are
capitalized until the product is commercially launched.
Technological feasibility is evaluated on a product-by-product
basis, but typically occurs when the online game has a proven
ability to operate in a massively multi-player format.
Technological feasibility of a product encompasses both
technical design documentation and game design documentation.
For products where proven technology exists, this may occur
early in the development cycle.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
After an online game is released, the capitalized product
development costs are amortized over the game&#146;s estimated
useful life, which is deemed to be three years. This expense is
recorded as a component of cost of revenues.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Capitalized software development costs net of accumulated
amortization at December&nbsp;31, 2004 and 2005 was
W468&nbsp;million and W6,370&nbsp;million, respectively, which
is included in the intangible assets of the accompanying balance
sheets. Amortization expense for fiscal years ended
December&nbsp;31, 2003, 2004 and 2005 was W157&nbsp;million,
W199&nbsp;million and W253&nbsp;million respectively.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company evaluates the recoverability of capitalized software
development costs on a product-by-product basis. The
recoverability of capitalized software development costs is
evaluated based on the expected performance of the specific
products for which the costs relate. Criteria used to evaluate
expected product performance include: historical performance of
comparable products using comparable technology; orders for the
product prior to its release; and estimated performance of a
sequel product based on the performance of the product on which
the sequel is based. Capitalized costs for those products that
are cancelled are expensed in the period of cancellation. In
addition, a charge to cost of revenues is recorded when
management&#146;s forecast for a particular game indicates that
unamortized capitalized costs exceed the net realizable value of
that asset. Significant management judgments and estimates are
utilized in the assessment of when technological feasibility is
established, as well as in the ongoing assessment of the
recoverability of capitalized costs. In evaluating the
recoverability of capitalized costs, the assessment of expected
product performance utilizes forecasted sales amounts and
estimates of additional development costs to be incurred. If
revised forecasted or actual product sales are less than and/or
revised forecasted or actual costs are greater than the original
forecasted amounts utilized in the initial recoverability
analysis, the actual impairment charge may be larger than
originally estimated in any given period.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Research and development costs</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Research and development costs consist primarily of payroll,
depreciation expense and other overhead expenses which are all
expensed as incurred until technological feasibility is reached.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Goodwill</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Goodwill is accounted for under SFAS&nbsp;No.&nbsp;142,
<I>Goodwill and Other Intangible Assets</I>,
(&#147;SFAS&nbsp;142&#148;), which requires that goodwill and
indefinite-lived intangible assets no longer be amortized, but
instead be tested for impairment at the reporting unit level, at
least annually.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Definite-lived other Intangible assets</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Definite-lived intangible assets are amortized over their
estimated useful life according to the nature and
characteristics of each intangible assets. The Company
continually evaluates the reasonableness of the useful lives of
these assets. Definite-lived intangible assets that are subject
to amortization shall be reviewed for
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-12

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
impairment in accordance with under SFAS&nbsp;No.&nbsp;144,
<I>&#147;Accounting for the impairment or Disposal of Long-Lived
Assets&#148;.</I>
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Advertising</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company expenses advertising costs as incurred. Advertising
expense was approximately W4,233&nbsp;million,
W4,614&nbsp;million and W6,273&nbsp;million for the years ended
December&nbsp;31, 2003, 2004 and 2005, respectively. Pursuant to
the terms of the agreement with YNK Korea, once the cumulative
royalty payments to YNK Korea reached W7&nbsp;billion, it is
required to use 15% of future royalty payments, paid by the
Company, to fund additional marketing of the Ragnarok game. In
March 2003, cumulative royalty payments to YNK Korea reached
W7&nbsp;billion. After January&nbsp;1, 2004, these marketing
activities were performed by the Company and therefore, YNK
Korea reimbursed the Company for these costs in compliance with
the agreed terms, which was credited to advertising expenses
within selling, general and administrative expenses in the
accompanying statement of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Accrued severance benefits and Pension Plan</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Employees and directors with one year or more of service are
entitled to receive a lump-sum payment upon termination of their
employment with the Company based on the length of service and
rate of pay at the time of termination. Accrued severance
benefits are estimated assuming all eligible employees were to
terminate their employment at the balance sheet date in
compliance with relevant laws in Korean. The annual severance
benefits expense charged to operations is calculated based upon
the net change in the accrued severance benefits payable at the
balance sheet date.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Accrued severance benefits are funded through a group severance
insurance plan. The amounts funded under this insurance plan are
classified as a deduction to the accrued severance benefits.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company introduced defined contribution pension plan
(&#147;Plan&#148;) in 2005 and provides an individual account
for each participant. A plan&#146;s defined contributions to an
individual&#146;s account are to be made for periods in which
that individual renders services, the net pension cost for a
period shall be the contribution called for in that period.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Foreign currency translation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Korean parent company and its subsidiaries use their local
currencies as their functional currencies. All assets and
liabilities of the foreign subsidiaries are translated into the
Korean Won at the exchange rate in effect at the end of the
period, and revenues and expenses are translated at average
exchange rates during the period. The effects of foreign
currency translation adjustments, net of tax, are reflected in
the cumulative translation adjustment account, reported as a
separate component of comprehensive income in shareholders&#146;
equity.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Foreign currency transactions</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Net gains and losses resulting from foreign exchanges
transactions are included in foreign currency gains (losses) in
the statement of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Income taxes</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company accounts for income taxes under the provisions of
SFAS&nbsp;No.&nbsp;109, <I>Accounting for Income Taxes.</I>
Under SFAS&nbsp;No.&nbsp;109, income taxes are accounted for
under the asset and liability method. Deferred taxes are
determined based upon differences between the financial
reporting and tax bases of assets and liabilities at currently
enacted statutory tax rates for the years in which the
differences are expected to reverse.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-13

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A valuation allowance is provided on deferred tax assets to the
extent that it is more likely than not that such deferred tax
assets will not be realized. The total income tax provision
includes current tax expenses under applicable tax regulations
and the change in the balance of deferred tax assets and
liabilities.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Fair value of financial instruments</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company&#146;s carrying amounts of cash, cash equivalents,
short-term financial instruments, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to
the short maturity of these instruments.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Derivatives</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Derivative instruments, regardless of whether they are entered
into for trading or hedging purposes, are valued at fair value.
Derivative contracts not meeting the requirements for hedge
accounting treatment are classified as trading contracts with
the changes in fair value included in current operations.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Derivative financial instruments used for hedging purposes are
accounted for in a manner consistent with the accounting
treatment appropriate for the transactions being hedged or
associated with such contract. The instruments are valued at
fair value when underlying transactions are valued at fair
value, and resulting unrealized valuation gains or losses are
recorded in current results of operations.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company entered into sixteen foreign currency forward
contracts with various financial institutions in 2005 and there
are no outstanding derivative contracts as of December&nbsp;31,
2005. The Company settled the contracts at the terminal dates
and recognized a transaction gains of W1,033&nbsp;million and
transaction losses of W1,886&nbsp;million for the year ended
December&nbsp;31, 2005.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Accounting for Stock-Based Compensation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of
SFAS&nbsp;No.&nbsp;123, <I>Accounting for Stock Based
Compensation</I>, using the fair value method. Under this
method, compensation cost for stock option grants are measured
at the grant date based on the fair value of the award and
recognized over the service period, which is usually the vesting
period, using the method promulgated by Financial Accounting
Standards Board (&#147;FASB&#148;) Interpretations No.&nbsp;28,
<I>Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans </I>(&#147;FIN&nbsp;28&#148;). The
Company uses a Black-Scholes model to determine the fair value
of equity-based awards at the date of grant.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Earnings per Share</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Basic earnings per share is computed by dividing net income
attributable to common shareholders by the weighted average
number of common shares outstanding for all periods. Diluted
earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding, increased
by common stock equivalents. Common stock equivalents are
calculated using the treasury stock method and represent
incremental shares issuable upon exercise of the Company&#146;s
outstanding stock options. However, potential common shares are
not included in the denominator of the diluted earnings per
share calculation when inclusion of such shares would be
anti-dilutive, such as in a period in which a net loss is
recorded.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Recent Accounting Pronouncements</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In December 2004, the FASB issued SFAS&nbsp;123(R) which
requires that the cost resulting from equity-based compensation
transactions be recognized in the financial statements using a
fair-value-based method. The Statement replaces SFAS&nbsp;123,
supersedes APB&nbsp;25, and amends SFAS&nbsp;No.&nbsp;95. The
new statement is effective for public entities in periods
beginning after June&nbsp;15, 2005. As the Company will be
required to estimate its forfeitures on option grants instead of
recognizing them when they occur, the Company will have a
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-14

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
transition adjustment on adoption. Upon adoption on
January&nbsp;1, 2006, the cumulative transition adjustment will
be approximately W270&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On December&nbsp;16, 2004, the FASB issued
SFAS&nbsp;No.&nbsp;153, <I>Exchanges of Non-Monetary Assets</I>,
an amendment of APB Opinion No.&nbsp;29. This Statement amends
Opinion 29 to eliminate the exception for non-monetary exchanges
of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have
commercial substance. The Statement is effective for
non-monetary asset exchanges occurring in fiscal periods
beginning after June&nbsp;15, 2005. The Company does not expect
a significant impact on its results of operations and
disclosures.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In May 2005, the FASB issued SFAS&nbsp;No.&nbsp;154,
<I>Accounting Changes and Error Corrections</I>, a replacement
of APB Opinion No.&nbsp;20 and FASB Statement No.&nbsp;3. This
Statement requires retrospective application to prior
periods&#146; financial statements of changes in accounting
principles, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
When it is impracticable to determine the period-specific
effects of an accounting change on one or more individual prior
periods presented, this Statement requires that the new
accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of
retained earnings (or other appropriate components of equity or
net assets in the statement of financial position) for that
period rather than being reported in an income statement. When
it is impracticable to determine the cumulative effect of
applying a change in accounting principles to all prior periods,
this Statement requires that the new accounting principle be
applied as if it were adopted prospectively from the earliest
date practicable. The Company does not believe adoption of
SFAS&nbsp;No.&nbsp;154 will have a material effect on its
consolidated financial position, results of operations or cash
flows.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In February 2006, the FASB issued SFAS&nbsp;No.&nbsp;155,
<I>Accounting for Certain Hybrid Financial Instruments</I>,
which amends SFAS&nbsp;No.&nbsp;133, <I>Accounting for
Derivatives Instruments and Hedging Activities </I>and
SFAS&nbsp;No.&nbsp;140, <I>Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities.</I> SFAS&nbsp;No.&nbsp;155 amends
SFAS&nbsp;No.&nbsp;133 to narrow the scope exception for
interest-only and principal-only strips on debt instruments to
include only such strips representing rights to receive a
specified portion of the contractual interest or principle cash
flows. SFAS&nbsp;No.&nbsp;155 also amends SFAS&nbsp;No.&nbsp;140
to allow qualifying special-purpose entities to hold a passive
derivative financial instrument pertaining to beneficial
interests that itself is a derivative instrument. The Company is
currently evaluating the impact of this new Standard but
believes that it will not have a material impact on the
Company&#146;s financial position, results of operations or cash
flows.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In March 2006, the EITF issued EITF issue number 06-3, <I>How
Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That is, Gross, Versus Net Presentation).</I>
EITF&nbsp;<FONT style="white-space: nowrap">06-3</FONT>
tentatively concluded that a company must adopt a policy of
presenting externally imposed taxes on either gross or net
basis. Gross or net presentation may be selected for each
different type of tax, but similar taxes should be presented
consistently. Taxes within the scope of this issue would include
taxes that are imposed on a revenue transaction between a seller
and a customer, for example, sales taxes, value-added taxes, and
some types of excise taxes. Under a final consensus on EIFT
<FONT style="white-space: nowrap">06-3,</FONT> the disclosure
would be required in annual financial period beginning after
December&nbsp;15, 2006. The Company has not assessed the impact
of this new standard.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Reclassifications</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Certain amounts in the 2003 and 2004 financial statements have
been reclassified to conform to 2005 presentation.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-15

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>3.</B></TD>
    <TD>
    <B>Convenience Translation into United States Dollar Amounts</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company reports its consolidated financial statements in the
Korean Won. The United States dollar (&#147;US dollar&#148;)
amounts disclosed in the accompanying financial statements are
presented solely for the convenience of the reader, and have
been converted at the rate of 1,010.0 Korean Won to one US
dollar, which is the noon buying rate of the US Federal Reserve
Bank of New York in effect on December&nbsp;31, 2005. Such
translations should not be construed as representations that the
Korean Won amounts represent, have been, or could be, converted
into, US dollars at that or any other rate. The US dollar
amounts are unaudited and are not presented in accordance with
generally accepted accounting principles either in Korea or the
United States of America.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>4.</B></TD>
    <TD>
    <B>Allowance for Accounts receivable</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Changes in the allowance for accounts receivable for the years
ended December&nbsp;31, 2003, 2004 and 2005 are as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="66%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(In millions of Korean Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at beginning of year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>151</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>242</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Provision for allowances</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>91</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>31</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Write-offs</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>242</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at end of year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>242</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>31</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>5.</B></TD>
    <TD>
    <B>Investment in equity method investee</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In April 2004, its subsidiary, GRAVITY Entertainment Corp.
(formerly &#147;RO Production Co., Ltd.&#148;) invested JPY
123&nbsp;million for a 30% interest in &#147;Animation
Production Committee&#148;, a joint venture. The investment was
accounted for under the equity method of accounting and it is
included in the other non&nbsp;&#151; current assets of the
accompanying balance sheets.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>6.</B></TD>
    <TD>
    <B>Acquisitions</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>(1)&nbsp;Acquisition of TriggerSoft Corp.</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In April and May 2005, the Company acquired an aggregate of
88.15% of the voting common shares of TriggerSoft Corp. (the
&#147;TriggerSoft&#148;) for a purchase price of
W1,627&nbsp;million in cash. TriggerSoft is a game developer of
&#147;R.O.S.E. Online&#148;, which is serviced by the Company.
The primary reasons for the acquisition were to involve actively
in the updates and improvements of the game.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
TriggerSoft&#146;s results of operations are included in the
Company&#146;s consolidated financial statement of operations
from the date of acquisition. The excess amount of the purchase
price over the fair market value of the net assets acquired is
accounted for as residual goodwill.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-16
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The estimated fair value of assets acquired and liabilities
assumed on the acquisition dates were:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="77%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>(In millions of</B></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Korean Won)</B></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>34</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Non-current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>200</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Intangible assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,979</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Goodwill</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>214</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred tax liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>272</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Non-current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>108</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net assets acquired</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>1,627</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company, with the assistance of independent valuation
experts, determined the fair values of assets acquired and
liabilities assumed and performed an allocation of the total
purchase price of W1,627&nbsp;million to the net assets
acquired. Goodwill is not subject to amortization but periodic
impairment assessment. The intangible asset of &#147;R.O.S .E
Online&#148; game of W1,979&nbsp;million is being amortized on a
straight&nbsp;&#151; line basis over a useful life of three
years. The amortization expense for the intangible asset for the
year ended December&nbsp;31, 2005 was W440&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
At December&nbsp;31, 2005, the Company determined to recognize
impairment losses for remaining balance of intangible assets and
goodwill due to deteriorated operational performance and adverse
future cash flow expectation based on income approach. Both
amortization expenses and impairment losses are included in
selling, general and administrative expense of the accompanying
statement of operations.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><B>(2)&nbsp;</B></TD>
    <TD>
    <B>Acquisition of NEOCYON, Inc.</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In November and December 2005, the Company acquired an aggregate
of 96.11% of the voting common share of NEOCYON, Inc. (the
&#147;NEOCYON&#148;) for a purchase price of W7,716&nbsp;million
in cash. NEOCYON is the Mobile Internet Service Provider (MISP),
who is engaged in the facilitation of content download business
for Club Cyon and WOW LG.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
NEOCYON&#146;s results of operations are included in the
Company&#146;s consolidated financial statement of operations
from the date of acquisition. The primary reasons for the
acquisition were to leverage from NEOCYON&#146;s knowledge of
MISP business and as result, become a leading MISP provider
globally. The excess amount of the purchase price over the fair
market value of the net assets acquired is accounted for as
residual goodwill.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-17
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The estimated fair value of assets acquired and liabilities
assumed on the acquisition dates were:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="77%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>(In millions of</B></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Korean Won)</B></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>970</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Non-current assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>263</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Property and equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,343</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Intangible assets</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,526</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Goodwill</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,451</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>861</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred tax liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>907</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Non-current liabilities</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>1,069</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net assets acquired</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>7,716</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company, with the assistance of independent valuation
experts, determined the fair values of assets acquired and
liabilities assumed and performed an allocation of the total
purchase price of W7,716&nbsp;million to the net assets acquired.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Of the W6,526&nbsp;million of acquired intangible assets,
W5,600&nbsp;million and W926&nbsp;million were assigned to the
value of content download business and the Ragnarok publishing
right in Russia, respectively. The Company recorded amortization
expense of W247&nbsp;million for the acquired intangible assets,
using straight-line method and useful life of three years, in
selling, general and administrative expense.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>7.</B></TD>
    <TD>
    <B>Property and Equipment, Net</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Property and equipment as of December&nbsp;31, 2004 and 2005
consist of the following:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="77%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(In millions of</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Korean&nbsp;Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Land</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,954</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>260</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Building</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,234</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>881</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Computer and equipment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,427</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,251</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Furniture and fixtures</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>537</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,146</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Vehicles</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>190</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>406</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Leasehold improvements</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,043</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>425</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Software externally-purchased</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,663</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19,585</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,032</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less: accumulated depreciation</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,825</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8,169</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>14,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>11,863</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Depreciation expenses for the years ended December&nbsp;31,
2003, 2004 and 2005, were W1,459&nbsp;million,
W2,989&nbsp;million and W4,388&nbsp;million, respectively.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2004, the Company&#146;s land and
building were collateralized for leasehold deposits which
amounted to W2,600&nbsp;million. The related lease contract
expired in July, 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, a certain of the Company&#146;s
land and buildings are collateralized up to W820&nbsp;million in
connections with long-term borrowings.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-18

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, the Company reclassified a certain
land and building to be disposed as Assets held for sale which
were sold in May 2006.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>8.</B></TD>
    <TD>
    <B>Accrued Severance Benefits</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Changes in accrued severance benefits for the years ended
December&nbsp;31, 2003, 2004 and 2005 are as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="68%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(In millions of Korean Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at beginning of year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>164</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>413</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>1,182</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Increase due to acquisition of subsidiaries</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>230</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Provisions for severance benefits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>363</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>913</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,464</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Severance payments</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(114</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(144</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(2,288</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>413</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,182</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>588</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less: amounts placed on deposit with insurance company</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(71</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(222</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Balance at end of year</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>342</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>588</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In December&nbsp;26, 2005, GRAVITY introduced a defined
contribution pension plan (&#147;Plan&#148;) in accordance with
Employee Benefit Security Act of Korea and entered into a
nonparticipating defined contribution insurance contract with a
life insurance company. As of December&nbsp;31, 2005, certain
GRAVITY&#146;s subsidiaries did not introduce this plan.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B>9.</B></TD>
    <TD>
    <B>Debt</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In February and April, 2002, the Company entered into agreements
with YNK&nbsp;Korea, pursuant to which the Company granted it
the exclusive right to distribute Ragnarok for a contractual
period of three years from the date Ragnarok was first
commercialized. As a result of the receipt of exclusive
distribution rights, YNK Korea loaned the Company
W7,000&nbsp;million at the inception of the agreement, which it
is accounted as debt in the accompanying balance sheets, in
accordance with EITF No.&nbsp;88-18, <I>Sales of Future
Revenues.</I>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As there is no interest rate stated in the agreement with YNK
Korea , the interest is imputed based on the difference between
the principal amount of the loan and the total payments expected
to be made pursuant to the agreements. Accordingly, the
repayment of principal amounts to YNK Korea is variable each
year in accordance with amount of annual revenue generated from
distribution of Ragnarok and deduction of annual interest
expense allocated using the interest rate method.
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="63%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2004</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>(In millions of Korean Won)</B></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Loans, representing obligations principally to YNK Korea Inc.</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Due 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>1,150</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less: Current portion</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,150</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In accordance with these agreements with YNK Korea, during the
years ended December&nbsp;31, 2004 and 2005, the Company
recognized payments in the amounts of W7,037&nbsp;million and
W3,406&nbsp;million, respectively to YNK Korea. Of these loan
amounts, W2,391&nbsp;million and W1,150&nbsp;million were
allocated to principal, and W4,646&nbsp;million and
W2,256&nbsp;million were allocated to interest, in 2004 and
2005, respectively.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-19
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>10.</B></TD>
    <TD>
    <B>Commitments and Contingencies</B></TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Commitments</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In June 2005, the Company entered into a publishing agreement to
acquire exclusive distribution right of the on-line game,
&#147;STYLIA&#148; which is under development by Sonnori Co.,
Ltd. Of the total contract price of W3,000&nbsp;million,
W2,000&nbsp;million was paid and recorded as research and
development expenses.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In November 2005, the Company entered into a publishing
agreement to acquire exclusive distribution right of the on-line
game, &#147;Time N Tales&#148; which is under development by
Ndoors Corp. Of the contract price of W2,000&nbsp;million,
W600&nbsp;million was paid and recorded as research and
development expenses.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In December 2005, the Company purchased an online game,
&#147;Emil Chronicle Online&#148;, developed by GungHo. The
costs related to the acquisition of &#147;Emil Chronicle
Online&#148; were recorded as intangible assets amounting to
W6,073&nbsp;million. In addition, the Company entered into an
agreement to acquire exclusive distribution right of the game.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In December 2005, the Company entered into an agreement with
Movida Investment Inc., SOFTBANK CORP. and other eight companies
to invest in &#147;Online Game Revolution
Fund&nbsp;No.&nbsp;1&#148; amounting to JPY1,000&nbsp;million as
a limited partner with 10% interest of the total fund. The
Company paid initial payment of JPY100&nbsp;million and recorded
an advance payment.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, the Company has an agreement with
a financial institution for foreign currency forward contract up
to the limit of US&nbsp;$5,000 thousand. However, there is no
outstanding balance as of December&nbsp;31, 2005 and short-term
financial instrument of W500&nbsp;million is restricted from
withdrawal to secure foreign currency forward contract.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
NEOCYON has general borrowing facilities with a limit of
W1,533&nbsp;million. As at December&nbsp;31, 2005, NEOCYON has
an outstanding balance of borrowing amounting to
W1,233&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company leases certain properties. The Company&#146;s
operating leases consist of various property leases expiring in
2007. Rental expenses incurred under these operating leases were
approximately W769&nbsp;million, W956&nbsp;million and
W1,275&nbsp;million for the years ended December&nbsp;31, 2003,
2004 and 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Future minimum lease payments for the leases as of
December&nbsp;31, 2005, are as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="79%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2006</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2007</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(In millions of</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Korean&nbsp;Won)</B></TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Operating lease</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>3,262</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>2,882</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I>Litigation</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In May 2005, the initial purchasers and shareholders of the ADSs
filed a number of class action complaints for violation of the
United States federal securities law in the United States
District Court for the Southern District of New York, which were
consolidated by an order of the Court entered on
December&nbsp;12, 2005. The complaints identify the Company and
certain of its officers as defendants, and claim that the
Company&#146;s registration statement on
Form&nbsp;<FONT style="white-space: nowrap">F-1</FONT> and the
prospectus which constitutes a part of the registration
statement used in connection with its initial public offering
contained material misstatements. The Company believes that the
claims are without merit and intends to defend the case
vigorously. As of audit report date, the Company cannot
determine what the final conclusion of this litigation will be,
including any damages which may need to be paid or any amounts
which may be paid in settlement. A judgment against the Company
in this litigation may result in significant damages.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, the Company is a defendant in two
lawsuits claiming for damages. The former chief executive
officer claims compensation for the unfair termination and a
shareholder claims compensation
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-20

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
for the loss from late authorization of his shareholder&#146;s
right. The outcome of these lawsuits cannot be determined and
the ultimate financial effects cannot be estimated as of audit
report date.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>11.</B></TD>
    <TD>
    <B>Shareholders&#146; Equity</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, GRAVITY is authorized to issue a
total of 40&nbsp;million shares with a par value of
W500&nbsp;per share, in registered form, consisting of common
shares and non-voting preferred shares. Of this authorized
amount, GRAVITY is authorized to issue up to 2&nbsp;million
non-voting preferred shares. Under the articles of
incorporation, holders of non-voting preferred shares are
entitled to dividends of not less than 1% and up to 15% of the
par value of such shares the exact rate to be determined by
GRAVITY&#146;s board of directors at the time of issuance,
provided that the holders of preferred shares are entitled to
receive dividend at a rate not lower than that determined for
holders of common shares. Gravity does not have any non-voting
preferred shares outstanding.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On February&nbsp;8, 2005, in an initial public offering, GRAVITY
registered 8,000,000&nbsp;shares of American Depository Shares
(&#147;ADS&#148;) on the NASDAQ National Market in the United
States of America. Of the total shares registered, the Company
sold 5,600,000&nbsp;shares ADSs, and the existing shareholders
sold 2,400,000 ADSs. Total cash received by GRAVITY after issue
cost was W71,837&nbsp;million. Four ADS are equivalent to one
common share.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, the Company had a total of
6,948,900 common shares issued and outstanding. All of the
issued and outstanding shares are fully paid and are registered.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>12.</B></TD>
    <TD>
    <B>Stock purchase option plan</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On December&nbsp;24, 2004, the Company&#146;s shareholders
approved the stock purchase option plan (the &#147;Plan&#148;).
The Plan provides incentive stock options to officers and
employees. On December&nbsp;24, 2004, the Company granted
certain officers, some senior employees and employees options to
purchase&nbsp;50,000 and 221,000&nbsp;shares of the
Company&#146;s common stock at an exercise price of W80,000 and
W70,000&nbsp;per share, respectively. The fair value of the
options at the date of the grant is estimated using the
Black-Scholes option pricing model. In accordance with the Plan,
all of the options granted in 2004 vest over four year period,
with 25% vesting after two years of continued employment, 25%
vesting after three years of continued employment, 25% vesting
after four years of continued employment, and the remaining 25%
vesting after five years from the grant date. The options that
have vested for each period must be exercised within one year
from the vesting date, and options that have not been exercised
during the each period shall be deemed to be terminated.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On February&nbsp;8, 2005, in accordance with the terms of the
stock options granted, the exercise prices for the outstanding
options were adjusted to the IPO price (W55,431) for officers,
some senior employees and to the IPO&nbsp;price minus W10,000
for employees. This repricing created a new measurement date for
the Company&#146;s stock compensation expenses. The
weighted-average exercise price modified is W46,697, as
presented below.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-21

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A summary of activity under the Plan reflecting modification of
stock options is as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="44%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Weighted-Average</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Weighted-Average</B></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Exercise Price</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Fair Value at</B></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Stock Options</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>per Share</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Date of Grant</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock options outstanding as of December&nbsp;31, 2003</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Options granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>271,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>71,845</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>20,211</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Options exercised</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Options forfeited</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    December&nbsp;31, 2004</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>271,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>71,845</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>20,211</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Options granted</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Options exercised</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Options forfeited</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>73,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>48,828</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,275</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Stock options outstanding as of December&nbsp;31, 2005</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>197,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>46,697</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>27,511</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The total modified compensation expense relating to the grant of
stock options on December&nbsp;24, 2004 of W7,343&nbsp;million,
is recognized over the five year vesting period using the
FIN&nbsp;28, graded attribution model. For the years ended
December&nbsp;31, 2004 and 2005, the Company recognized
W49&nbsp;million and W1,584&nbsp;million in stock compensation
expense for the shares granted. Stock compensation expenses are
included in selling, general and administrative expenses and
cost of revenue in the statements of operations.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The following table summarizes information about stock options
outstanding and currently exercisable at December&nbsp;31, 2005:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="53%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Weighted-Average</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Remaining</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Options</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Contractual Life</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Options</B></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2" align="left" nowrap><B>Exercise Prices</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>(Yrs)</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>Exercisable</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    W45,431</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>172,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.98</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    55,431</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>25,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2.98</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The fair value for each option was estimated, at the date of
grant and repricing date, using the Black Scholes&#146; option
pricing model, with the following weighted average assumptions:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="66%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="14%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Grant Date</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>Repricing Date</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expected dividend yield</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>0</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Risk-free interest rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.50</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3.54</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expected volatility</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>53</TD>
    <TD align="left" valign="bottom" nowrap>%</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fair value of stock</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>55,431</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>55,431</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The fair value of the stock at the date of grant was based on
the initial public offering price of the Company&#146;s American
Depositary Shares on the National Market on February&nbsp;8,
2005, adjusted for the ratio of common stock to ADSs.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-22

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>13.</B></TD>
    <TD>
    <B>Earnings per Share</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The components of basic and diluted earnings per share are as
follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="49%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap><B>2005</B></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center" nowrap><B>(In millions of Korean Won, except share and per</B></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center" nowrap><B>share data)</B></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net income (loss) available for common shareholders(A)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>19,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>28,057</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(3,030</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Weighted average outstanding shares of common shares(B)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,130,895</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,548,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,803,147</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Earnings (losses) per share</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Basic and diluted (A/ B)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>3,730</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,056</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(445</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The 271,000 and 197,400 stock options outstanding as of
December&nbsp;31, 2004 and 2005 are excluded from the
Company&#146;s calculation of earnings (losses) per share as
their effect is antidilutive.
</DIV>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>14.</B></TD>
    <TD>
    <B>Income Taxes</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Income tax expenses (benefit) for the years ended
December&nbsp;31, 2003, 2004 and 2005 consist of the following:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(In millions of Korean Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income (loss) before income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Domestic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>22,332</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>33,338</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(3,872</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,058</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>404</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>417</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>23,390</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>33,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,455</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Current income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Domestic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,868</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,253</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,100</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>294</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>315</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,162</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,415</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Domestic</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,044</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,085</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,134</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(132</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>70</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>912</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,146</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax effect resulting from business combination</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,086</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total income tax expenses (benefit)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>4,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(817</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The preceding table does not reflect the tax effects of
unrealized gains and losses on available-for-sale securities and
foreign currency translation. The tax effect of W1&nbsp;million,
W2&nbsp;million and W75&nbsp;million for the years ending
December&nbsp;31, 2003, 2004 and 2005 is recorded directly as
other comprehensive income within shareholders&#146; equity.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-23
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The tax effects of temporary differences that give rise to
significant portions of the deferred income tax assets and
deferred income tax liabilities as of December&nbsp;31, 2004 and
2005 are as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="73%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>(In millions of</B></TD><TD></TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="center" nowrap><B>Korean&nbsp;Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Current deferred income tax assets (liabilities)</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign tax credit carryforwards</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>1,502</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>896</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax credit carryforwards for research and human</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    resource development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>351</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,204</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>417</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Accrued income</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(17</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(104</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Deferred expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(152</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>79</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,692</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,492</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less: Deferred tax asset relating to other comprehensive income
    (loss)</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>76</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>1,691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>2,416</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Non-current deferred income tax assets (liabilities)</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign tax credit carryforwards</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>4,881</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax credit carryforwards for research and human</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    resource development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>433</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Depreciation and amortization</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>142</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>344</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Intangible assets in connection with business combination</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(874</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Impairment on other investment</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>192</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>214</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Provisions for severance benefits</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>145</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>19</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Unremitted earnings of subsidiary</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(111</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(186</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net operating loss carryforwards in subsidiaries</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>86</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>302</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>462</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,135</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less: Valuation allowance</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>86</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>338</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>4,797</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Deferred income tax assets are recognized only to the extent
that realization of the related tax benefit is more likely than
not. Realization of the future tax benefits related to the
deferred tax assets is dependent on many factors, including the
Company&#146;s ability to generate taxable income within the
period during which the temporary differences reverse, the
outlook for the economic environment in which the Company
operates, and the overall future industry outlook.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In assessing the realizability of deferred tax assets,
management considered whether it was more likely than not that
some portion or all of the deferred tax assets would not be
realized. The ultimate realization do deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences became
deductible. Management considered the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax
assets were deductible, management believed it was more likely
than not that the Company
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-24

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
would realize the benefits of these deductible differences, net
of the existing valuation allowances at December&nbsp;31, 2005.
The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of
future taxable income during the carryforward period were
reduced.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, GRAVITY Entertainment Corp., the
Company&#146;s 100% owned subsidiary in Japan, had available
loss carryforwards of W338&nbsp;million which expire in 2011 and
2012. Based on this subsidiary&#146;s historical and projected
net and taxable income, the Company determined that it would not
be able to realize these loss carryforwards, and recognized a
valuation allowance of W86 on the full amount of the available
loss carryforwards at an effective rate expected to be incurred
in Japan.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, TriggerSoft, the Company&#146;s
88.15% owned subsidiary in Korea, had temporary differences of
W259&nbsp;million and available loss carryforwards of
W1,563&nbsp;million which expire in 2010. Based on this
subsidiary&#146;s historical and projected net and taxable
income, the Company determined that it would not be able to
realize these loss carryforwards, and recognized a valuation
allowance of W251&nbsp;million, on the full amount of the
temporary differences and available loss carryforwards, at an
effective rate expected to be incurred to TriggerSoft.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, the Company also has foreign tax
credit carryforwards and tax credit carryforwards for research
and human resource development of W5,777&nbsp;million and
W1,637&nbsp;million, respectively, which expire in 2009 and 2010.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The statutory income tax rate, including tax surcharges,
applicable to the Company was approximately 29.7% in 2003 and
2004. The statutory income tax rate was amended to 27.5%,
effective for fiscal years beginning January&nbsp;1, 2005 in
accordance with the Corporate Income Tax Law amended on
December&nbsp;30, 2003.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2005, the Company is entitled to a
reduced tax rate of 13.75% by virtue of the Special Tax
Treatment Control Law of Korea, which is 50% of the statutory
tax rate and applied to certain designated venture companies. As
the reduced tax rate is valid until 2006, in the year 2007, the
Company will reapply for its designation as a venture company.
However it is uncertain as to whether the Company will obtain
this designation. However, even if the Company ceases to enjoy
the 50% reduction in corporate income tax rate in 2007, the
Company will instead be entitled to a special tax exemption of
10% in corporate income tax rate for fiscal year 2007 by virtue
of being a small-and medium-sized company. Accordingly, deferred
income taxes as of December&nbsp;31, 2005 were calculated based
on the rate of 13.75%, 24.75% and 27.50% for the amounts
expected to be realized during the fiscal year 2006, 2007, 2008
and thereafter, respectively.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-25

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A reconciliation of income tax expense at the Korean statutory
income tax rate to actual income tax expense is as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="67%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(In millions of Korean Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax expense at Korean statutory tax rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>6,947</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>10,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(950</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income tax exemption</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(3,473</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(5,011</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>475</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Tax credit carryforwards for research and human resource
    development</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(351</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(1,286</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Foreign tax differential</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>274</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>116</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expense not deductible for tax purpose</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>184</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>139</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>342</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Change in statutory tax rate</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(72</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>139</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>26</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Change in valuation allowances</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(154</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>86</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>197</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Expiration of unused foreign tax credit</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>214</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>337</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Income tax penalties</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>633</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>61</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Others</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(89</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(19</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(74</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Total income tax expense</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>4,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>5,406</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>(817</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>15.</B></TD>
    <TD>
    <B>Operations by Geographic Area</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Geographic information for the years ended December&nbsp;31,
2003, 2004 and 2005 is based on the location of the distribution
entity. Revenues by geographic region are as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="66%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(In millions of Korean Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Korea</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>16,475</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>13,524</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>10,093</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Japan</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,180</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>18,372</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>17,246</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Taiwan</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>11,969</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>14,643</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>10,582</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Thailand</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,504</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4,933</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    United States</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,373</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,528</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,701</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    China</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,089</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,842</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>1,178</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Other</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>939</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,651</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>49,515</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>64,426</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>53,384</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>16.</B></TD>
    <TD>
    <B>Related Party Transactions</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
As of December&nbsp;31, 2004, the Company provided loans to
employees for housing amounting to W12&nbsp;million at an annual
interest rate of 9%. All the loans were repaid and therefore
there is no remaining balance as of December&nbsp;31, 2005.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-26

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
During the years ended December&nbsp;31, 2003, 2004 and 2005,
there were related party transactions with a major shareholder
and an equity investee as follows:
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="66%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(In millions of Korean Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Sales to related parties</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>55</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Purchases from related parties</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>721</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>861</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amounts due from related parties</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>3,899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>4</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Misappropriated funds receivable</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,441</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>7,482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Amounts due to related parties</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>146</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>132</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
A majority of the purchase transactions is rental expense in
accordance with agreements between the Company and the former
Chairman.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Most of due from balances have resulted from leasehold deposits
remitted to its former Chairman. The balances as of
December&nbsp;31, 2003 and 2004 are included in the leasehold
and other deposits balance and due to the former Chairman&#146;s
equity transfer as stated in Note&nbsp;1, the former Chairman
ceased to be related party on August&nbsp;30, 2005.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
The Company&#146;s former Chairman was found to have diverted
revenues otherwise due to the Company. The Company&#146;s
resulting investigation concluded that W7,482&nbsp;million was
diverted by the former Chairman from 2002 to 2004. And such
amounts were accounted for in the line item of
&#147;Misappropriated funds receivable&#148; in the accompanying
balance sheets. In addition, in March 2003, the former Chairman
had misappropriated the Company&#146;s cash in the amount of
W1,623&nbsp;million and repaid the same amount to the Company in
nine days.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Due to balance represents amount of accrued expenses payable to
equity investee. The balance is included in the other current
liabilities in the accompanying balance sheet.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On February&nbsp;20, 2003, the Company obtained a loan of
W3,000&nbsp;million at an annual interest rate of 18% from
IAMBiz Co., Ltd. On September&nbsp;30, 2003, the Company fully
repaid the loan to IAMBiz Co., Ltd. On October&nbsp;1, 2003,
IAMBiz Co., Ltd. acquired 4.99% of the Company&#146;s
outstanding common shares. On October&nbsp;31, 2003, the Company
disposed its sticker photo division, together with mobile phones
and digital and other cameras to IAMBiz Co., Ltd. for proceeds
of W510&nbsp;million. On December&nbsp;10, 2003, the Company
also disposed its license to a horse racing game to IAMBiz Co.,
Ltd. for proceeds of W20&nbsp;million. IAMBiz Co., Ltd. changed
its name to Rhoceo Co., Ltd. (&#147;Rhoceo&#148;) on
November&nbsp;11, 2004. In August 2005, the Company paid
W200&nbsp;million to Rhoceo for licensing the game under
development by Rhoceo and recorded as research and development
expenses. Rhoceo Co., Ltd., which was under the control of the
former Chairman ceased to be related party on August&nbsp;30,
2005 due to the former Chairman&#146;s his equity transfer.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In 2003, the Company invested W1,000&nbsp;million in the mobile
business of Rople-net Co., Ltd. which was a subsidiary of Rhoceo
Co., Ltd. and recovered W223&nbsp;million and gave up its right
for the remainder of investment, and purchased right to do
mobile business and software totaling W123&nbsp;million from
Rople-net Co., Ltd. In August 2004, the Company also purchased
tangible assets totaling W53&nbsp;million from Rople-net Co.,
Ltd. Rople-net Co., Ltd., which was a subsidiary of Rhoceo Co.,
Ltd. and, in turn, under the control of the former Chairman,
ceased to be related party on August&nbsp;30, 2005 due to the
former Chairman&#146;s equity transfer.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-27

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">
<B>GRAVITY Co., Ltd.</B>
</DIV>

<DIV align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Notes to Consolidated Financial
Statements&nbsp;&#151;&nbsp;(Continued)</B>
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>17.</B></TD>
    <TD>
    <B>Supplemental Cash Flow Information and Non-Cash Activities</B></TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10.0pt; margin-top: 6pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="64%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>

<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2003</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2004</B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B>2005</B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 8.0pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B>(In millions of Korean Won)</B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Supplemental cash flow information</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Cash paid during the year for income taxes</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>4,343</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>6,935</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>6,648</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Interest paid</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>6,773</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>5,163</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>2,476</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>11,116</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>12,098</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>9,124</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B>Supplemental non-cash activities</B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Increase of capital lease asset</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Acquisitions:</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Fair value of assets acquired</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>12,774</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Less: cash acquired</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(150</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>12,624</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Net cash paid</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>(9,193</TD>
    <TD align="left" valign="bottom" nowrap>)</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    Liabilities assumed</DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">W</TD>
    <TD align="right" valign="bottom" nowrap>3,431</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

</TABLE>
</CENTER>

<DIV style="margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10.0pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B>18.</B></TD>
    <TD>
    <B>Subsequent event</B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In April 2006, the former Chairman agreed to pay
W4,645&nbsp;million to the Company, in part to reimburse the
Company for certain of the costs and expenses incurred by the
Company in connection with the investigation of the former
Chairman&#146;s diversion of revenues otherwise due to the
Company. As a part of the settlement, the Company and the former
Chairman have mutually agreed to cease both civil and criminal
action against the former Chairman. In accordance with the
agreement, the former Chairman is to pay W4,645&nbsp;million to
the Company upon ceasing both civil and criminal lawsuits
against him by the Company. Accordingly, the Company withdrew
both cases and received W4,645&nbsp;million on May&nbsp;17, 2006.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In May, 2006, the Company entered into a contract to invest in
Perpetual Entertainment, Inc. (&#147;Perpetual&#148;), an
on-line game developer based in the United States of America.
The Company has secured right to appoint one Board member and
acquired preferred stock of $9,000 thousand of Perpetual.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
In May, 2006, the Company entered into a contract with YAHOH
Communication Ltd. to dispose of its Assets held for sale which
consist of land and building for W9,500&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10.0pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
On April&nbsp;28, 2006, the Company&#146;s Board of Directors
approved to establish a subsidiary in France to enter into
online game servicing and publishing business. On June&nbsp;2,
2006, the Company established a bank account in France and
transferred EUR1,800 thousand to that account.
</DIV>

<P align="center" style="font-size: 10.0pt;color: #000000; background: #ffffff;">F-28
</BODY>
</HTML>
[{"type": "20-F", "sequence": "1", "filename": "h00617e20vf.htm", "description": "GRAVITY CO.,LTD.", "secsgml_size_bytes": 1473808}]
{"company-data": {"conformed-name": "GRAVITY Co., Ltd.", "cik": "0001313310", "assigned-sic": "7371", "irs-number": "000000000", "state-of-incorporation": "M5", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "20-F", "act": "34", "file-number": "000-51138", "film-number": "06935564"}, "business-address": {"street1": "14/F MERITZ TOWER, 825-2 YEOKSAM-DONG", "street2": "GANGNAM-GU", "city": "SEOUL", "state": "M5", "zip": "135-934", "phone": "82-2-2019-6000"}, "mail-address": {"street1": "14/F MERITZ TOWER, 825-2 YEOKSAM-DONG", "street2": "GANGNAM-GU", "city": "SEOUL", "state": "M5", "zip": "135-934"}}
GRAVITY CO.,LTD.
Table of Contents
As filed with the Securities and Exchange Commission on
June 30, 2006
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
(Mark One)
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
    OF THE SECURITIES EXCHANGE ACT OF 1934
or
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
or
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
    from           to
Commission file
number:          -
GRAVITY CO., LTD.
(Exact name of registrant as specified in its charter)
N/A
The Republic of Korea
(Translation of registrant's name into English)
(Jurisdiction of incorporation or organization)
14/ F Meritz Tower, 825-2 Yeoksam-Dong, Gangnam-Gu
Seoul 135-934 Korea
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common stock, par value Won 500 per share*
Nasdaq National Market
American depositary shares, each representing
one-fourth of a share of common stock
*
Not for trading, but only in connection with the listing of
    American depositary shares on the Nasdaq National Market
    pursuant to the requirements of the Securities and Exchange
    Commission.
Securities registered or to be registered pursuant to
Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the
issuer's classes of capital or common stock as of the close
of the last full fiscal year covered by this Annual Report:
6,948,900 shares of common stock, par value of Won
500 per share
Indicated by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.     Yes
o
No
þ
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934.     Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days:     Yes
þ
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of "accelerated filer and large
accelerated filer" in
Rule
12b-2
of the
Exchange Act.
Large Accelerated
filer
o
Accelerated
filer
þ
Non-accelerated-filer
o
Indicate by check mark which financial statement item the
registrant has elected to follow:
Item 17
o
Item 18
þ
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in
Rule
12b-2
of the
Exchange
Act).     Yes
o
No
þ
Table of Contents
TABLE OF CONTENTS
CERTAIN DEFINED TERMS
4
FORWARD-LOOKING STATEMENTS
4
PART I
5
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
    AND ADVISERS
5
1.A.
Directors and Senior Management
5
1.B.
Advisers
5
1.C.
Auditors
5
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
5
ITEM 3.
KEY INFORMATION
5
3.A.
Selected Financial Data
5
3.B.
Capitalization and Indebtedness
7
3.C.
Reasons for the Offer and Use of
    Proceeds
7
3.D.
Risk Factors
7
ITEM 4.
INFORMATION ON THE COMPANY
26
4.A.
History and Development of the Company
26
4.B.
Business Overview
26
4.C.
Organizational Structure
50
4.D.
Property, Plants and Equipment
50
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND
    PROSPECTS
51
5.A.
Operating Results
51
5.B.
Liquidity and Capital Resources
65
5.C.
Research and Development, Patents and
    Licenses, etc.
67
5.D.
Trend Information
68
5.E.
Off-Balance Sheet Arrangements
68
5.F.
Contractual Obligations
68
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND
    EMPLOYEES
69
6.A.
Directors and Senior Management
69
6.B.
Compensation
71
6.C.
Board Practices
71
6.D.
Employees
73
6.E.
Share Ownership
73
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY
    TRANSACTIONS
75
7.A.
Major Shareholders
75
7.B.
Related Party Transactions
76
7.C.
Interests of Experts and Counsel
78
ITEM 8.
FINANCIAL INFORMATION
78
8.A.
Consolidated Statements and Other Financial
    Information
78
8.B.
Significant Changes
79
ITEM 9.
THE OFFER AND LISTING
79
9.A.
Offer and Listing Details
79
9.B.
Plan of Distribution
80
9.C.
Markets
80
9.D.
Selling Shareholders
80
9.E.
Dilution
80
9.F.
Expenses of the Issue
80
ITEM 10.
ADDITIONAL INFORMATION
80
10.A.
Share Capital
80
2
Table of Contents
10.B.
Articles of Incorporation
80
10.C.
Material Contracts
85
10.D.
Exchange Controls
88
10.E.
Taxation
90
10.F.
Dividends and Paying Agents
98
10.G.
Statement by Experts
98
10.H.
Documents on Display
98
10.I.
Subsidiary Information
98
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK
98
11.A.
Quantitative Information about Market
    Risk
98
11.B.
Qualitative Information about Market
    Risk
99
11.C.
Interim Periods
99
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY
    SECURITIES
99
12.A.
Debt Securities
99
12.B.
Warrants and Rights
99
12.C.
Other Securities
99
12.D.
American Depositary Shares
99
PART II
105
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND
    DELINQUENCIES
105
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF
    SECURITY HOLDERS AND USE OF PROCEEDS
105
ITEM 15.
CONTROLS AND PROCEDURES
105
ITEM 16.
108
16.A.
Audit Committee Financial Expert
108
16.B.
Code of Ethics
108
16.C.
Principal Accountant Fees and Services
109
16.D.
Exemptions from the Listing Standards for
    Audit Committee
109
16.E.
Purchases of Equity Securities by the
    Issuer and Affiliated Purchasers
109
PART III
110
ITEM 17.
FINANCIAL STATEMENTS
110
ITEM 18.
FINANCIAL STATEMENTS
110
ITEM 19.
EXHIBITS
110
INDEX TO FINANCIAL STATEMENTS
F-1
EX-4.37 LEASE AGREEMENT
EX-4.38 REAL ESTATE SALE AGREEMENT
EX-4.39 GLOBAL PUBLISHING AGREEMENT
EX-4.40 GLOBAL PUBLISHING AGREEMENT
EX-8.1 LIST OF REGISTRANT'S SUBSIDIARIES
EX-11.1 REGISTRANT'S CODE OF ETHICS
EX-12.1 CEO CERTIFICATION PURSUANT TO SECTION 302
EX-12.2 CFO CERTIFICATION PURSUANT TO SECTION 302
EX-13.1 CEO CERTIFICATION PURSUANT TO SECTION 906
EX-13.2 CFO CERTIFICATION PURSUANT TO SECTION 906
3
Table of Contents
CERTAIN DEFINED TERMS
Unless the context otherwise requires, references in this annual
report to:
•
"China" or the "PRC" are to the
    People's Republic of China;
•
"Government" are to the government of the Republic;
•
"GRAVITY," "the Company," "we,"
    "us," "our," or "our company" are
    to GRAVITY Co., Ltd. and its subsidiaries.
•
"Japanese Yen" or "JPY" are to the currency
    of Japan;
•
"Korea" or the "Republic" are to The
    Republic of Korea;
•
"Taiwan" or the "ROC" are to Taiwan, the
    Republic of China;
•
"US$" and "U.S. dollars" are to the
    currency of the United States; and
•
"Won" or "W" are to the currency of the
    Republic of Korea.
For your convenience, this annual report contains translations
of certain Won amounts into U.S. dollars at the noon buying
rates of the Federal Reserve Bank of New York for Won in effect
on December 31, 2005, which was Won 1,010.0 to US$1.00.
Discrepancies in tables between totals and sums of the amounts
listed are due to rounding.
FORWARD-LOOKING STATEMENTS
This annual report on
Form
20-F
for the
year ended December 31, 2005 contains "forward-looking
statements," as defined in Section 27A of the
U.S. Securities Act of 1933, as amended, and
Section 21E of the U.S. Securities Exchange Act of
1934, as amended ("Exchange Act"). All statements,
other than statements of historical facts, included in this
annual report that address activities, events or developments
which we expect or anticipate will or may occur in the future
are forward-looking statements. The words "believe,"
"intend," "expect," "anticipate,"
"project," "estimate," "predict,"
"considering," "depends," "may,"
"could," "should" or "could" and
similar expressions are also intended to identify
forward-looking statements.
These forward-looking statements address, among others, such
issues as:
•
future prices of and demand for our products;
•
future earnings and cash flow;
•
expansion and growth of our business and operations; and
•
our prospective operational and financial information.
These statements are based on assumptions and analyses made by
us in light of our experience and our perception of historical
trends, current conditions and expected future developments, as
well as other factors we believe are appropriate in particular
circumstances. However, whether actual results and developments
will meet our expectations and predictions depends on a number
of risks and uncertainties which could cause actual results to
differ materially from our expectations, including the risks set
forth in Item 3. "Key Information — Risk
Factors" and the following:
•
fluctuations in prices of our products;
•
potential acquisitions and other business opportunities;
•
general economic, market and business conditions; and
•
other risks and factors beyond our control.
Consequently, all of the forward-looking statements made in this
annual report are qualified by these cautionary statements. We
cannot assure you that the actual results or developments
anticipated by us will be realized or, even if substantially
realized, that they will have the expected effect on us or our
business or operations.
4
Table of Contents
PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
    ADVISERS
1.A.
Directors and Senior Management
Not applicable.
1.B.
Advisers
Not applicable.
1.C.
Auditors
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
3.A.
Selected Financial Data
The following selected consolidated financial information is
derived from our consolidated financial statements as of each of
the dates and for each of the periods indicated below. This
information should be read in conjunction with our audited
consolidated financial statements and the related notes thereto,
included in this annual report. Our consolidated financial
statements and related notes thereto have been prepared in
accordance with accounting principles generally accepted in the
United States.
The balance sheet data as of December 31, 2003 and the
statement of operations data for the years ended
December 31, 2002 and 2003 have been derived from our
audited financial statements and related notes thereto not
included in this annual report. The balance sheet data as of
December 31, 2002 are derived from our unaudited financial
statements and related notes thereto, which are not included in
this annual report.
As of and for the Years Ended December 31,
2001
2002
2003
2004
2005
2005(1)
(Unaudited)
(In millions of Won and thousands of US$, except share and per share data, operating data
and percentages)
Statement of operations:
Revenues:
Online games — subscription revenue
W
—
W
7,310
W
18,560
W
16,253
W
11,249
US$
11,138
Online games — royalties and license fees
—
2,330
29,727
45,101
37,375
37,005
Mobile games
—
—
43
376
1,664
1,648
Character merchandising, animation and other revenue
167
427
1,185
2,696
3,096
3,065
Total revenues
167
10,067
49,515
64,426
53,384
52,856
Cost of revenues
—
1,738
6,958
10,116
16,038
15,879
Gross profit
167
8,329
42,557
54,310
37,346
36,977
Operating expenses:
Selling, general and administrative
354
4,870
11,360
13,660
30,795
30,490
Research and development
718
815
1,597
2,029
9,219
9,128
5
Table of Contents
As of and for the Years Ended December 31,
2001
2002
2003
2004
2005
2005(1)
(Unaudited)
(In millions of Won and thousands of US$, except share and per share data, operating data
and percentages)
Operating income (loss)
(905
)
2,644
29,600
38,621
(2,668
)
(2,641
)
Other expenses, net
(3
)
(2,424
)
(6,210
)
(4,879
)
(787
)
(780
)
Income (loss) before income tax expenses, minority interest, and
    equity in loss of related joint venture
(908
)
220
23,390
33,742
(3,455
)
(3,421
)
Income tax expenses (benefit)
—
542
4,250
5,406
(817
)
(809
)
Income (loss) before minority interest and equity in loss of
    related joint venture
(908
)
(322
)
19,140
28,336
(2,638
)
(2,612
)
Minority interest
—
—
—
(17
)
(2
)
(2
)
Equity in loss of related joint venture
—
—
—
296
394
390
Net income (loss)
W
(908
)
W
(32
)
W
19,140
W
28,057
W
(3,030
)
US$
(3,000
)
Earnings (loss) per share:
Basic and diluted per share
W
(492
)
W
(96
)
W
3,730
W
5,056
W
(445
)
US$
(0.44
)
Basic and diluted per ADS
—
—
—
—
(111
)
(0.11
)
Weighted average number of shares outstanding (basic and diluted)
1,846,575
3,355,616
5,130,895
5,548,900
6,803,147
6,803,147
Balance sheet data:
(Unaudited
)
Cash and cash equivalents
W
1,820
W
560
W
5,405
W
16,405
W
25,874
US$
25,618
Total current assets
2,383
7,916
17,824
46,868
109,428
108,345
Property and equipment, net
522
2,254
5,417
14,760
11,863
11,746
Total assets
3,055
13,617
36,424
68,644
144,857
143,423
Total current liabilities
1,123
8,251
10,575
12,221
19,448
19,255
Total liabilities
2,912
13,707
13,960
18,209
24,073
23,835
Total shareholders' equity
143
(90
)
22,464
50,435
120,762
119,566
Selected operating data and financial ratios:
Gross profit margin(2)
100.0
%
82.7
%
85.9
%
84.3
%
70.0
%
70.0
%
Operating profit margin(3)
N/M
26.3
59.8
59.9
(5.0
)
(5.0
)
Net profit margin(4)
N/M
(3.2
)
38.7
43.5
(5.7
)
(5.7
)
N/ M = not meaningful
Notes:
(1)
For convenience, the Won amounts are expressed in
    U.S. dollars at the rate of Won 1,010.0 to US$1.00.
(2)
Gross profit margin for each period is calculated by dividing
    gross profit by total revenues for each such period.
(3)
Operating profit margin for each period is calculated by
    dividing operating income (loss) by total revenues for each such
    period.
(4)
Net profit margin for each period is calculated by dividing net
    income (loss) by total revenues for each such period.
6
Table of Contents
Exchange Rates
Fluctuations in the exchange rate between Won and
U.S. dollar may affect the market price of our ADSs. These
fluctuations will also affect the U.S. dollar conversion by
the depositary of any cash dividends paid in Won and the Won
proceeds received by the depositary from any sale of our common
shares represented by our ADSs.
In certain parts of this annual report, we have translated Won
amounts into U.S. dollars for convenience purposes only.
The "noon buying rate" is the rate in The City of New
York used for cable transfers in foreign currencies as certified
for customs purposes by the Federal Reserve Bank of New York.
Unless otherwise stated, all translations from Won to
U.S. dollars were made at Won 1,010.0 to US$1.00, which was
the noon buying rate announced on December 31, 2005. The
translation is not a representation that the Won or
U.S. dollar amounts referred to herein could have been or
could be converted into U.S. dollars or Won, as the case
may be, at any particular rate, or at all. The table below sets
forth, for the periods indicated, information concerning the
noon buying rate for Won, expressed in Won per one
U.S. dollar.
Year Ended December 31,
At End of Period
Average(1)
High
Low
(Won per US$1.00)
2001
1,313.5
1,292.0
1,369.0
1,234.0
2002
1,186.3
1,250.4
1,332.0
1,160.6
2003
1,192.0
1,192.1
1,262.0
1,146.0
2004
1,035.1
1,139.3
1,195.1
1,035.1
2005
1,010.0
1,023.8
1,059.8
997.0
2006 (through June 29, 2006)
960.4
962.2
1,002.9
927.4
January
958.9
981.8
1,002.9
958.9
February
970.9
969.8
976.3
962.0
March
971.4
974.7
982.0
966.8
April
942.8
952.6
970.4
939.6
May
945.3
940.8
951.5
927.4
June (through June 29, 2006)
960.4
954.4
961.8
942.7
Note:
(1)
Annual and monthly averages are calculated using the average of
    the daily rates during the relevant period.
3.B.     Capitalization and
Indebtedness
Not applicable.
3.C.     Reasons for the Offer and
Use of Proceeds
Not applicable.
3.D.     Risk Factors
Risks Relating to Our Business
We currently depend on one product, Ragnarok Online, for
    substantially all of our revenues.
Substantially all of our revenues have been and are currently
derived from a single product, Ragnarok Online, which was
commercially introduced in August 2002. In 2005, we derived
approximately 88.3% of our revenues from Ragnarok Online. We
expect to continue to derive a substantial portion of our
revenues from Ragnarok Online. Our failure to maintain, improve,
update or enhance Ragnarok Online in a timely manner or
successfully enter new markets could reduce Ragnarok
Online's user base, decrease its popularity, and reduce our
revenues which would materially and adversely affect our
business, financial condition and results of
7
Table of Contents
operations. In addition, we are currently developing Ragnarok
Online II, the successor game to Ragnarok Online, as
Ragnarok online has been in the market for close to four years
and we believe that this game has reached relative maturity in
our principal markets. Although we have indicated our plan to
introduce Ragnarok Online II at various times in the past,
the launch of this successor game has been delayed for various
reasons, including technical difficulties. We currently intend
to launch Ragnarok Online II by the end of 2006, although
no assurance can be given that we will be able to meet our
current anticipated launch date for this game. In addition, no
assurance can be given that when launched, such game will gain
market acceptance and popularity. The success of Ragnarok
Online II will be subject to many factors, including the
quality, uniqueness and playability of the game and the launch
by our competitors of other games that may gain more market
acceptance than Ragnarok Online II. Our inability to launch
Ragnarok Online II and if launched, the lack of popularity
or market acceptance of such game, is likely to have a material
adverse effect on our business, prospects, reputation, financial
condition and results of operations.
If we are unable to consistently develop, acquire,
    license, launch, market or operate commercially successful
    online games in addition to Ragnarok Online, our business,
    financial condition and results of operations may be materially
    and adversely affected.
In order to maintain our growth and profitability, we must
continually develop or publish commercially successful online
games in addition to Ragnarok Online that will retain our
existing users and attract new users. We have recently acquired
a controlling interest in a third party developer that developed
R.O.S.E. Online, from whom we used to have an exclusive license
to distribute such game. In addition, we have acquired
publishing rights for a casual game portal, as well as games
licensed from third party online game developers. We are also
internally developing two new massively multiplayer online role
playing games, Requiem and Ragnarok Online II, a sequel to
Ragnarok Online. No assurance can be given that the Requiem,
Ragnarok Online II or any of the other games we develop or
purchase licensing rights to, will gain popularity with the
market or that we will generate sufficient revenues from such
games to justify the costs of development and/or payment of
licensing fees for such games.
A game's commercial success largely depends on appealing to
the tastes and preferences of a critical mass of users as well
as the willingness of such users to continue as paying
subscribers after the completion of the free open beta testing
stage, all of which are difficult to predict prior to a
game's development and introduction. Developing games
internally requires substantial development costs, including the
costs of employing skilled developers and acquiring or
developing game engines which enable the creation of products
with the latest technological features. In order to succeed, we
must acquire, license or develop promising games at an
acceptable cost and ensure technical support for the successful
operation of such games. The online game publishing market is
highly competitive. And in order to successfully distribute and
operate a game, we also need a sizable game management and
support staff, continued investment in technology and a
substantial marketing budget. If we are not able to consistently
develop, acquire, license, launch, market or operate
commercially successful online games, we may not be able to
generate enough revenues to offset our initial development,
acquisition, licensing or marketing costs, and our future
business, financial condition and results of operations will be
materially and adversely affected.
Our limited resources may affect our ability to manage our
    growth.
Our growth to date has placed, and the anticipated further
expansion of our operations will continue to place, a
significant strain on our management, systems and resources. In
addition to training and managing our employees, we will need to
continue to develop and improve our financial and management
controls as well as our reporting systems and procedures
appropriate for a publicly listed company. We cannot assure you
that we will be able to efficiently or effectively manage the
growth of our operations, and any failure to do so may limit our
future growth and materially and adversely affect our business,
financial condition and results of operations.
8
Table of Contents
We depend on license fees and royalty payments from our
    overseas licensees for a substantial portion of our
    revenues.
In markets other than Korea, the United States and Canada, we
license Ragnarok Online to overseas operators or distributors
from whom we receive license fees and royalty payments based on
a percentage of such operators' revenues from Ragnarok
Online. Such overseas license fees and royalty payments
represented 70.0% of our revenues in 2005. In addition, we are
heavily dependent on two licensees for a significant portion of
our revenues. In 2005, we derived 31.1% of our total revenues
from GungHo Online Entertainment Inc., our licensee in Japan,
and 19.8% of our total revenues from Soft-World International
Corporation, our licensee in Taiwan. Deterioration in our
relationship with our material licensees, or material changes in
the terms of our license with such licensees, will likely have a
material adverse affect on our business, prospects, financial
condition and results of operations. In addition, as we are
heavily dependent on certain licensees, deterioration or any
adverse developments in the operations, including changes in
senior management, of our overseas licensees may materially and
adversely affect our business, financial conditions and results
of operations. Our reliance on third parties that we do not
control exposes us to certain risks that we would not encounter
if we were to operate or distribute directly in such markets. If
our overseas licensees fail to perform their contractual
obligations or suffer from management or other problems in their
businesses, our business operations in overseas markets and our
ability to collect royalty payments from such markets may be
materially and adversely affected. We may not be able to easily
terminate our license agreements with our overseas licensees as
these agreements do not specify particular financial or
performance criteria that need to be met by our licensees. As
our overseas licensees generally have the exclusive right to
distribute our games in their respective markets generally for a
term of two years, we may not be able to enter into a new
license agreement in a particular country for the term of the
agreement unless it is terminated earlier. Under the license
arrangements, our overseas licensees may operate or publish
other online games developed or offered by our competitors.
Therefore, our overseas licensees may devote greater time and
resources to marketing their proprietary games or those of our
competitors than to ours. In general, we may not unilaterally
terminate our license agreements. Furthermore, as a part of our
license agreement with our licensees, we must provide technical
and other consulting services to our licensees in order for them
to offer Ragnarok Online in their markets. Our inability to
provide such technical and other assistance may hinder our
licensees' efforts to gain market share in their market and
affect users' satisfaction and loyalty as well as impact
the number of users in these markets for Ragnarok Online, which
may lead to modifications in the terms and conditions of our
licensing agreement with our licensees and, in certain
circumstances, result in our licensees terminating their
relationship with us.
Our overseas licensees are responsible for remitting royalty
payments to us based on a percentage of sales from our games,
after deducting certain expenses. We generally receive royalties
earned by us from such licensee within 20 to 30 days
following the end of each month (except Europe and China, where
such payments are received up to 60 days after the record
date). Online payment systems in China and certain other
countries are still in a developmental stage and are not as
widely available or used. Payment for online game services in
these countries generally take the form of prepaid cards sold in
Internet cafés, convenience stores and other distribution
channels. Some of our overseas licensees rely heavily on a
multilayer distribution and payment network composed of third
party distributors for sales to, and collection of payments
from, users. Failure by our licensees to maintain a stable and
efficient billing, recording, distribution and payment
collection network in these markets may result in inaccurate
recording of sales or insufficient collection of payments from
these markets and may materially and adversely affect our
financial condition and results of operations. In addition,
although we have pursuant to our license agreement audit rights
to the database of our licensees to ensure that proper payment
amounts are being recorded and remitted, such activities can be
disruptive and time consuming and we have as a result not always
exercised such rights. Certain of our licensees in the past have
failed to accurately report amounts due to us and have diverted
certain payables to us to our former chairman, in contravention
of our license agreements.
9
Table of Contents
We operate in a highly competitive industry and compete
    against many large companies.
Many companies worldwide, including over 100 companies in
Korea alone, are dedicated to developing and/or operating online
games. We expect more companies to enter the online game
industry and a wider range of online games to be introduced in
our current and future markets. Our competitors in the massively
multiplayer online role playing game industry vary in size from
small companies to very large companies with dominant market
shares such as NCsoft of Korea and Shanda of China. We also
compete with online casual game and game portal companies such
as NHN, Nexon and CJ Internet, all from Korea. In addition, we
may face stronger competition from console game companies, such
as Sony, Microsoft, Electronic Arts, Nintendo and Sega, many of
which have announced their intention to expand their game
services and offerings over the Internet. For example,
Electronic Arts recently announced that it has entered into an
agreement to acquire Mythic Entertainment Inc. Upon consummation
of the transaction, it is expected to give Electronic Arts, one
of the world's leading games publisher by sales, an entry
into the market for massively multiplayer online games. Many of
our competitors have significantly greater financial, marketing
and game development resources than we have. As a result, we may
not be able to devote adequate resources to develop, acquire or
license new games, undertake extensive marketing campaigns,
adopt aggressive pricing policies or adequately compensate our
or third-party game developers to the same degree as certain of
our competitors.
As the online game industry in many of our markets is relatively
new and rapidly evolving, our current or future competitors may
compete more successfully as the industry matures. In
particular, any of our competitors may offer products and
services that have significant performance, price, creativity or
other advantages over those offered by us. These products and
services may weaken the market strength of our brand name and
achieve greater market acceptance than ours. In addition, any of
our current or future competitors may be acquired by, receive
investments from or enter into other strategic relationships
with larger, longer-established and better-financed companies
and therefore obtain significantly greater financial, marketing
and game licensing and development resources than we have.
Increased competition in the online game industry in our markets
could make it difficult for us to retain existing users and
attract new users, and could reduce the number of hours users
spend playing our current or future games or cause us and our
licensees to reduce the fees charged to play our current or
future games. In some of the countries in which our games are
distributed, such as Korea and Taiwan, growth of the market for
online games has slowed while competition continues to be
strong. If we are unable to compete effectively in our principal
markets, our business, financial condition and results of
operations could be materially and adversely affected.
We have a limited operating history, which may make it
    difficult for you to evaluate our business.
We have a limited operating history upon which you can evaluate
our business and prospects. Our business was established in
April 2000 but Ragnarok Online was commercially introduced in
August 2002. Our senior management and employees have worked
together at our company for a relatively short period of time,
including as a result of frequent changes in senior management
to date. In addition, the online game industry, from which we
derive substantially all of our revenues, is a relatively new
industry. The first massively multiplayer online role playing
game in Korea was developed and distributed by one of our
competitors in 1996. Since then, only a limited number of
companies have successfully commercialized such online games on
an international scale. You must consider our business prospects
in light of the risks and difficulties we encounter as an
early-stage company in a new and rapidly evolving industry. We
may not be able to successfully address these risks and
difficulties, which could materially harm our business
prospects, financial condition and results of operations.
Rapid technological change may adversely affect our future
    revenues and profitability.
The online game industry is subject to rapid technological
change in areas including hardware, software and content
programming. We need to anticipate the emergence of new
technologies and games, assess their likely market acceptance,
and make substantial game development and related investments.
In addition, new technologies in online game programming or
operations could render our current or future games obsolete or
unattractive to our subscribers, thereby limiting our ability to
recover game-related development, acquisition
10
Table of Contents
or licensing costs and potentially materially and adversely
affecting our business, financial condition and results of
operations.
If we fail to retain and hire skilled and experienced game
    developers or other key personnel in order to design and develop
    new online games and additional game features, we may be unable
    to achieve our business objectives.
In order to meet our business objectives and maintain our
competitiveness in the future, we will need to attract and
retain skilled and experienced online game developers and other
key personnel. While certain of our current senior employees or
staff members are bound by non-competition agreements for six
months after termination of employment with us, since our
industry is characterized by high demand and intense competition
for talent, we may need to offer higher compensation and other
benefits in order to retain or replace key employees, and no
assurance can be given that should such key employees leave,
that we will be able to hire qualified employees to replace
them, or on terms that are reasonable. In addition, as we are
still a relatively young company and our business has grown
rapidly since our establishment, at times our ability to train
and integrate new employees into our operations may not meet the
growing demands of our business.
Undetected programming errors or flaws in our games could
    harm our reputation or decrease market acceptance of our games,
    which would materially and adversely affect our business
    prospects, reputation, financial condition and results of
    operations.
Our current and future games may contain programming errors or
flaws, which may become apparent only after their release. In
addition, our online games are developed using programs and
engines developed by and licensed from third party vendors,
which may include programming errors or flaws over which we have
no control. If our users have a negative experience with our
games related to or caused by undetected programming errors or
flaws, they may be less inclined to continue or resume
subscriptions for our games or recommend our games to other
potential users. Undetected programming errors and game defects
can also harm our reputation, cause our users to cease playing
our games, divert our resources or delay market acceptance of
our games, any of which could materially and adversely affect
our business, financial condition and results of operations.
Unexpected network interruptions, security breaches or
    computer virus attacks could harm our business.
Any failure to maintain satisfactory performance, reliability,
security and availability of our network infrastructure, whether
maintained by us or by our overseas licensees, may cause
significant harm to our reputation and our ability to attract
and maintain users. Major risks relating to our network
infrastructure include:
•
any breakdowns or system failures, including from fire, flood,
    earthquake, typhoon or other natural disasters, power loss or
    telecommunications failure, resulting in a sustained shutdown of
    all or a material portion of our servers;
•
any disruption or failure in the national or international
    backbone telecommunications network, which would prevent users
    in certain countries in which our games are distributed from
    logging onto or playing our games for which the game servers are
    all located in other countries; and
•
any security breach caused by hacking, loss or corruption of
    data or malfunctions of software, hardware or other computer
    equipment, and the inadvertent transmission of computer viruses.
From time to time, we detect users that gain an unfair advantage
by modifying Ragnarok Online execution files saved on the
users' computers to facilitate the progression of their
game characters. Unauthorized character manipulation may
negatively impact the image and users' perception of
Ragnarok Online and could limit the popularity of the games and
damage our reputation.
Any of the foregoing factors could reduce our users'
satisfaction, harm our business and reputation and have a
material adverse effect on our financial condition and results
of operations.
11
Table of Contents
Unauthorized use of our intellectual property by third
    parties, and the expenses incurred in protecting our
    intellectual property rights, may adversely affect our
    business.
We regard our copyrights, service marks, trademarks, trade
secrets and other intellectual property as critical to our
success. Unauthorized use of the intellectual property used in
our business, whether owned by us or licensed to us, may
materially and adversely affect our business and reputation.
We rely on trademark and copyright law, trade secret protection
and confidentiality agreements with our employees, customers,
business partners and others to protect our intellectual
property rights. Despite certain precautions taken by us, it may
be possible for third parties to obtain and use our intellectual
property without authorization. For example, in April 2003, we
discovered that the server-end software of Ragnarok Online was
unlawfully released in Korea, China and the United States. This
enabled unauthorized third parties to set up local server
networks to operate Ragnarok Online, which may have resulted in
a diversion of a significant number of paying subscribers. Since
then, we have designated certain employees to be responsible for
detecting these illegal servers and reporting them to the
relevant enforcement authority in Korea in charge of crimes on
the Internet. In overseas markets, we cooperate with and rely on
our overseas licensees to seek enforcement actions against
operators of illegal free servers. We may incur considerable
costs in the future to remedy software piracy and to enforce our
rights against the operators of unauthorized server networks.
The validity, enforceability, enforcement mechanisms and scope
of protection of intellectual property in Internet-related
industries are uncertain and evolving. In particular, the laws
and enforcement regime of Korea, Japan, Taiwan, Thailand, China
and certain other countries in which our games are distributed
are uncertain or do not protect intellectual property rights to
the same extent as do the laws and enforcement procedures of the
United States and other developed countries. Moreover,
litigation may be necessary in the future to enforce our
intellectual property rights. Such litigation could result in
substantial costs and diversion of our resources, and could
disrupt our business, as well as have a material adverse effect
on our business, prospects, financial condition and results of
operations.
We may be subject to claims with respect to the
    infringement of intellectual property rights of others, which
    could result in substantial costs and diversion of our financial
    and management resources.
We cannot be certain that our online games do not or will not
infringe upon patents, copyrights or other intellectual property
rights held by third parties. We may become subject to legal
proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our
business. If we are found to have violated the intellectual
property rights of others, we may be enjoined from using such
intellectual property, and we may incur licensing fees or be
forced to develop alternative technology or obtain other
licenses. In addition, we may incur substantial expenses in
defending against these third party infringement claims,
regardless of their merit. In addition, certain of our employees
were recruited from other online game developers, including
certain of our current or potential competitors. To the extent
these employees have been and are involved in the development of
our games similar to the development in which they have been
involved at their former employers, we may become subject to
claims that such employees or we have improperly used or
disclosed trade secrets or other proprietary information.
Although we are not aware of any pending or threatened claims of
this type, if any such claims were to arise in the future,
litigation or other dispute resolution procedures might be
necessary to retain our ability to offer our current and future
games, which could result in substantial costs and diversion of
our financial and management resources.
Successful infringement or licensing claims against us may
result in substantial monetary damages, which may materially
disrupt the conduct of our business and have a material adverse
effect on our reputation, business, financial condition and
results of operations.
The discontinuation of any of the preferential tax
    treatments currently available to us in Korea could materially
    and adversely affect our business, financial condition and
    results of operations.
Under Korean law and regulations, small- and medium-sized
venture companies may be entitled to enjoy a preferential tax
treatment from the Korean government in the form of a 50%
reduction in corporate income tax rates for the year in which it
first generates taxable income and the following five years if
such company
12
Table of Contents
satisfies a number of financial and non-financial criteria,
including the maintenance of its status as a designated venture
company. In 2002, when we first generated taxable income, we
qualified for the preferential tax treatment and enjoyed the 50%
reduction in corporate income tax rates. In 2005, we also
qualified for this preferential treatment and our applicable
corporate income tax rate (including resident surtax) was 13.75%
after the 50% reduction. A company that engages in data
processing or computer related businesses, including us, may
qualify as a small-and medium-sized enterprise under the
Framework Act on Small- and Medium-Sized Enterprises if, among
other things, (i) we hire less than three hundred full-time
employees or (ii) our total revenue does not exceed Won
30 billion (US$30 million). In 2004, we failed to
satisfy both of these tests. However, even if a company fails to
satisfy both of the preceding requirements, it may continue to
enjoy its status as a small- and medium-sized enterprise for the
following three years so long as that company neither
(x) merges into, nor consolidates with, another company nor
(y) becomes an affiliate of certain large enterprises.
Accordingly, we believe that we qualify as a small- and
medium-sized company through September 2007 as long as we
satisfy such conditions. See Item 5.A. "Operating
Results — Overview — Income tax
expenses." However, if the National Tax Service were to
audit us and determine that we were not entitled to such tax
benefit, we may be required to pay back-taxes and statutory
interest.
We may not be able to successfully implement our growth
    strategies.
We are pursuing a number of growth strategies, including the
following:
•
distributing games developed in-house;
•
publishing games acquired from third parties or developed by
    third parties through licensing arrangements;
•
offering our games in countries where we currently have little
    or no presence;
•
taking advantage of our popular online games to strengthen our
    other lines of businesses, such as mobile games, animation and
    character merchandising;
•
selectively pursuing acquisitions of, investments in, or joint
    ventures with, game development companies, technologies and
    personnel that are complementary to our existing
    business; and
•
investing our capital in investment funds which target online
    game industry, with the goal, among others, of increasing our
    knowledge of, as well as building relationship with, potential
    third party developers of online games.
In addition, we have formulated a strategic vision to promote
our role as a hub for integrating the financial and human
resources, technology and distribution networks worldwide to
create and publish online games globally. To this end, we will
continue to (i) strengthen our efforts to develop online
games, (ii) identify and implement opportunities for
overseas publishing of our games, (iii) establish strategic
alliances with major players in the online game industry in
Korea, (iv) enhance brand recognition for our key online
games and facilitate cross-selling of other products and
(v) promote our mobile games.
We cannot assure you that we will be successful in any of these
strategies. Some of these strategies relate to new services or
products for which there are no established markets, or in which
we lack experience and expertise. If we are unable to
successfully implement our growth strategies, our revenues,
profitability and competitiveness may be materially and
adversely affected. Our growth potential in many of the markets
in which Ragnarok Online is currently distributed or which we
intend to enter may be limited since the penetration rate for
personal computers is relatively low and the cost of Internet
access relative to the per capita income is higher in such
markets when compared to some of our principal markets such as
Korea and Japan. If we decide to pursue acquisitions,
investments or joint ventures to achieve growth, the success of
such acquisitions, investments or joint ventures will depend on
the availability of suitable acquisition and investment
candidates at an acceptable cost, our ability to compete
effectively to attract and reach agreement with acquisition
candidates or joint venture partners on commercially reasonable
terms, and the availability of financing to complete such
acquisitions, joint ventures or investments. For example, in May
2006, we entered into a contract to invest US$9 million in
Perpetual Entertainment, Inc. an online game developer based in
the
13
Table of Contents
United States. Also, in December 2005, we completed our
acquisition of a controlling interest in NEOCYON, Inc., a mobile
Internet solution provider in Korea. In December 2005, we
entered into an agreement with Movida Investment Inc., SOFTBANK
CORP. and eight other companies to invest in "Online Game
Revolution Fund No. 1," with total capital
commitment in the amount of Japanese Yen 1 billion, which
represents 10% of the aggregate size of the fund. As of the date
hereof, we have invested Japanese Yen 100 million, which
represents 10% of our total capital commitment. We cannot be
certain that any particular acquisition, investment or joint
venture will produce the intended benefits on a timely basis or
at all.
Mr. Il Young Ryu, our chairman, chief executive
    officer and representative director and also the representative
    director of EZER Inc., our largest shareholder, has substantial
    control over us and can delay or prevent a change in corporate
    control.
As of June 26, 2006, Mr. Il Young Ryu, our chairman,
chief executive officer and representative director and also the
representative director of EZER Inc., our largest shareholder,
beneficially owned, in the aggregate, approximately 52.4% of our
outstanding common shares. As a result, Mr. Ryu exerts
significant control over all matters requiring shareholder
approval, including the election of directors and approval of
significant corporate transactions, including acquisitions,
divestures, strategic relationships and other matters.
Mr. Ryu also has the power to prevent or cause a change in
control. In addition, the rights and responsibilities of our
shareholders and members of our board of directors under Korean
law may be different from those that apply to shareholders and
directors of a corporation incorporated in the United States.
While the facts and circumstances of each case will differ, the
duty of care required of a director under Korean law may not be
the same as the fiduciary duty of a director of a corporation
incorporated in the United States. Holders of our ADSs may have
more difficulty protecting their interests against actions of
our management, members of our board of directors or controlling
shareholder than they would as shareholders of a corporation
incorporated in the United States.
Our business may be adversely affected by developments
    affecting the Korean economy and other of our principal
    markets.
We are incorporated and headquartered in Korea, and derived
18.9% of our revenues in 2005 from our operations in Korea. In
addition, in 2005, we derived an aggregate of 61.3% of our
revenues from Japan, Taiwan and Thailand. Accordingly, our
business, financial condition, results of operations and
prospects are subject, to a significant extent, to economic,
political, legal and regulatory conditions and developments in
these countries.
We have limited business insurance coverage in
    Korea.
The insurance industry in Korea is still at an early stage of
development. In particular, Korean insurance companies offer
limited business insurance products. As a result, we do not have
any business liability or disruption insurance coverage for our
operations in Korea. In 2004 and 2005, we derived 21.0% and
18.9% of our total revenues from Korea, respectively. Any
business disruption, litigation or natural disaster might result
in our incurring substantial costs and the diversion of our
resources.
Slow growth or contractions in the Internet café
    industry in Korea may affect our ability to target a core group
    of potential users.
According to the 2005 report issued by the Korean Game
Development and Promotion Institute, or KGDI, the growth in the
number of active Internet cafés in Korea has stabilized
since 2000 and the number of such cafés actually declined
in 2003, with no significant change to the number of active
Internet cafés in 2004 from 2003. We believe that there was
no significant change in the number of active Internet
cafés in 2005. Intensifying competition for users of online
games, as well as more widespread availability of personal
computers, or PCs, and broadband Internet access in homes in
Korea could trigger further declines in the number of Internet
cafés. Future reductions in the number of Internet
cafés operating in Korea could adversely affect our ability
to target a core group of potential users, who tend to prefer
playing online games, in particular, massively multiplayer
online role playing games, at Internet cafés.
14
Table of Contents
We may be required to take significant actions that are
    contrary to our business objectives in order to avoid being
    deemed an investment company as defined under the Investment
    Company Act of 1940, as amended.
Generally, the Investment Company Act provides that a company is
not an investment company and is not required to register under
the Investment Company Act as an investment company if:
•
the company is primarily engaged, directly or through a
    wholly-owned subsidiary or subsidiaries, in a business or
    businesses other than that of investing, reinvesting, owning,
    holding or trading in securities; and
•
40% or less of the fair market value of the company's
    assets is represented by investment securities.
We believe that we are engaged primarily and directly in the
businesses of providing online game services, that less than 40%
of the fair market value of our assets is represented by
investment securities and, consequently, that we are not an
investment company as that term is defined under the Investment
Company Act. However, in the future we may be required to take
actions to avoid the requirement to register as an investment
company, such as shifting a significant portion of our long- and
short-term investment portfolio into low-yielding bank deposits
or other short-term securities which are not considered to be
investment securities due to their liquidity and certain other
characteristics. These types of investments may reduce the
amount of interest on other income that we could otherwise
generate from our investment activities. In addition, we may
need to acquire additional income or loss generating assets that
we might not otherwise have acquired or forego opportunities to
acquire minority interests in companies that could be important
to our strategy.
The Investment Company Act also contains regulations with
respect to investment companies, including restrictions on their
capital structure, operations, transactions with affiliates and
other matters which would be incompatible with our operations.
If we were to be deemed an investment company in the future, we
would, among other things, effectively be precluded from making
public offerings in the United States. We could also be subject
to administrative or legal proceedings and, among other things,
contracts to which we are a party might be rendered
unenforceable or subject to rescission.
Our businesses may be adversely affected by developments
    affecting the economies of the countries in which our games are
    distributed.
Our future performance will depend in large part on the future
economic growth of our principal markets. Adverse developments
in such markets may have an adverse effect on the number of our
subscribers and results of operations, which could have a
material adverse effect on our business.
A deterioration in the economies of the countries in which our
games are distributed can also occur as a result of
deterioration in global economic conditions. The worldwide
economy has experienced periods of economic weakness since the
beginning of 2001, which has been exacerbated by the terrorist
attacks in the United States on September 11, 2001, recent
developments in the Middle East, including the war in Iraq and
terrorist attacks and threats across the globe and rising oil
prices. In addition, if investors perceive that there is a
crisis in Asia, such as due to economic difficulties similar to
those that Asian economies experienced in the late 1990s,
companies and economies in that region may be adversely affected
irrespective of their economic soundness.
Any future deterioration in global economic conditions, or a
significant adverse change in politics and economies in Asia or
a loss of investor confidence in the financial systems of
emerging and other markets could have a material adverse effect
on our business, financial condition and results of operations.
We may have been in 2005, and may be in subsequent years,
    a passive foreign investment company, which could result in
    adverse U.S. tax consequences to you.
In light of the nature of our business activities and our
holding of a significant amount of cash, short-term investments
and other passive assets after our initial public offering in
2005, we may have been in 2005, and
15
Table of Contents
may be in subsequent years, a passive foreign investment company
for U.S. federal income tax purposes. If we are a passive
foreign investment company for any taxable year during which you
hold our ADSs or common shares, you could be subject to adverse
U.S. federal income tax consequences. You are urged to
consult your tax advisors concerning the U.S. federal
income tax consequences of holding our ADSs or common shares if
we are considered a passive foreign investment company in any
taxable year. See Item 10.E. "Taxation —
U.S. federal income tax considerations — Passive
foreign investment companies."
We have identified certain material weaknesses in our
    internal controls over financial reporting. If we fail to
    achieve and maintain an effective system of internal controls
    over financial reporting, we may be unable to accurately report
    our financial results on a timely basis or reduce our ability to
    prevent or detect fraud, and investor confidence and the market
    price of our ADSs may be adversely affected.
In connection with the audit of our financial statements
prepared under U.S. GAAP for the year ended
December 31, 2005, we have identified certain material
weaknesses (as defined under Standards of the Public Company
Accounting Oversight Board (United States)) in our system of
internal controls over financial reporting. Specifically, we did
not maintain a control environment adequate to encourage the
prevention or detection of the override of our controls or
intentional misconduct, including the embezzlement of revenues
due to us, improper payment for assets not purchased for our
benefit, the intentional and inappropriate early recognition of
revenue and the preparation of false management reports,
accounting records, financial statements and documents together
with forged invoices. The absence of effective control
environment allowed our former Chairman to take inappropriate
actions that resulted in certain transactions not being properly
reflected in our consolidated financial statements as of
December 31, 2003 and 2004 and for the years ended
December 31, 2002, 2003 and 2004. Such intentional
misconduct by the former Chairman included the preparation of
false accounting records and documents to deceive accounting
personnel under his supervision, other members of senior
management, our Board of Directors and our independent
registered public accountants. Additionally, the lack of an
effective control environment allowed our lines of communication
among, and our monitoring of, our operations and accounting
personnel, including the former Chairman, to be ineffective in
preventing or detecting these instances of intentional
misconduct. Taken as a whole, our control environment did not
adequately emphasize appropriate judgment, skepticism and
objectivity, which we believe contributed to the events which
necessitated our having to restate our financial statements and
us having to file an amendment to our annual report on F-20 for
the fiscal year ended December 31, 2004.
This control environment material weakness could result in
misstatements of any of our financial statement accounts that
are not prevented or detected which could result in a material
misstatement to our annual consolidated financial statements.
Accordingly, our management has determined that this control
deficiency constitutes a material weakness. This material
weakness in our control environment contributes to the existence
of the certain additional material weaknesses, including, lack
of independent oversight and supervision controls, lack of
controls over the reported revenues from our overseas licensees,
lack of controls over bank accounts, lack of sufficient
complement of personnel, lack of controls over the purchase and
accounting for fixed assets and lack of controls over the
financial close and reporting process.
Our management, in particular, our CEO and CFO along with the
Audit Committee, is in the process of addressing the material
weaknesses and will seek to put in place a system of internal
control over financial reporting which will remediate such
material weaknesses as expeditiously as possible. All disclosure
controls and procedures, no matter how well designed, however,
have inherent limitations including the possibility of human
error and the circumvention or overriding of the controls and
procedures. A company's internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
company's internal control over financial reporting
includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and
16
Table of Contents
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a
material effect on the financial statements.
Furthermore, we are subject to the Sarbanes-Oxley Act of 2002,
or the Sarbanes-Oxley Act. The Sarbanes-Oxley Act requires us
to, among other things, maintain an effective system of internal
controls over financial reporting, and requires our management
to provide a certification on the effectiveness of our internal
controls on an annual basis. Additionally, our independent
accountants must provide an attestation report on
management's assessment of internal controls beginning from
the fiscal year ending December 31, 2006. We have not yet
fully completed the establishment of a system of internal
controls appropriate for our anticipated reporting requirements.
No assurance can be given that we will be able to establish such
system in a timely manner and even if we do, that our internal
controls system will not fail in the future.
If we fail to create an effective system of internal controls
over financial reporting, we may be unable to accurately report
our financial results in a timely manner or prevent errors or
fraud, and investor confidence and the market price of our ADSs
may be adversely affected. See Item 15. "Controls and
Procedures" for additional discussion concerning our
material weaknesses.
Risks Relating to Recent Developments at GRAVITY
Our senior management team is required to devote a
    significant amount of attention to matters arising from events
    related to the embezzlement of funds by the former
    Chairman.
Our Chief Executive Officer, our Chief Financial Officer and all
members of our Audit Committee and certain senior members of our
management have changed from the time of filing of our annual
report on
Form
20-F
for the
fiscal year ended December 31, 2004 originally filed on
June 30, 2005. Our new directors and senior management
team's ability to manage the Company's business has
been hindered by their need to spend significant time, effort
and resources addressing our internal review of events related
to the internal investigation into embezzlement of company funds
by Mr. Jung Ryool Kim, our former Chairman, which led to
the issuance by the Company of restated financial statements as
of December 31, 2003 and 2004 and for the years ended
December 31, 2002, 2003 and 2004 and our amending our
annual report on
Form
20-F
for the
fiscal year ended December 31, 2004. Our board of directors
and our senior management have had to spend considerable amount
of time communicating with regulators, auditors, external
advisors with respect to the investigation, developing effective
corporate governance procedures and designing and implementing
effective internal control over financial reporting. In
addition, because our directors and senior management are new to
the company, and by virtue of their relatively short tenure in
their respective positions, these individuals may be required to
expend more time and resources to undertake such efforts as they
are not as familiar with our business. We cannot assure you that
the demands on our senior management and directors to address
such matters will not adversely affect our business, prospects,
financial condition and results of operations.
Harm from continued regulatory scrutiny and securities
    litigation
We have received and continue to receive requests and inquiries
from the staff of the Securities and Exchange Commission, the
officials of Nasdaq, shareholders and others seeking information
regarding our financial condition and results of operations,
accounting and related internal controls over financial
reporting and details related to the Investigation and the
Restated Financial Statements. We cannot predict if such
inquiries will ultimately lead to formal investigations and
enforcement actions by the Securities and Exchange Commission or
Nasdaq, or other government agencies or lead to lawsuits filed
by our shareholders. If such formal investigations or
enforcement actions occur or lawsuits are brought, we may be
required to pay material fines, consent to injunctions on future
conduct, be subject to other penalties or be required to expend
time and resources on defending against such litigation, each of
which could have a material adverse effect on our business,
financial condition and results of operations.
Furthermore, we are currently subject to a class action lawsuit
pending in the United States District Court for the Southern
District of New York titled
In Re Gravity Co., Ltd.
Securities Litigation
(Consolidated Civ. Act.
No. 1:05-CV-4804 (LAP.)). This action combines three
separate lawsuits filed in the Southern District in May 2005,
which were consolidated by an order of the Court entered on
December 12, 2005. The
17
Table of Contents
plaintiffs seek to represent a class of persons who purchased
our ADSs in the open market between February 7, 2005 and
May 12, 2005. Each of the complaints alleged violations of
the Securities Act of 1933 and the Exchange Act of 1934 against
us and the former individual directors and officers. The claims
arise out of an initial public offering of our ADSs in the
United States beginning February 7, 2005. Plaintiffs allege
that, in connection with the public offering of the ADSs, we
misstated or omitted material information relating to various
aspects of our business, including an alleged decline in sales
of our core online product, and material adverse trends
affecting our mobile animation business and Chinese operations.
Plaintiffs seek, for themselves and the class members,
compensatory damages, fees and expenses and other unspecified
relief. Following the consolidation of the actions, a
Stipulation and Order was entered by the Court in which, among
other things, it provided for the filing of a single
consolidated amended complaint by the later of February 28,
2006 or 45 days after we announce a restatement of our
previously issued financial statements. As of the date of this
report, the consolidated amended complaint has not yet been
filed or served. We cannot at this time determine what the final
conclusion of such litigation will be, including any damages
which may need to be paid or any amounts which may be paid in
settlement. A judgment against us in such litigation may result
in significant damages. Also, any settlement amounts, if we were
to agree to settle, may be significant and may have a material
adverse affect on our financial condition, results of operations
and liquidity.
In addition, certain of our minority shareholders in Korea and
outside of Korea have recently made various demands on our
management, including with respect to our corporate governance
practices. For example, certain of our minority shareholders
have formed a committee named The Gravity Committee for the Fair
Treatment of Minority Shareholders, or the Minority Shareholders
Committee, in March 2006 and have since made a number of
requests, including inspection of our financial documents. In
particular, the Minority Shareholders Committee has recently
issued a press release announcing the intention to review
decisions made by our management concerning transactions entered
into with certain parties, and to pursue legal action if the
committee views such transactions to have been entered into
improperly. Our management may be required to expend substantial
time, effort and resources to respond to such requests from our
minority shareholders, including the Minority Shareholders
Committee, in the future, which may negatively impact the
ability of our management to address business challenges and
operational requirements facing us, and adversely affect our
business, financial condition and results of operation.
Risks Relating to Our Regulatory Environment
Our operations are subject to the regulation of the
    Internet in certain of the countries in which our games are
    distributed, such as Korea, China, Taiwan, Japan and Thailand,
    the impact of which is difficult to predict.
The regulatory and legal regimes in nearly all of the countries
in which our games are distributed have yet to establish a
sophisticated set of laws, rules or regulations designed to
regulate, among other things, the social, political and
financial risks relating to the online game industry. However,
in many of our principal markets, such as Korea, China, Taiwan
and Thailand, the legislators and regulators have, either
through public announcements or press releases, indicated their
intention to implement laws, rules or regulations regulating and
restricting this industry, which include laws or regulations
relating to issues such as user privacy, defamation, pricing,
advertising, taxation, promotions, financial market regulation,
consumer protection, content regulation, quality of products and
services, and intellectual property ownership and infringement
that may directly or indirectly impact our activities. In some
of these countries, distribution of information over the
Internet and electronic commerce are currently under legal and
regulatory review. Other countries in which our games are
distributed or which we intend to enter may adopt similar laws
and regulations. The impact of such laws and regulations on our
business and results of operations is difficult to predict.
However, as we might unintentionally violate such laws or such
laws may be modified and new laws may be enacted in the future,
any such developments, or developments stemming from enactment
or modification of other laws, could increase the costs of
regulatory compliance, force changes in business practices or
otherwise have a material adverse effect on our business and
results of operations.
18
Table of Contents
Our online games may be subject to governmental
    restrictions or rating systems, which could delay or prohibit
    the release of new games or reduce the existing and potential
    range of our user base.
Legislation is periodically introduced in many of the countries
in which our games are distributed to establish a system for
protecting consumers from the influence of graphic violence and
sexually explicit materials contained in various types of games.
For instance, Korean law requires online game companies to
obtain rating classifications and implement procedures to
restrict the distribution of online games to certain age groups.
Similar mandatory rating systems and other regulations affecting
the content and distribution of our games have also been adopted
or are under review in Taiwan, China, the United States and
other markets for our online games. In the future, we may be
required to modify our games or alter our marketing strategies
to comply with new governmental regulations or new ratings
assigned to our current or future games that may call for
restrictions or modifications to our game content or features,
which could delay or prohibit the release of new games or
upgrades and reduce the existing and potential range of our user
base. Moreover, uncertainties regarding governmental
restrictions or rating systems applicable to our business could
give rise to market confusion, thereby materially and adversely
affecting our business.
The legal systems in some of the countries where our games
    are distributed have uncertainties which could limit the legal
    protections available to us.
The laws, regulations and legal requirements in many of the
countries in which our games are distributed are constantly
changing, and their interpretation and enforcement involve
uncertainties. These uncertainties could limit the legal
protections available to us. We cannot predict the effect of
future developments in the legal systems in these countries,
particularly with regard to the Internet, including the
promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, or the preemption of
local regulations by national laws. If the cost of regulatory
compliance increases for our licensees as a result of regulatory
changes, our licensees may in the future seek to reduce
royalties and license fees, which may materially and adversely
affect our licensee's business and our results of
operations and financial condition.
If our licensee in Taiwan adopts the model consumer
    contract promulgated by the ROC Ministry of Economic Affairs or
    the ROC Ministry of Economic Affairs imposes additional
    regulatory burdens on our licensee in Taiwan, our licensee in
    Taiwan may require us to reduce the license fee or royalties, or
    share the cost of regulatory compliance.
In 2004 and 2005, we derived 22.7% and 19.8%, respectively, of
our total revenues from our licensee in Taiwan. As a result of
increasing disputes between the online game companies and
consumers in Taiwan, on February 17, 2006, the ROC Ministry
of Economic Affairs of the Executive Yuan (the "ROC
MOEA") has promulgated a model consumer contract that
online game companies are encouraged to adopt. In addition, the
ROC MOEA may, within its authority, further consider
promulgating certain standard provisions that must be included
in a consumer contract that online game companies must use in
order to operate in the future when necessary. If our licensee
in Taiwan adopts the above model consumer contract or these
standard provisions are implemented, the cost of regulatory
compliance may significantly increase for our Taiwanese
licensee. Our Taiwanese licensee may in the future seek to
reduce royalties and license fees, which may materially and
adversely affect our licensee's business and our results of
operations and financial condition.
Our business may be adversely affected by complexities,
    uncertainties and changes in law and regulations of China
    regulating Internet companies and businesses operating in China,
    including those related to online games.
In 2004 and 2005, we derived 4.4% and 2.2%, respectively, of our
total revenues from our licensee in China. The Chinese
government, through various regulatory authorities, heavily
regulates the Internet sector, which includes the online game
industry. These laws and regulations include the following:
•
restrictions on content on the Internet, including restriction
    on distribution of online games containing content that purports
    to propagate obscenity, gambling or violence, instigate crime,
    undermine public morality or the cultural traditions of China,
    or compromise state security or secrets;
19
Table of Contents
•
license and permit requirements for companies in the Internet
    industry, including for importing and operating online games,
    from various regulatory authorities; and
•
restrictions on and supervision of Internet cafés,
    including closing of unlicensed Internet cafés and
    requiring installation of security software to prevent access to
    subversive sites.
In addition, there are uncertainties in the interpretation and
application of existing Chinese laws, regulations and policies
regarding the businesses and activities of Internet companies
and businesses in China, including those related to our online
games. Any violations of the foregoing laws and regulations as
well as other laws and regulations to be introduced in the
future could materially and adversely affect the business and
results of operations of our Chinese licensee and us.
Restrictions on currency exchange in certain of the
    countries in which our games are distributed may limit our
    ability to receive and remit revenues effectively.
The governments in certain countries, including Taiwan, Thailand
and China, in which our games are distributed, impose controls
on the convertibility of the local currency into foreign
currencies and, in some cases, the remittance of currency
outside of their countries. Under current foreign exchange
control regulations, shortages in the availability of foreign
currency may restrict the ability of our overseas licensees to
pay license fees and royalties to us in U.S. dollars.
Restrictions on our ability to receive license fees, royalties
and other payments from our overseas licensees would adversely
affect our financial condition and liquidity.
In many of our markets, we rely heavily on our overseas
    licensees to operate and distribute our games and to comply with
    applicable laws and government regulations.
We rely on our overseas licensees for substantially all aspects
of our overseas operations, including:
•
holding the required government licenses for the operation and
    distribution of our games;
•
publishing, advertising and marketing our games;
•
establishing the pricing of our games after consultation with us;
•
owning and operating the server network and other aspects of
    game management and maintenance;
•
providing customer service and trouble-shooting;
•
maintaining network security and providing
back-up
for game data
    and software; and
•
billing and collecting subscription fees from users and
    remitting royalty payments to us.
Our overseas licensees are responsible for complying with local
laws, including obtaining and maintaining the requisite
government licenses and permits. Failure by our overseas
licensees to do so may have a material adverse effect on our
business, financial condition and results of operations.
Restrictions on currency exchange in Korea in certain
    emergency circumstances may limit our ability to utilize
    effectively revenues generated in Won to fund our business
    activities outside Korea or expenditures denominated in foreign
    currencies.
The existing and any future restrictions on currency exchange in
Korea, including Korean exchange control regulations, may
restrict our ability to convert Won into foreign currencies
under certain emergency circumstances, such as an outbreak of
natural calamities, wars, conflict of arms or grave and sudden
changes in domestic or foreign economic circumstances,
difficulties in Korea's international balance of payments
and international finance and obstacles in carrying out currency
policies, exchange rate policies and other macroeconomic
policies of Korea. Such restrictions may limit our ability to
utilize effectively revenues generated in the Won to fund our
business activities outside Korea or expenditures denominated in
foreign currencies.
20
Table of Contents
Adverse changes in the withholding tax rates in the
    countries from which we receive license fees and royalties could
    adversely affect our net income.
We may be subject to income withholding in countries where we
derive revenues. Such withholding is made by our overseas
licensees at the current withholding rates in such countries. To
the extent Korea has a tax treaty with any such country, the
withholding rate prescribed by such tax treaty will apply. Under
the Corporation Tax Law of Korea, we are entitled to, and
recognize, a tax credit computed based on the amount of income
withheld overseas when filing our income tax return in Korea, up
to a limited amount. Accordingly, the amount of taxes withheld
overseas may be offset against tax payable in Korea. Adverse
changes in tax treaties between Korea and the countries from
which we receive license fees and royalties, in the rate of
withholding tax in the countries in which our games are
distributed or in Korean tax law enabling us to recognize tax
credits for taxes withheld overseas could adversely affect our
net income.
Risks Relating to Our Market Environment
Fluctuations in exchange rates could result in foreign
    currency exchange losses.
In 2005, approximately 81.1% of our revenues were denominated in
foreign currencies, primarily in the U.S. dollar and the
Japanese Yen. In most of the countries in which our games are
distributed, other than the United States, Japan and Europe, the
revenues generated by our licensees in those markets are
denominated in local currencies, which include the NT dollar,
the Baht and the Renminbi. Depreciation of these local
currencies against the U.S. dollar will result in reduced
license fees and monthly royalty payments in U.S. dollar
terms and may materially and adversely affect our financial
condition and results of operations.
While we receive our monthly royalty revenues from our overseas
licensees in foreign currencies, primarily the U.S. dollar,
the Japanese Yen and the Euro, substantially all of our costs
are denominated in Won. Our financial statements are also
prepared and presented in the Won. We receive monthly royalty
payments from our overseas licensees based on a percentage of
revenues confirmed and recorded at the end of each month
applying the foreign exchange rate applicable on such date. We
generally receive these royalty payments 20 to 30 days
after such record date (except in Europe and China, where such
payments are received up to 60 days after the record date).
Appreciation of the Won against these foreign currencies during
this period will result in foreign currency losses that may
materially and adversely affect our financial condition and
results of operations.
As of December 31, 2005, there are no outstanding foreign
currency forward exchange contracts entered into by us. We may
enter into hedging transactions in the future to mitigate our
exposure to foreign currency exchange risks, but we may not be
able to do so in a timely or cost-effective manner or at all.
Increased tensions with North Korea could adversely affect
    us.
Relations between Korea and North Korea have been tense over
most of Korea's modern history. The level of tension
between Korea and North Korea has fluctuated and may increase or
change abruptly as a result of current and future events,
including ongoing contacts at the highest levels of the
governments of Korea and North Korea. The level of tension
between Korea and North Korea, as well as between North Korea
and the United States, has increased as a result of North
Korea's admission in October 2002 to the maintenance of a
nuclear weapons program in breach of the peace accord executed
in October 1994. In response, the United States, Japan, Korea
and the European Union (which became party to the 1994 accord in
November 2002) decided to suspend shipments of oil to North
Korea called for by the 1994 accord and reiterated their demands
for the dismantling of North Korea's nuclear weapons
program. Following the suspension of oil shipments, North Korea
removed the seals and surveillance equipment from its Yongbyon
nuclear power plant and evicted inspectors from the United
Nations International Atomic Energy Agency, or IAEA, and has
reportedly resumed activity at its Yongbyon power plant. In
January 2003, North Korea announced its intention to withdraw
from the Nuclear Non-Proliferation Treaty, demanding that the
United States sign a non-aggression pact as a condition to North
Korea dismantling its nuclear program. In August 2003,
representatives of Korea, the United States, North Korea, China,
Japan and Russia held multilateral talks in an effort to resolve
issues relating to North Korea's nuclear weapons program.
While the talks
21
Table of Contents
concluded without resolution, participants in the August meeting
indicated that further negotiations may take place in the future
and, in February and June 2004, six-party talks were held in
Beijing, China. In June 2004, the third round of the six-party
talks resumed in Beijing, which ended with an agreement by the
parties to hold further talks by the end of September 2004,
which failed to take place as planned due to North Korea's
refusal to participate. In February 2005, North Korea announced
that it possessed nuclear weapons. In September 2005, North
Korea agreed to end its nuclear weapons program, and the six
participating nations signed a draft preliminary accord pursuant
to which North Korea agreed to dismantle its existing nuclear
weapons, abandon efforts to produce new future weapons and
readmit international inspectors to its nuclear facilities. In
return, the other five nations participating in the talks,
China, Japan, Korea, Russia and the United States, expressed
willingness to provide North Korea with energy assistance and
other economic support. The six parties agreed to hold further
talks in November 2005. However, one day after the joint
statement was released, North Korea announced that it would not
dismantle its nuclear weapons program unless the United States
agreed to provide civilian nuclear reactors in return, a demand
that the United States rejected. We cannot assure you that
future negotiations will result in a final agreement on North
Korea's nuclear program, including critical details such as
implementation and timing, or that the level of tensions between
Korea and North Korea will not escalate. Any further increase in
tensions, resulting for example from a break-down in contacts,
test of long-range nuclear missiles coupled with continuing
nuclear programs by North Korea or an outbreak in military
hostilities, could adversely affect our business, prospects,
financial condition and results of operations and could lead to
a decline in the market value of our ADSs.
Disruptions in Taiwan's political environment could
    seriously harm our business and operations in Taiwan.
The government of China asserts sovereignty over mainland China
and Taiwan and does not recognize the legitimacy of the
government of Taiwan. The government of China has indicated that
it may use military force to gain control over Taiwan if Taiwan
declares independence or a foreign power interferes in
Taiwan's internal affairs. On the other hand, the
government of Taiwan promulgated the Referendum Law on
December 31, 2003 and as last amended on May 30, 2006
allowing referenda on a range of issues to be proposed and voted
upon. The law allows a referendum on key constitutional issues
in the event that Taiwan comes under military attack from a
foreign power and its sovereignty is threatened. In 2004 and
2005, we derived 22.7% and 19.8% of our total revenues from our
licensee in Taiwan. Deteriorations in the relationship between
Taiwan and China and other factors affecting Taiwan's
political environment may materially and adversely affect our
Taiwanese licensee's business and our results of operations.
The economic, political and social conditions, as well as
    government policies in China, could adversely affect our
    operations in China.
In 2004 and 2005, we derived 4.4% and 2.2% of our total revenues
from our licensee in China, respectively. While the Chinese
economy has experienced significant growth in the past twenty
years, growth has been uneven, both geographically and among
various sectors of the economy. The Chinese government has
implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures
benefit the overall Chinese economy, but may also have a
negative effect on us. For example, our financial condition and
results of operations may be adversely affected by government
control over capital investments or changes in tax regulations
that are applicable to us or our licensees.
The Chinese economy has been transitioning from a planned
economy to a more market-oriented economy. Although the Chinese
government has implemented measures since the late 1970s
emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets
and the establishment of sound corporate governance in business
enterprises, a substantial portion of productive assets in China
is still owned by the Chinese government. In addition, the
Chinese government continues to play a significant role in
regulating industry development by imposing industrial policies.
The Chinese government also exercises significant control over
China's economic growth through the allocation of
resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential
treatment to particular industries or companies.
22
Table of Contents
Risks Relating to Our American Depositary Shares
The public shareholders of our ADSs may have more
    difficulty protecting their interests than they would as
    shareholders of a U.S. corporation.
Our corporate affairs are governed by our articles of
incorporation and by the laws and regulations governing Korean
corporations. The rights and responsibilities of our
shareholders and members of our board of directors under Korean
law may be different from those that apply to shareholders and
directors of a U.S. corporation. For example, minority
shareholder rights afforded under Korean law often require the
minority shareholder to meet minimum shareholding requirements
in order to exercise certain rights. Under applicable Korean
law, a shareholder must own at least (i) one percent of the
total issued shares to bring a shareholders' derivative
lawsuit, (ii) three percent to demand an extraordinary
meeting of shareholders, demand removal of directors or inspect
the books and related documents of a company, (iii) ten
percent to apply to the court for dissolution if there is gross
improper management or a deadlock in corporate affairs likely to
result in significant and irreparable injury to the company or
to apply to the court for reorganization in the case of an
insolvency and (iv) 20 percent to block a small-scale
share exchange that may be approved only by a board resolution.
In addition, while the facts and circumstances of each case will
differ, the duty of care required of a director under Korean law
may not be the same as the fiduciary duty of a director of a
U.S. corporation. Although the concept of "business
judgment rule" exists in Korea, there is insufficient case
law or precedent to provide guidance to the management and
shareholders as to how it should be applied or interpreted in a
particular circumstance. Holders of our ADSs may have more
difficulty protecting their interests against actions of our
management, members of our board of directors or controlling
shareholder than they would as shareholders of a
U.S. corporation.
Any dividends paid on our common shares will be in the Won
    and fluctuations in the exchange rate between the Won and the
    U.S. dollar may affect the amount received by you.
If and when we declare cash dividends, the dividends will be
paid to the depositary for the ADSs in Won and then converted by
the depositary into U.S. dollars in connection with the
deposit agreement. Fluctuations in the exchange rate between the
Won and the U.S. dollar will affect, among other things,
the U.S. dollar amounts you will receive from the
depositary as dividends. Holders of ADSs may not receive
dividends if the depositary does not believe it is reasonable or
practicable to do so. In addition, the depositary may collect
certain fees and expenses, at the sole discretion of the
depositary, by billing the holders of ADSs for such charges or
by deducting such charges from one or more cash dividends or
other cash distributions from us to be distributed to the
holders of ADSs.
Your ability to deposit or withdraw common shares
    underlying the ADSs into and from the depositary facility may be
    limited, which may adversely affect the value of your
    investment.
Under the terms of our deposit agreement, holders of our common
shares may deposit such shares with the depositary's
custodian in Korea and obtain ADSs, and holders of our ADSs may
surrender the ADSs to the depositary and receive our common
shares. However, to the extent that a deposit of common shares
exceeds the difference between:
•
the aggregate number of common shares we have consented to be
    deposited for the issuance of ADSs (including deposits in
    connection with offerings of ADSs and stock dividends or other
    distributions relating to ADSs); and
•
the number of common shares on deposit with the custodian for
    the benefit of the depositary at the time of such proposed
    deposit;
such common shares will not be accepted for deposit unless
(i) our consent with respect to such deposit has been
obtained or (ii) such consent is no longer required under
Korean laws and regulations or under the terms of the deposit
agreement.
Under the terms of the deposit agreement, no consent is required
if the common shares are obtained through a dividend, free
distribution, rights offering or reclassification of such
shares. Under the terms of the
23
Table of Contents
deposit agreement, we have consented to any deposit to the
extent that, after the deposit, the aggregate number of
deposited common shares does not exceed 3,552,229 common shares
or any greater number of common shares we determine from time to
time (i.e., as a result of a subsequent offering, stock dividend
or rights offer), unless the deposit is prohibited by applicable
laws or violates our articles of incorporation; provided,
however, that in the case of any subsequent offer by us or our
affiliates, the limit on the number of common shares on deposit
shall not apply to such offer and the number of common shares
issued, delivered or sold pursuant to the offer (including
common shares in the form of ADSs) shall be eligible for deposit
under the deposit agreement, except to the extent such deposit
is prohibited by applicable laws or violates our articles of
incorporation, or, in the case of any subsequent offer by us or
our affiliates, we determine with the depositary to limit the
number of common shares so offered that would be eligible for
deposit under the deposit agreement in order to maintain
liquidity of the shares in Korea as may be requested by the
relevant Korean authorities. We might not consent to the deposit
of any additional common shares. As a result, if a holder
surrenders ADSs and withdraws common shares, it may not be able
to deposit the common shares again to obtain ADSs.
You may not be able to exercise preemptive rights or
    participate in rights offerings and may experience dilution of
    your holdings.
The Korean Commercial Code and our articles of incorporation
require us to offer shareholders the right to subscribe for new
common shares in proportion to their existing ownership
percentages whenever new common shares are issued, except under
certain circumstances as provided in our articles of
incorporation. See Item 10.B. "Articles of
Incorporation — Preemptive rights and issuance of
additional shares."
Such exceptions include offering of new shares:
•
through a general public offering;
•
to the members of the employee stock ownership association;
•
upon exercise of a stock option;
•
in the form of depositary receipts;
•
to induce foreign direct investment necessary for business in
    accordance with the Foreign Investment Promotion Act of Korea;
•
for the purpose of raising funds on an emergency basis;
•
as necessary for the inducement of technology, to certain
    companies under an alliance arrangement with us; or
•
by a public offering or subscribed for by the underwriters for
    the purpose of listing on the Korean public stock markets.
Accordingly, if we issue new shares to non-shareholders based on
such exception, a holder of our ADSs will be diluted. If none of
the above exemptions is available under Korean law, we may be
required to grant subscription rights when issuing additional
common shares. However, under U.S. law, we would not be
able to make those rights available in the United States unless
we register the securities to which the rights relate or an
exemption from the registration requirements of the
U.S. Securities Act is available. Under the deposit
agreement governing the ADSs, if we offer rights to subscribe
for additional common shares, the depositary under the deposit
agreement, after consultation with us, may make such rights
available to you or dispose of such rights on behalf of you and
make the net proceeds available to you or, if the depositary is
unable to take such actions, it may allow the rights to lapse
with no consideration to be received by you. The depositary is
generally not required to make available any rights under any
circumstances. We are under no obligation to file a registration
statement under the Securities Act to enable you to exercise
preemptive rights in respect of the common shares underlying the
ADSs, and we cannot assure you that any registration statement
would be filed or that an exemption from the registration
requirement under the Securities Act would be available.
24
Table of Contents
Accordingly, you may not be entitled to exercise preemptive
rights and may thereby suffer dilution of your interests in us.
You will not be treated as our shareholder and you will
    not have shareholder rights such as the voting rights of a
    holder of common shares.
As an ADS holder, we will not treat you as one of our
shareholders and you will not have the rights of a shareholder.
Korean law governs shareholder rights. The depositary will be
the shareholder of the common shares underlying your ADSs. As a
holder of ADSs, you will have ADS holder rights. A deposit
agreement among us, the depositary and you, as an ADS holder,
sets out ADS holder rights as well as the rights and obligations
of the depositary. New York law governs the deposit agreement
and the ADSs. Upon receipt of the necessary voting materials,
you may instruct the depositary to vote the number of shares
your ADSs represent. The depositary will notify you of
shareholders' meetings and arrange to deliver our voting
materials to you only when we deliver them to the depositary
with sufficient time under the terms of the deposit agreement.
If there is a delay, we cannot ensure that you will receive
voting materials or otherwise learn of an upcoming
shareholders' meeting in time to ensure that you may
instruct the depositary to vote your shares. In addition, the
depositary and its agents are not responsible for failing to
carry out voting instructions or for the manner of carrying out
voting instructions.
You would not be able to exercise dissent and appraisal
    rights unless you have withdrawn the underlying common shares
    from the depositary facility and become our direct
    shareholders.
In some limited circumstances, including the transfer of the
whole or any significant part of our business, our acquisition
of a part of the business of any other company having a material
effect on our business, our merger or consolidation with another
company, dissenting shareholders have the right to require us to
purchase their shares under Korean law. However, if you hold our
ADSs, you will not be able to exercise such dissent and
appraisal rights unless you have withdrawn the underlying common
shares from the depositary facility and become our direct
shareholder prior to the record date for the shareholders'
meeting at which the relevant transaction is to be approved.
We may amend the deposit agreement and the ADRs without
    your consent for any reason and, if you disagree, your option
    will be limited to selling the ADSs or withdrawing the
    underlying securities.
We may agree with the depositary to amend the deposit agreement
and the American depositary receipts, or ADRs, without your
consent for any reason. If an amendment adds or increases fees
or charges, except for taxes and other governmental charges or
expenses of the depositary, for registration fees, facsimile
costs, delivery charges or similar items, or prejudices a
substantial right of ADS holders, it will not become effective
for outstanding ADRs until 30 days after the depositary
notifies ADS holders of the amendment. At the time an amendment
becomes effective, you are considered, by continuing to hold
your ADSs, to agree to the amendment and to be bound by the ADRs
and the deposit agreement as amended. If you do not agree with
an amendment to the deposit agreement or the ADRs, your option
is limited to selling the ADSs or withdrawing the underlying
securities. No assurance can be given that the sale of ADSs
would be made at a price satisfactory to you in such
circumstances. In addition, as of the date hereof, the common
shares underlying the ADSs are not listed on any stock exchange
in Korea. Your ability to sell the underlying common shares
following withdrawal and the liquidity of the common shares may
be limited.
You may be subject to Korean withholding tax.
Under Korean tax law, if you are a U.S. investor, you may
be subject to Korean withholding taxes on capital gains and
dividends in respect of the ADSs unless an exemption or a
reduction under the income tax treaty between the United States
and Korea is available. Under the United States-Korea tax
treaty, capital gains realized by holders that are residents of
the United States eligible for treaty benefits will not be
subject to Korean taxation upon the disposition of the ADSs.
However, under the United States-Korea income tax treaty, the
following holders are not eligible for such tax treaty benefits:
(i) in case the holder is a United States corporation, if
by reason of any special measures, the tax imposed on such
holder by the United States
25
Table of Contents
with respect to such capital gains is substantially less than
the tax generally imposed by the United States on corporate
profits, and 25% or more of the holder's capital is held of
record or is otherwise determined, after consultation between
competent authorities of the United States and Korea, to be
owned directly or indirectly by one or more persons who are not
individual residents of the United States and (ii) in case
the holder is an individual, if such holder maintains a fixed
base in Korea for a period or periods aggregating 183 days
or more during the taxable year and the holder's ADSs or
common shares giving rise to capital gains are effectively
connected with such fixed base or such holder is present in
Korea for a period or periods of 183 days or more during
the taxable year.
You may have difficulty bringing an original action or
    enforcing any judgment obtained outside Korea against us, our
    directors and officers or other offering participants, such as
    underwriters or experts, who are not U.S. persons.
We are organized under the law of Korea, and all of our
directors and officers reside in Korea. All or a significant
portion of our assets and the assets of such persons are located
outside of the United States. As a result, it may not be
possible for you to effect service of process within the United
States upon these persons or to enforce against them or us court
judgments obtained in the United States that are predicated upon
the civil liability provisions of the federal securities laws of
the United States or of the securities laws of any state of the
United States. We have, however, irrevocably appointed an agent
in New York to receive service of process in any proceedings in
the State of New York relating to our ADSs. Notwithstanding the
foregoing, there is doubt as to the enforceability in Korea,
either in original actions or in actions for enforcement of
judgments of United States courts, of civil liabilities
predicated on the federal securities laws of the United States
or the securities laws of any state of the United States.
ITEM 4.
INFORMATION ON THE COMPANY
4.A.
History and Development of the Company
History and Development of the Company
We were incorporated as a company with limited liability under
Korean law on April 4, 2000 under the legal name of GRAVITY
Co., Ltd. In August 2002, we commercially launched Ragnarok
Online, our first online game, in Korea. In March 2003, we
established GRAVITY Interactive, LLC, our wholly-owned
subsidiary in the United States. The name of GRAVITY
Interactive, LLC was changed on January 1, 2006 to GRAVITY
Interactive, Inc. In January 2004, we acquired 50% of the voting
shares of GRAVITY Entertainment Corporation, formerly RO
Production Co., Ltd., our subsidiary in Japan. In October 2004,
we obtained from GungHo Online Entertainment Inc., then the
other 50% shareholder of RO Production, their ownership interest
in RO Production, which made GRAVITY Entertainment our
wholly-owned subsidiary. RO Production changed its corporate
name to GRAVITY Entertainment Corporation on February 5,
2005. In April and May 2005, we acquired an aggregate of 88.15%
equity interest in TriggerSoft Corporation, which develops our
R.O.S.E. Online game. In November and December 2005, we acquired
an aggregate of 96.11% of the total shares of NEOCYON, Inc.,
which provides mobile multimedia and online game distribution
services in Korea and Russia.
Capital Expenditures
For the year ended December 31, 2003, 2004 and 2005, we
expended Won 4,749 million, Won 12,324 million and Won
8,459 million (US$8,375 thousand) for capital expenditures
(including capitalized interest) in connection with purchase of
property and equipment.
4.B.     Business Overview
Overview
We are a leading developer and distributor of online games in
Japan, Taiwan and Thailand based on the number of peak
concurrent users. We are based in Korea and our principal
product, Ragnarok Online, is
26
Table of Contents
currently commercially offered in 21 markets, including Korea.
We also offer a number of mobile games and license the
merchandizing of character-related products based on our online
games. We intend to diversify our online game offering by
developing online games internally and publishing additional
online games developed by third parties. We have in the past
produced a televised animation series and intend to create other
animation products for international distribution in the future.
Other than Korea, the United States, Canada and Russia, in all
the countries in which Ragnarok Online is distributed, our
overseas licensees are responsible for the marketing, operation,
billing and customer service in their respective markets in
consultation with us. Our license agreements generally have a
term of two years. We rely, as a significant source of our
revenue, on the initial license fees and the ongoing royalties
from our overseas licensees. The ongoing royalties are based on
a percentage of revenues generated by our overseas licensees
from the subscription to Ragnarok Online in their respective
markets. In Korea, we directly manage game operations while in
the United States and Canada, our wholly-owned subsidiary,
GRAVITY Interactive, Inc., is responsible for all aspects of the
operation in such countries. In Russia, Mados, Inc., a
subsidiary of Cybermedia International Inc., a wholly-owned
subsidiary of NEOCYON, Inc., manages our game operations.
The table below provides for the periods indicated, the peak
concurrent users and average concurrent users of Ragnarok Online
since August 1, 2002, in each of our principal markets.
3Q 02
4Q 02
1Q 03
2Q 03
3Q 03
4Q 03
1Q 04
2Q 04
3Q 04
4Q 04
1Q 05
2Q 05
3Q 05
4Q 05
1Q 06
Taiwan
PCU(1)
73,274
112,823
158,695
184,436
206,904
250,030
342,228
339,843
352,592
325,351
344,534
326,848
213,006
134,869
132,539
& Hong Kong
ACU(2)
31,338
53,134
79,410
83,762
91,620
168,913
220,448
176,976
193,132
241,170
283,553
231,980
146,467
104,702
107,141
Thailand
PCU
—
40,807
65,100
60,600
66,700
72,200
82,385
86,133
107,798
130,148
116,672
111,959
102,716
75,373
69,997
ACU
—
25,451
22,519
37,025
36,048
31,757
43,609
56,465
64,935
81,312
88,475
74,087
71,097
57,948
52,404
Japan
PCU
—
56,033
58,785
75,582
75,026
83,880
89,111
101,983
100,503
104,559
106,195
96,119
93,954
95,706
73,751
ACU
—
33,875
34,076
32,146
40,634
47,086
50,306
50,132
50,699
56,091
59,345
50,253
52,213
49,647
36,362
China
PCU
—
—
—
112,844
125,183
118,257
147,059
116,208
100,002
78,302
76,993
64,970
58,253
35,336
28,248
ACU
—
—
—
73,100
87,577
81,725
97,547
81,240
78,509
63,767
62,006
46,840
41,756
23,734
21,909
Korea
PCU
24,966
31,294
28,598
29,103
33,491
27,931
30,059
22,051
26,508
21,459
22,403
15,784
16,516
13,520
13,145
ACU
13,880
14,930
15,758
14,687
17,554
14,430
15,439
11,236
13,023
10,179
10,569
7,153
8,124
6,401
6,342
USA & Canada
PCU
—
—
—
—
9,000
7,484
9,456
11,230
12,965
10,011
9,190
8,997
8,219
7,433
8,088
ACU
—
—
—
—
—
5,641
6,995
8,477
8,919
7,108
6,457
5,378
5,426
4,922
5,222
Notes:
(1)
PCU, or peak concurrent users, represents the highest number of
    users of Ragnarok Online during the specified time period as
    recorded on the servers for the various countries.
(2)
ACU, or average concurrent users, represents the average number
    of concurrent users of Ragnarok Online during the specified time
    period as recorded on the servers for the various countries.
(3)
We believe that the number of users as measured by PCU or ACU
    (i) is reflective of our active user base and (ii) is
    co-related to revenues as revenues from an online game depend on
    the numbers of users as well as the time spend playing the game.
    However, PCU and ACU are not measures under K-GAAP or US GAAP
    and should not be construed as an alternative to operating
    income or another measure of performance determined in
    accordance with U.S. GAAP or K-GAAP. Other companies may
    determine PCU or ACU differently than we do.
27
Table of Contents
The following table sets forth a summary of our consolidated
statement of operations as a percentage of total revenues for
the periods indicated.
Year Ended December 31,
2003
2004
2005(1)
(Unaudited)
(In millions of Won and thousands of US$, except percentages)
Ragnarok Online and R.O.S.E. Online revenues:
Subscriptions:
Korea
W16,186
32.7
%
W12,725
19.7
%
W8,548
US$
8,464
16.0
%
United States(2)
2,374
4.8
3,528
5.5
2,701
2,674
5.1
Royalties and license fees:
Japan
11,383
23.0
17,009
26.4
15,447
15,294
28.9
Taiwan
11,863
24.0
14,350
22.3
9,770
9,674
18.3
Thailand
3,459
7.0
5,335
8.3
4,817
4,769
9.0
Others
3,022
6.0
8,407
13.0
7,341
7,268
13.8
Sub-total
29,727
60.0
45,101
70.0
37,375
37,005
70.0
Mobile games
43
0.1
376
0.6
1,664
1,648
3.1
Character merchandising and other revenue
1,185
2.4
2,696
4.2
3,096
3,065
5.8
Total revenues
W49,515
100.0
%
W64,426
100.0
%
W53,384
US$
52,856
100.0
%
Notes:
(1)
For convenience, the Won amounts are expressed in
    U.S. dollars at the rate of Won 1,010.0 to US$1.00.
(2)
Includes subscription revenues from Canada.
Strategy
Our key strategic objective is to strengthen our competitive
position and to be a leading developer and publisher of online
games with a broad product offering and presence in multiple
markets. Our business strategy consists principally of the
following elements:
Maintain and strengthen our competitive position in online
    games
We aim to maintain and strengthen the competitive position of
our online games by continuing to upgrade game content and
quality to satisfy user expectations. We, along with our
overseas licensees, will continue to conduct marketing campaigns
and online in-game events to increase the loyalty and playing
time of our existing user and attract new users. We also plan to
expand our game community by developing attractive community
features and tools to enhance user interaction and loyalty. For
instance, we plan to further update and enhance the content of
our principal product, Ragnarok Online, generally on a quarterly
basis. In addition, we plan to continue to provide dedicated
customer service and technical support to provide our users with
a stable game playing environment. Moreover, we decided to
invest Japanese Yen 1 billion in "Online Game
Revolution Fund No. 1," an investment fund
organized in Japan, pursuant to the approval of our board of
directors' meeting held in November 29, 2005.
"Online Game Revolution Fund No. 1," with a
total proposed investment size of Japanese Yen 10 billion,
has an investment objective of investing in companies which
develop online games in Japan. Furthermore, we are contemplating
a future investment in another fund, which will invest
approximately Won 100 billion in developers of games and
game related technology companies in Korea and elsewhere. We
intend to continue to utilize some of our available cash to
invest indirectly in companies with excellent technical
competence and capability to commercially offer their products.
For example, in May 2006, we entered into a contract to invest
approximately US$9 million in Perpetual Entertainment,
Inc., an online game developer based in the United States. We
believe that we will be able to participate in the management of
Perpetual Entertainment by appointing one member to Perpetual
28
Table of Contents
Entertainment's board of directors. We further believe that
this investment will provide us with access to game content,
game engine and also the platform of Perpetual Entertainment,
which gives us priority negotiation rights for future access to
contents and other intellectual property rights of Perpetual
Entertainment.
Continue to focus on international expansion
We plan to continue the expansion and penetration of our
products in new overseas markets. We are currently conducting
open beta testing of Ragnarok Online in Russia, Vietnam, Spain
and 25 Latin American countries. We plan to maintain our
existing relationships with online game operators in overseas
markets and take advantage of our relationships to distribute
other products and/or obtain more favorable contractual terms.
We also intend to focus on the operations of our overseas
subsidiaries in the United States and Russia to enhance our
presence in these markets. We believe that further geographic
diversification will contribute to the growth and stabilization
of our revenue streams. As we evaluate our license agreements in
these markets, we may selectively choose to operate directly in
certain markets through our subsidiaries.
Enhance development of proprietary games and publication
    of licensed games
We intend to offer a broader and more sophisticated game
offering by developing and procuring additional games. We will
continue to devote significant resources to the in-house
development of our own games by hiring new talented development
staff to augment our game development capabilities and to make
additional investments in new technologies. We are currently
developing Ragnarok Online II and Requiem and expect to
commence open beta testing of Ragnarok Online II by the end
of 2006 and Requiem by the first half of 2007, respectively.
Moreover, we will continue to focus on publishing online games
licensed from third party developers by taking advantage of our
game distribution capability. For example, in June 2005, we
entered into an agreement with Sonnori Co., Ltd, a third-party
game developer, to publish, market and offer a casual game
portal, STYLIA. Under this agreement, we have the right to
publish games on STYLIA for five years, which right encompasses
publishing in markets both in and outside of Korea. In November
2005, we also concluded a contract with Ndoors Corp. for the
worldwide publishing right of Time N Tales, an online game. In
addition, in December 2005, we entered into a contract with
GungHo Online Entertainment Inc. for the rights to publish Emil
Chronicle Online worldwide (except Japan).
Taking advantage of our current products for revenue
    diversification and growth
In order to continually diversify our revenue base, we intend to
take advantage of our current products to expand into related
businesses, including mobile games, animation and game
character-based merchandise businesses. We offer mobile games in
Korea, Japan, Taiwan, the Philippines, Thailand, Singapore,
Malaysia, Indonesia and the United States, based on game content
that is derived from Ragnarok Online. We generated revenue of
Won 1,664 million (US$1,648 thousand) from mobile games in
2005.
Our products
We currently have four product lines: online games including
massively multiplayer online role playing games as well as
casual games, mobile games animation and character-based
merchandise. Revenues from our principal product, Ragnarok
Online, accounted for 95.2% of our revenue in 2004 and 88.3% of
our revenue in 2005. We are seeking to diversify our revenue
sources by offering additional massively multiplayer online role
playing games and other products and services, including mobile
games.
Massively multiplayer online role playing games
Until recently, we commercially offered one massively
multiplayer online role playing game, Ragnarok Online. In
January 2005, we commercially launched another massively
multiplayer online role playing game, R.O.S.E. Online. In
addition, we are currently in the process of developing two
additional massively multiplayer online role playing games,
Requiem and Ragnarok Online II.
29
Table of Contents
The following table summarizes the massively multiplayer online
role playing games that we are either currently offering or in
the process of developing, as well as publishing games licensed
from third parties we are planning to offer in the near future.
Date of Commercial
Game Title
Description
Game source
Launch/Testing(2)
Ragnarok Online
Action adventure with 99 levels of skill upgrades, which
    features two- dimensional characters in three-dimensional
    backgrounds(1)
Developed in-house
Launched in August 2002
Ragnarok Online II
Three-dimensional sequel to Ragnarok Online
Developed in-house
Currently in development with open beta testing planned by the
    end of 2006
Requiem
Three-dimensional action adventure
Developed in-house
Currently in development with open beta testing with
    commercialization planned in the first half of 2007
R.O.S.E. Online
Three-dimensional action adventure with seven independent
    storylines
Licensed from third party developer
Launched in January 2005
Time N Tales
Two-dimensional real- time tactical game
Licensed from third party developer
Commercial launch scheduled in the third quarter of 2006
Emil Chronicle Online
Three-dimensional action adventure
Licensed from third party developer
To be determined
Notes:
(1)
A game with such features is generally referred to as a 2.5
    dimensional game.
(2)
The actual date of commercial launch of games are dependent on a
    variety of factors, including technical viability and
    durability, availability of in-house development capability,
    market conditions, beta testing results and availability of
    licensing partners in various jurisdictions, among others.
Massively multiplayer online role playing games currently
    offered
Ragnarok Online
Ragnarok Online represented 88.3% of our total revenues or Won
47,152 million (US$46,685 thousand) in 2005, compared with
95.2% of our total revenues or Won 61,354 million in 2004.
Ragnarok Online is offered commercially in 21 markets as of
June 26, 2006.
In developing Ragnarok Online, we obtained an exclusive license
from Mr. Myoung-Jin Lee to use the storyline and characters
from his cartoon titled "Ragnarok" for the production
of online games, animation and character merchandising. We paid
Mr. Lee an initial license fee of Won 40 million and
are required to pay royalties based on a percentage of adjusted
revenues (net of value-added taxes and certain other expenses)
or net income generated from the use of the Ragnarok brand,
including the operation or licensing of Ragnarok Online through
January 2033.
Ragnarok Online is an action adventure-based massively
multiplayer online role playing game that combines cartoon-like
characters, community-oriented themes and combat features in a
virtual world within which thousands of players can interact
with one another. Unlike games offered by many of our
competitors, Ragnarok Online features cute, fantasy-based
characters and is not centered on sexual or violent content.
30
Table of Contents
Furthermore, we believe that the highly interactive and
community-oriented nature of Ragnarok Online, such as marriages
and organization of guilds, are important to users who
appreciate social interaction in a virtual setting.
Other key features of Ragnarok Online include the following:
•
players may assume an ongoing role, or alter-ego, of a
    particular game character, each with different strengths and
    weaknesses. In Ragnarok Online, the user starts as a
    "novice" and undergoes training in a specialized
    mapped game zone to become familiar with the game features. Once
    that stage is completed, the user can choose from six basic
    characters, each with a distinct combination of different traits;
•
as each game character advances in challenge levels, the
    character can enter into a greater range of mapped game zones
    and morph into a more sophisticated game character in terms of
    game attributes and special powers;
•
Ragnarok Online characters may visually express the users'
    mood and emotions by using emotive icons that appear within a
    bubble above the characters' heads. We believe that this
    feature significantly expands the interface for user interaction
    and elevates the level of social reality of the game;
•
game features may be traded or sold within the game, and game
    characters may simulate real-life experiences such as marriage,
    group fights and joining a guild. In addition, players may
    communicate with each other through in-game chatting or instant
    messaging;
•
special events are held from time to time to stimulate community
    formations. For example, we periodically host "fortress
    raids" for which players are encouraged to organize
    themselves into a team to compete against other teams to capture
    a fortress within a set time; and
•
the game has no preordained ending and is designed to
    continuously evolve in terms of plots, mapped game zones and
    character attributes through enhancements from time to time.
We believe that the personal computer, or PC, configurations
required to run Ragnarok Online are lower than or on par with
many other competing massively multiplayer online role playing
games, which we believe has facilitated our successful entry
into and continued expansion of Ragnarok Online in many of the
developing countries in which Ragnarok Online is distributed. As
we were developing and preparing to launch Ragnarok Online in
Korea and overseas markets, we carefully balanced perceived
demand for sophisticated three-dimensional graphics with
prevailing computer processing and graphics capabilities in such
markets. Based on these considerations, we opted to launch
Ragnarok Online based on a combination of two-dimensional
characters with a three-dimensional background, which would
require lower PC configurations than three-dimensional massively
multiplayer online role playing games. The recommended minimum
PC configuration for Ragnarok Online is Pentium III
1.6 GHz, 256 MB RAM and 32 MB graphic card.
Ragnarok Online can be accessed through a
dial-up
modem as well
as broadband Internet.
R.O.S.E. Online
R.O.S.E. Online, which was commercially launched in January
2005, represented 2.8% of our total revenues or Won
1,472 million (US$1,458 thousand) in 2005.
We commenced open beta testing of our second massively
multiplayer online role playing game, R.O.S.E. Online, in
September 2004 and commercially launched R.O.S.E. Online in
January 2005. R.O.S.E. Online, a three-dimensional game, is the
first online game developed by a third party that we published
pursuant to an exclusive publishing license agreement. R.O.S.E.
Online was developed by TriggerSoft Corporation, a Korean game
developer with nearly ten years of experience in PC game
development, in close coordination with our in-house game
development team. The term of our exclusive publishing license
under this agreement is for a five year period beginning in
October 2003. Under this agreement, we have a right to
sublicense R.O.S.E. Online to third parties, including our
overseas licensees. In addition, we have a right to participate
in the development or licensing of the games which will be
developed by TriggerSoft. Of the seven episodes to be introduced
for R.O.S.E. Online, three episodes are currently available and
the remaining four
31
Table of Contents
episodes are expected to be added over time. In May 2005, we
acquired control of TriggerSoft, which we believe will enhance
our ability to update and improve R.O.S.E. Online more
effectively and on a more timely basis. In January and February
2005, we entered into arrangements with three licensees to
distribute R.O.S.E. Online in Japan, Taiwan, Hong Kong, Macao
and the Philippines. We have been offering R.O.S.E. Online
commercially in Korea, Japan, the Philippines and the United
States and Canada since 2005. In Europe, we had licensed the
distribution of R.O.S.E. Online in 17 European countries with
Gamesrouter Ltd., , but have since ceased offering commercial
service in Europe beginning in January 2006 Gamesrouter is
currently in bankruptcy proceedings. We are pursuing various
other options in Europe and expect to find an alternative
licensee or directly market the game in Europe.
Time N Tales
We commenced open beta service of Time N Tales in March 2006
under a publishing agreement entered into with Ndoors Corp., a
Korean online game developer, in November 2005. We plan to
commercially launch Time N Tales in the third quarter of 2006.
Time N Tales allows users to vary game settings, in particular,
the country or the time period for the particular episode to be
played according to their preferences. Moreover, Time N Tales
allows game users to select one game character for each episode,
as well as to supplement their game character with up to five
additional game characters that are hired as mercenaries upon
payment of game credit.
Expected future release of massively multiplayer online
    role playing games
Ragnarok Online II
We are currently developing Ragnarok Online II as a sequel
to Ragnarok Online. We plan to commence open beta testing by the
end of 2006. We expect that this game will offer substantially
the same gaming experience as Ragnarok Online with respect to
storyline and other central features of the game, but in a more
dynamic three-dimensional format. We currently have 31
designers, 9 programmers and 14 game planners dedicated to the
development of Ragnarok Online II.
Requiem
We are currently developing Requiem and plan to commence its
open beta testing in the first half of 2007. Unlike Ragnarok
Online, which we believe did not emphasize violent themes, we
are designing Requiem to prominently feature
user-to
-user combat. In
addition, we are using advanced game development engines for
enhanced graphics and to capture the game's speedy and
streamlined action movements. We currently have 38 designers, 10
programmers and 7 game planners dedicated to the development of
Requiem.
Emil Chronicle Online
We are currently preparing to test the Korean language version
of Emil Chronicle Online. This game was developed by GungHo
Online Entertainment Inc., the publisher of Ragnarok Online in
Japan. Emil Chronicle Online has been commercially offered for
service in Japan since 2005. We entered into a software
licensing agreement for the right to publish Emil Chronicle
Online worldwide (except Japan), together with a software
purchase agreement in respect of the game, with GungHo Online
Entertainment, in December 2005.
Casual games currently offered
STYLIA
We commenced the open beta testing of STYLIA, a casual online
game portal site, with Love Forty, an online tennis game,
followed by TVBoyz, a three-dimensional action game, in May and
June 2006, respectively. We commenced commercial service of
STYLIA in June 2006. STYLIA was developed by Sonnori Co., Ltd.
We entered into a publishing contract with Sonnori Co., Ltd. in
June 2005. We plan to launch one new game every month, for a
total of seven titles during 2006. In addition, we have been
contacting
32
Table of Contents
various developers to publish diverse games through STYLIA and
we have entered into arrangements with four online game
developers to publish their games through STYLIA as of
June 1, 2006.
Expected future release of casual games
Pucca Online
We plan to commence open beta service of a casual bike racing
game, which we have tentatively named Pucca Online, in the
second quarter of 2007 after three closed beta test runs from
December 2006 to February 2007, with a target user base
comprising female online game users aged from late teens to
early twenties. Pucca is a character originally designed by Vooz
Co., Ltd., a character development and licensing company in
Korea. We entered into the contract of co-development with Vooz
and worldwide publishing of an online game incorporating and
using the Pucca character in July 2005. The development team of
Pucca Online consists of the developers of Gravity, who are
responsible for game planning and programming, and the designers
from Vooz, in charge of the storyline and graphic design. Pucca
Online is expected to offer game users with the experience of
driving motorcycles in well-known tourist destinations such as
the Great Wall in China, Paris and the Alps, among other locales.
Mobile games currently offered
As compared to massively multiplayer online role playing games,
mobile games, which are played using mobile phones and other
mobile devices, have shorter game playtime and less complex
user-game interaction. We believe that mobile games, due to such
characteristics, provide less-experienced users with a means to
become familiar with both game playing and the online game
culture without making substantial commitment in terms of time
and resources. As a result, we believe that mobile games will
allow us to target a broader audience of users, help us expand
the online game culture beyond Internet cafés and
users' homes and act as effective marketing tools to
attract new users to our massively multiplayer online role
playing games.
Our game-related products and services
Animation
GRAVITY Entertainment, our Japanese subsidiary, entered into an
agreement with G&G Entertainment Inc. and three other
Japanese media and entertainment companies for the production
and distribution of 26 half-hour episode animation series based
on the storyline and characters of our online game Ragnarok
Online licensed from us. The series was broadcast on television
in Korea, Japan, the Philippines, Indonesia, Taiwan, Hong Kong
and Malaysia. The series has also been exported to China,
Taiwan, Hong Kong, Thailand, Malaysia, Singapore and Brazil. We
intend to expand the distribution of Ragnarok animation to other
countries in North and South America, Europe and elsewhere in
which Ragnarok Online is in service and create other animation
products for international distribution. In addition to the
potential revenue generated from the sale of broadcasting
rights, videos, DVDs and Internet viewing, we believe that our
animation products will enhance the brand recognition of
Ragnarok Online and facilitate cross-selling of other products.
Our revenues from our animation business was Won
614 million (US$608 thousand) in 2005.
Game character merchandising
In order to take advantage of the commercial opportunities
presented by the popularity generated by our games and game
characters, we and our licensees have been marketing dolls,
fancy items and other character-based merchandise, as well as
game manuals, monthly magazines and other publications, based on
Ragnarok Online characters. We market the merchandise mostly
through convenience stores where, in China and many Southeast
Asian countries, prepaid game cards for our games are sold.
We have entered into arrangements with seven Korean vendors and
five overseas vendors to license Ragnarok's animation
characters in Japan, Taiwan, Hong Kong, China, Thailand, the
Philippines, Indonesia, Singapore, Malaysia and Brazil. In 2005,
the total amount of licensing fees from our contracts with
Korean vendors was approximately Won 204 million (US$202
thousand) and the total amount of licensing fees from
33
Table of Contents
our contracts with overseas vendors was approximately Won
1,648 million (US$1,632 thousand). We intend to expand our
character marketing to other countries in Asia, North and South
America and Europe.
Our markets
In 2004, revenues generated from Korea accounted for 21.0% of
our total revenues while 79.0% of our revenues were generated
from our overseas markets. In 2005, approximately 18.9% of our
revenues were generated in Korea, while 81.1% of our revenues
were generated from our overseas markets.
Korea
In Korea, we commercially launched Ragnarok Online and began to
charge subscribers in August 2002. Ragnarok Online subscribers
in Korea consist of individual PC account subscribers and
Internet café subscribers. Individual PC account
subscribers are individuals who log on to our game servers from
places other than Internet cafés, such as from home or
work, whereas Internet café subscribers are commercial
businesses operating Internet café outlets equipped with
multiple PCs that provide broadband Internet access to their
customers who typically prefer to play the most
up-to
-date versions of
online games. Most Internet cafés charge their customers PC
usage and Internet access fees that generally range from Won 500
to Won 1,500 per hour and subscribe to various online
games. As of December 31, 2005, over 8,000 Internet
cafés offered Ragnarok Online in Korea. In order to offer
Ragnarok Online, an Internet café typically purchases from
us minimum game hours. In 2005, the subscription collected from
Internet cafés accounted for 12.9% of our subscription
revenues in Korea.
Overseas markets
Ragnarok Online is currently offered in 20 overseas markets:
Taiwan, Hong Kong, Japan, China, United States, Canada,
Singapore, Malaysia, Thailand, the Philippines, Indonesia,
Germany, Austria, Switzerland, Italy, Turkey, Australia, New
Zealand, Brazil and India. We are currently conducting open beta
testing for Ragnarok Online in Russia, Spain, Vietnam and the
following 25 countries: Mexico, Guatemala, El Salvador,
Nicaragua, Panama, Honduras, Belize, Cuba, Jamaica, Haiti, the
Dominican Republic, Costa Rica, Puerto Rico, Ecuador, Colombia,
Peru, Venezuela, Guyana, Surinam, French Guiana, Chile, Bolivia,
Paraguay, Argentina and Uruguay. In addition, we currently plan
to conduct closed beta testing of Ragnarok Online in the
following 12 countries: United Arab Emirates, Saudi Arabia,
Kuwait, Qatar, Bahrain, Oman, Yemen, Iraq, Egypt, Israel,
Lebanon and Jordan. In February 2006, we revised the licensing
agreement with the distributor for in the Middle East to exclude
Iran and Syria, as these two countries have been identified by
the U.S. State Department as state sponsors of terrorism
and are subject to economic sanctions administered by the
U.S. Treasury Department's Office of Foreign Assets
Control. In most of our overseas markets, Ragnarok Online is
distributed through local game operators and distributors.
34
Table of Contents
The following table lists the countries in which Ragnarok Online
is commercially offered, names or our licensees, where
applicable, the dates of license agreements, commercial launch
and expiry of the license agreements.
Date of
Date of
License
Commercial
Country
Licensee
Agreement
Launch
Date of Expiry
Japan
GungHo Online Entertainment Inc.
July 2002
December  2002
August 2006(1)
Taiwan/ Hong Kong(2)
Soft-World International
May 2002
October 2002
October 2006(3)
Thailand
Asiasoft International Company Ltd.
June 2002
March 2003
March 2007(4)
China
Shengqu Information Technology
August 2005
May 2003
July 2008
(Shanghai) Co., Ltd(5)
Singapore/Malaysia(2)
Value Central Corporation(6)
May 2003
April 2004
April 2006(7)
Philippines
Level Up! Inc.
March 2003
September  2003
August 2008(8)
Indonesia
PT. Lyto Datarindo Fortuna(9)
February 2003
November 2003
February 2007(10)
Europe(11)
Burda Holdings International GmbH
November 2003
April 2004
April 2006(12)
Australia/ New Zealand(2)
Ongamenet PTY LTD.
July 2004
December  2004
November 2006
Brazil
Level Up! Interactive S.A.
August 2004
February 2005
February 2007
India
Level Up! Network India Pvt. Ltd.
May 2004
March 2006
March 2008
Notes:
(1)
Renewed in September 2004.
(2)
Governed under a single license agreement covering both markets.
(3)
Renewed in October 2004.
(4)
Renewed in October 2004.
(5)
Shengqu is a wholly owned subsidiary of Shanda Interactive
    Entertainment Ltd., previously with different licensee.
(6)
Wholly-owned subsidiary of Soft-World International which offers
    and operates Ragnarok Online through Game Flier (Malaysia) Sdn.
    Bhd., another subsidiary of Soft-World International.
(7)
License Agreement with Value Central Corporation expired in
    April 2006. We are considering entering into a new license
    agreement with Game Flier (Malaysia) Sdn. Bhd. for a period
    through April 2008. Although we currently do not have a license
    agreement with Game Flier (Malaysia), Game Flier (Malaysia)
    services our game in Singapore/Malaysia and has been remitting
    royalty payments to us.
(8)
Renewed in March 2006.
(9)
Previously with a different licensee.
(10)
Renewed in October 2004.
(11)
Represents massively multiplayer online role playing game
    operations in Germany, Austria, Switzerland, Italy and Turkey. A
    single operator services these five countries under one license
    agreement.
(12)
License Agreement with Burda Holdings International GmbH expired
    in April 2006. We currently contemplate extending the term of
    the expired license agreement with Burda through April 2007.
    Although there is no license agreement in effect, Burda
    currently continues to service our game in Europe.
35
Table of Contents
Our licensees pay us:
•
an initial license fee for initial
set-up
costs, technical
    support and advisory services that we provide until commercial
    launch; and
•
ongoing royalty payments based on a percentage of revenues
    generated from Ragnarok Online subscription in the respective
    overseas markets.
In addition, if the license agreement is renewed, we typically
negotiate a renewal license fee. The license agreements may be
terminated in the event of bankruptcy or a material breach by
either party, including by us, the licensee fails to pay royalty
fees in a timely manner. To date, only our Australian licensee
has failed to pay our license fees when due.
Pricing
Our overseas licensees generally develop, after consultation
with us, a retail pricing structure for the Ragnarok Online
users in their respective markets. Pricing structures are
determined primarily based on the cost of publishing and
operating the game, the playing and payment patterns of the
users, the pricing of competing games in a given market and the
purchase power parity of consumers in that market. Since the
launch of Ragnarok Online in August 2002, we have tracked and
accumulated user data generated from our user base, which
provide us with an extensive database to analyze user patterns
and establish pricing for other markets. The pricing for
Ragnarok Online has remained generally stable in each of our
markets since the respective date of Ragnarok Online's
commercial launch in those markets.
Korea
We determine the pricing plan for Ragnarok Online in Korea. We
offer separate pricing plans to Internet cafés and
individual PC account subscribers. Our subscribers have an
option to pay an hourly fee or a flat monthly fee. The following
table sets forth our published pricing plans in Korea for
Ragnarok Online access as of December 31, 2005, although we
provide discounts based on the volume of business generated.
Subscription Fees
Individual PC users
Flat-fee rate
One month
W22,000
Two months
41,800
Three months
59,400
Hourly-fee rate
5 hours
3,300
20 hours
8,800
Flat Fee per
Number of PCs
PC
Internet cafés(1)
Monthly flat-fee
1-4 PCs
W33,000
5-10 PCs
31,350
11-20 PCs
30,250
21-30 PCs
29,700
over 30 PCs
28,700
Hourly-fee rate
300 hours
77,000
600 hours
154,000
1,000 hours
238,700
2,000 hours
455,400
Note:
(1)
Actual monthly and hourly-rate fees may vary depending on volume
    of use by the subscriber.
36
Table of Contents
Approximately 87.1% of our revenues from Ragnarok Online in
Korea in 2005 were derived from subscriptions by individual PC
users and the remaining 12.9% was derived from Internet
cafés.
Individual PC subscribers in Korea can choose from a number of
alternative payment options, including charges made through
mobile or fixed telephone service provider payment systems,
prepaid cards, gift certificates, online credit card payments
and bank transfers. We pay a commission in the range of 9% to
13% to third parties to process payments. These third parties
bear the delinquency risk associated with payments from
subscribers.
Overseas markets
The pricing for Ragnarok Online in our principal overseas
markets, Japan, Taiwan, China, Thailand and the United States,
is as follows:
Japan
Our licensee in Japan, GungHo Online Entertainment, offers only
one rate for Ragnarok Online and charges Japanese Yen
1,500 per 30 days of unlimited use. Users in Japan
typically pay for access to Ragnarok Online with credit cards or
cyber money, which is increasingly becoming a popular payment
method in Japan.
Taiwan
Our licensee in Taiwan, Soft-World International, typically does
not offer a separate subscription plan for Internet café
outlets. In Taiwan, most users purchase prepaid debit point
cards to access Ragnarok Online. The prepaid cards can be
purchased online, by mobile phones or at convenience stores,
Internet cafés and at other locations. Taiwan also has
websites dedicated to selling prepaid cards for various uses,
including online game payments. Our licensee in Taiwan currently
offers approximately 200 different rates for Ragnarok Online.
The following table sets forth our licensee's published
basic pricing for Ragnarok Online access in Taiwan as of
December 31, 2005:
Points(1) or Days
Retail Price(2)
150 points
NT$
142
450 points
450
30 days
350
Notes:
(1)
Each time a user logs onto Ragnarok Online, 20 points are
    deducted. After a user's playtime exceeds 12 hours,
    additional 20 points are deducted for every 12 hours of use.
(2)
As of December 31, 2005, the noon buying rate of NT dollars
    to U.S. dollars quoted by the Federal Reserve Bank of New
    York was NT$32.8 to US$1.00.
China
Our licensee in China, Shanda Interactive Entertainment Limited,
operates and offers Ragnarok Online through Shengqu Information
Technology (Shanghai) Co., Ltd, its wholly-owned subsidiary. In
China, Ragnarok Online can be accessed through prepaid cards.
The prepaid card system was introduced to take account of the
limited availability of online and credit card payment systems
in China. A majority of Ragnarok Online players purchase prepaid
debit point cards at Internet cafés or retail game outlets
or purchase prepaid online credits by directly paying at
Internet cafés, which in turn purchase online credits from
our China licensee. Each prepaid card contains a network access
password to access Ragnarok Online from a PC at home or at an
Internet café. Ragnarok Online access prices were set
significantly lower in China than in Korea to take into account
the prevailing pricing structure of other online games in the
Chinese market as well as relatively low consumer spending
levels. Our licensee in China currently offers approximately 200
different
37
Table of Contents
rates for Ragnarok Online. The following table sets forth our
licensee's published basic pricing for Ragnarok Online
access in China as of December 31, 2005:
Points(1) or Days
Retail Price(2)
150 points
RMB9
450 points
30
30 days
45
Notes:
(1)
Six points are deducted for every hour of use.
(2)
As of December 31, 2005, the noon buying rate of Renminbi
    to U.S. dollars quoted by the Federal Reserve Bank of New
    York was RMB 8.07 to US$1.00.
Thailand
Our licensee in Thailand, Asiasoft International, permits users
to access Ragnarok Online through prepaid cards. Each prepaid
card has a specified maximum number of hours or days of use.
Users can purchase prepaid cards from automated teller machines,
Internet cafés or convenience stores. The following table
sets forth our licensee's published basic pricing for
Ragnarok Online access in Thailand as of December 31, 2005:
Hours or Days
Retail Price(1)
10 hours
55
Baht
20 hours
89
40 hours
159
15 days
189
30 days
349
Note:
(1)
As of December 31, 2005, the noon buying rate of Baht to
    U.S. dollars quoted by the Federal Reserve Bank of New York
    was Baht 40.99 to US$1.00.
The United States
GRAVITY Interactive, Inc. (formerly known as GRAVITY
Interactive, LLC), our wholly-owned subsidiary in the United
States, permits users to access Ragnarok Online through credit
cards, money orders, and wire and/or bank transfers. The
following table sets forth our licensee's published basic
pricing for Ragnarok Online access in the United States as of
December 31, 2005:
Retail Price
Hours or Month
Money Order
Wire/Bank Transfer
Credit Card/Debit Card
30 hours
US$
9.99
US$
8.99
US$
7.99
1 month
13.99
12.99
12.00
3 months
35.98
33.99
32.00
6 months
63.48
59.99
57.00
Game development and publishing
We expect the online game industry to be characterized by
increasing demand for sophisticated games with higher graphics
resolution, better sound quality and more life-like animation.
In response, we intend to expand our game offerings by
continuing to develop additional games in-house and by
publishing new games developed by us or licensed or acquired
from third party developers.
38
Table of Contents
To prepare for the commercial launch of a new game, we conduct
"closed beta testing" for the game to eliminate
technical problems, which is followed by "open beta
testing" in which we allow registered users to play the
game free of charge. During these testing periods, users provide
us with feedback and our technical team seeks to address any
technical problems and programming flaws that may compromise a
stable and consistent game environment.
In-house game development
We developed Ragnarok Online in-house. In order to remain
competitive, we are focusing our in-house game development
efforts on enhancing the Ragnarok Online experience and on
developing new massively multiplayer online role playing games
incorporating the latest technologies. We currently have two
massively multiplayer online role playing games, Ragnarok
Online II and Requiem and several casual online games under
in-house development. Our game development department is divided
into four development teams, each responsible for the massively
multiplayer online role playing games in operation or under
development. We also have another development team dedicated to
developing mobile games. As of December 31, 2005, we
employed a total of 211 game developers.
Publishing
R.O.S.E. Online was developed by TriggerSoft Corporation, a
Korean game developer with more than ten years of game
developing experience, and is published by us pursuant to an
exclusive publishing license agreement with TriggerSoft. Under
this agreement, we paid TriggerSoft an initial license fee of
Won 700 million, and we are obligated to pay ongoing
royalties equal to 25% of domestic, and 50% of overseas,
adjusted revenues (net of value-added taxes and marketing and
certain other expenses) related to R.O.S.E. Online. In April and
May 2005, we acquired an aggregate of 88.15% of equity interest
in TriggerSoft, which we believe will enable us to obtain more
timely and effective updates to and improvements on R.O.S.E.
Online. In line with our product diversification strategy, we
intend to publish more games developed by third parties. For
details concerning new games to be offered by us in the future,
see "— Our Products."
Our publishing and licensing process includes the following:
•
Preliminary screening.
Our preliminary screening process
    for a game typically includes our preliminary review and testing
    of the game and discussions with the game developer regarding
    technological and operational questions.
•
In-depth examination, analysis and commercial
    negotiation.
Once a game passes the preliminary screening,
    we thoroughly review and test the game, conduct a cost analysis,
    develop operational and financial projections and formulate a
    preliminary game operating plan. We then begin commercial
    negotiations with the developer.
•
Game rating and regulatory registration and approval.
Once a license agreement for a game is signed, we submit an
    application to the Korea Media Rating Board to obtain a game
    rating. This process generally takes anywhere from seven days to
    three months. We also typically register our intellectual
    property rights with respect to our license agreements with the
    relevant Korean government agency. We or our licensees follow
    similar procedures in the respective markets where our games are
    commercially offered.
•
Testing and marketing.
Once the required registration and
    approvals are obtained, we conduct closed beta testing and open
    beta testing of the new game and assist the licensor with
    development of the game. Closed beta testing usually takes
    6-12 months for massively multiplayer online role playing
    games but may take significantly more time if material problems
    are detected. Open beta testing of massively multiplayer online
    role playing games usually takes three to six months before
    commercial launch. We generally commence our other marketing
    activities for the game during the open beta testing stage. For
    overseas markets, we also localize the language and content of
    our games to tailor to the local cultural preferences.
39
Table of Contents
Marketing
We employ a variety of traditional and online marketing programs
and promotional activities, including in-game events, in-game
marketing and offline events. Due to the close-knit nature of
the online game community, we believe that
word-of
-mouth is an
important medium for the promotion of our games.
In Korea, seven independent promotional agents currently promote
our online games to Internet cafés pursuant to agency
agreements. Under these agreements, each promotional agent is
granted non-exclusive promotion rights within a specified
geographical area. The agent is generally paid a monthly base
commission of 30% of revenues received from Internet cafés
in the allocated area.
We conduct a variety of marketing programs and online and
offline events to target potential subscribers accessing the
Internet from home. Our main marketing efforts include
advertising on website portals and in online game magazines,
conducting online promotional events, participating in trade
shows and entering into promotional alliances with Internet
service providers. We spent Won 4,233 million in 2003, Won
4,614 million in 2004 and Won 6,273 million (US$6,211
thousand) in 2005 on advertising and promotions.
We frequently organize in-game events, such as "fortress
raids" for our users, which we believe encourages the
development of virtual communities among our users and increases
user interest in our games. We also host from time to time
in-game tournaments in which users can compete against each
other either as a team or individually. In addition, we use
in-game events to introduce users to new features of our games.
We organized six in-game events for Ragnarok Online users in
2004, and 18 in-game events in 2005. In July 2004, we hosted in
Korea the Ragnarok World Championship, an offline competition
event, at which more than 200 users from 21 countries convened
to compete. The event was visited by approximately 100,000
visitors and was broadcast over one of Korea's cable
television channels. Other recent offline events in 2005 include
our hosting of 60 booths at G-Star 2005 in November 2005 in
Korea, where we had more than 45,000 visitors to our booths. We
also participated in the Tokyo Game Show 2005, which was held in
September 2005, where we introduced Ragnarok Online II to
the public for the first time.
In most of our overseas markets, marketing activities are
principally conducted by our overseas licensees and typically
consist of advertising on website game portals and online game
magazines and through television commercials, as well as hosting
online and offline promotional events. The licensees are
responsible for the costs associated with such advertising and
promotional activities. From time to time our licensees also
market our games through sponsoring promotional events jointly
with other local game publishers in order to reach a broader
local audience.
Our licensees are selected in part on the basis of their
marketing capabilities, including the size and scope of their
distribution networks. We believe that conducting marketing
through our licensees is more effective and cost-efficient than
direct marketing by us in light of the established brand
recognition and marketing networks of our licensees and their
comparative advantage in identifying and taking advantage of the
cultural and other local preferences of overseas users.
Game support and customer service
We are committed to providing superior customer service to our
users directly and through our licensees. As of
December 31, 2005, 69 employees were game masters, or
persons who are in charge of test, updates, server maintenance
for online games, as well as dealing with customer complaints,
72 employees were members of our domestic customer service team
and 66 employees were members of our overseas customer support
team. With the growth of our user base and the diversification
of our game offering and in order to better serve our users, we
expect to continue to expand the size of our customer service
team.
In Korea, we provide customer service for our massively
multiplayer online role playing games through in-game bulletin
boards, call centers, email and facsimile and at our walk-in
customer service center. Our in-game bulletin boards allow our
customers to post questions to, and receive responses from,
other users and our support staff. In our overseas markets, our
licensees administer customer service through varying
combinations of in-game bulletin boards, call centers, email and
facsimile, with assistance, from time to time, from our overseas
customer support staff.
40
Table of Contents
In addition to providing customer service to our users, our
customer service staff also collect user comments with respect
to Ragnarok Online and generate daily and weekly reports for our
management and operations that summarize important issues raised
by users as well as how such issues have been addressed.
Network and technology infrastructure
We have designed and assembled a game server network and
information management system in Korea to allow a centralized
game management on a global basis. Our system network is
designed to speedily accommodate a growing subscriber base and
demand for faster game performance. Our game server architecture
runs multiple servers on a parallel basis to readily accommodate
increased user traffic through deployment of connection to
servers, which permits us to route users in the same country to
servers with less user traffic. Each of these servers is linked
to our information systems network to ensure rapid
implementation of game upgrades and to facilitate game
monitoring and supervision.
We maintain our server hardware in a single climate-controlled
facility at Korea Internet Data Center in Seocho-dong,
Seocho-gu, Seoul, Korea and our other system hardware in our
offices in Seoul. As of December 31, 2005, our server
network for our game operations in Korea consisted of a total of
451 servers.
In overseas markets, our overseas licensees own or lease the
servers necessary to establish the server network for the online
games and we assist our overseas licensees with initial assembly
and installation of operating game servers and optimizing their
systems network for game operations in their respective markets.
While the overseas system architectures are modeled on our
system architecture in Korea, they are also tailored to meet the
specific needs of each market. When we install and initialize a
game in an overseas market, we generally dispatch network
engineers and database technicians from Korea to assist with
assembly and operation of the system network and game servers.
Following installation, we typically station two to five of our
technicians and customer support staff in that market to assist
with
on-site
game
operation and technical support. Our overseas licensees are
responsible for providing database and other game information
backup.
Our game management software can program the game content to
include localized features such as virtual map zones specific to
each market. These features can be updated disparately at the
host country level in order to encourage development of a
communal spirit among the users from the same country.
Competition
We compete primarily with other massively multiplayer online
role playing game developers and distributors in each of our
markets. In addition, we compete against providers of games on
various platforms, such as console games, handheld games, arcade
games and mobile games. We compete primarily on the basis of the
quality of the online game experience offered by us to our
users, which depends on a number of factors, including our
ability to do the following:
•
hire and retain creative personnel to develop games that appeal
    to our users;
•
maintain online game platform that is stable and is not prone to
    server shutdowns, connection problems or other technical
    difficulties;
•
provide timely and responsive customer service; and
•
establish payment systems which are secure and efficient.
Competition in Korea
The online game market in Korea is comprised of the massively
multiplayer online game market and the market for casual games,
such as online card games, that are available on game portal
websites. Currently, the leading providers of massively
multiplayer online games in Korea are NCsoft Corporation, Nexon
Corporation and Webzen Inc. based on the number of peak
concurrent users. NCsoft released Lineage II, a sequel to
the original Lineage in July 2003. Lineage II is an
enhanced version of the original Lineage game released in 1998,
which gained dominant popularity in Korea. Nexon released in
1996 the Kingdom of the Winds, the
41
Table of Contents
world's first massively multiplayer online role playing
game to be introduced commercially, and Kart Rider, an online
racing game, in Korea in 2004. Webzen released Mu in May 2001
and has recently commenced open beta service of Soul of the
Ultimate Nation Online, its second massively multiplayer online
role playing game. The leading providers of portal-based online
casual games in Korea are Neowiz Corporation, operating under
the brand portal of Pmang, NHN Corporation operating under the
brand portal of Hangame, and CJ Internet operating under the
brand portal of NetMarble. Many of our competitors have
significantly greater financial, marketing and game development
resources than we have.
While the number of domestic massively multiplayer online game
developers in Korea may increase in the future, we expect the
online game industry will consolidate into a small number of
leading massively multiplayer online role playing game companies
as the high cost of game development, marketing and distribution
networks drives a greater number of unsuccessful massively
multiplayer online role playing game providers to go out of
business or be acquired.
Competition in overseas markets
In each of the overseas markets in which Ragnarok Online is
distributed, we face strong competitive pressures. For example,
Japan's large game market is primarily driven by console
games although online games are gaining popularity among
Japanese game users. Our major competitors in Japan are Square
Enix Co., Ltd., well-known for its Final Fantasy games, NCsoft
Corporation and Webzen, Inc. Taiwan's online game industry
has demonstrated significant growth in recent years with the
market dominated by games developed in Korea. Our principal
competitors in Taiwan include Blizzard Entertainment, NCsoft
Corporation and Nexon Corporation. Thailand is also a fast
growing online game market in Asia, where we believe that
Ragnarok Online is the dominant online game based on the number
of peak concurrent users. There are many online game developers
and distributors in China such as The9 Limited, which publishes
the World of Warcraft, and Shanda Interactive Entertainment.
Competition from other game platforms
We also compete against PC- and console-based game developers
that produce popular package games, such as Electronic Arts,
Sony Computer Entertainment, Blizzard Entertainment and Namco,
and game console manufacturers such as Microsoft, Sony and
Nintendo. In 2003, Microsoft and Sony introduced
Internet-enabled video consoles and we believe that they plan to
enhance their respective game platforms to provide online games
in Korea and other markets. For example, in Korea, Sony Computer
Entertainment Korea started distributing the PlayStation 2 game
consoles, equipped with a network adapter to enable online game
beginning in November 2003, and Microsoft started an online game
service on Xbox Live consoles beginning in October 2003. Several
PC-based game developers are introducing online features to
their
PC-packaged
games, such as team plays or
users-to
-users combat
features. In 2004, Nintendo launched Nintendo DS, a sequel to
Gameboy Advance, a handheld game console. In addition, Microsoft
launched Xbox 360, an enhanced version of Xbox in 2005.
Moreover, at the Electronic Entertainment Expo held in May 2006,
Sony announced PlayStation 3, the next generation of
PlayStation platform, and Nintendo released details concerning
Wii, a sequel to its Game Cube platform.
Competition in the online game market is and is expected to
remain intense as established game companies with significant
financial resources seek to enter the industry. For a discussion
of risks relating to competition, see Item 3.D. "Risk
Factors — Risks Relating to Our Business —
We operate in a highly competitive industry and compete against
many large companies."
Insurance
We maintain medical and accident insurance for our employees to
the extent required under Korean law, and we also maintain fire
and general commercial insurance with respect to our facilities.
We do not have any business liability or disruption insurance
coverage for our operations in Korea. We maintain a
directors' and officers' liability insurance policy
covering certain potential liabilities of our directors and
officers.
42
Table of Contents
Laws and Regulations
Korea
The Korean game industry and online game companies operating in
Korea are subject to the following law and regulations:
The Sound Records, Video
Products and Game Products Act.
In April 2006, the Korean National Assembly passed the Act on
Promotion of the Game Industry ("New Act"), which will
become effective in October 2006. Upon this Act becoming
effective, the Sound Records, Video Products and Game Products
Act ("Current Act") will no longer be effective.
Report of business operation.
Under the Current Act, a
person or entity who desires to operate a game manufacturing
and/or distributing business shall report its business to the
relevant mayor or provincial governor. A person or entity who
has duly reported its game manufacturing and/or distributing
business under the Current Act will be deemed to have reported
under the New Act.
Rating regulation.
Under the Current Act, a person or
entity who desires to manufacture or distribute games in Korea
must obtain a game rating in advance from the Korea Media Rating
Board established under the Current Act. Online games are
generally divided into two rating categories: "suitable for
users of all ages" and "suitable for users
18 years of age or older." At the request of
applicants, however, the ratings category may be classified into
four categories: "suitable for users of all ages,"
"suitable for users 12 years of age or older,"
"suitable for users 15 years of age or older" and
"suitable for users 18 years of age or older."
Our online game, Ragnarok Online, was classified as
"suitable for users 12 years of age or older." In
addition, we received the same rating for R.O.S.E. Online.
Under the New Act, classification will be carried out by a game
rating board to be established under the New Act. Online games
will be generally divided into two rating categories:
"suitable for users of all ages" and "not
suitable for adolescence." For purposes of the New Act,
"adolescence" means a person younger than
18 years of age or a person enrolled in a high school under
the Elementary, Middle and High School Act. At the request of
applicants, however, the ratings category may be classified into
three categories: "suitable for users of all ages,"
"not suitable for adolescence," and "suitable for
users 12 years of age or older." Online games
classified as "suitable for users 12 years of age or
older" or "suitable for users 15 years of age or
older" under the Current Act will be deemed to be
classified as "suitable for users of all ages" under
the New Act.
The Telecommunications Business Act
Report of business operation.
Under this Act we are
classified as a value-added communications service provider. A
person who intends to run a value-added communications business
shall report to the relevant Commissioner of Communications
Office to which the Minister of Information and Communication,
or MIC, has delegated its authority to accept and monitor such
reports.
Report of operation status.
We, as a value-added
communications service provider, are required to prepare and
submit statistical reports regarding, among others, the current
status of facilities by telecommunications service, subscription
records, current status of users, etc., to the MIC upon its
request. The MIC is responsible for information and
telecommunications policies under this Act. In addition, we are
required to report any transfer, takeover, suspension or closing
of our business activities to the MIC. The MIC may cancel our
registration or order us to suspend our business for a period of
up to one year if we fail to comply with its rules and
regulations.
The Act on Consumer Protection for Transactions through
    Electronic Commerce
Protection of consumer information for electronic settlement
services.
Under this Act, we are required to take necessary
measures to maintain the security of consumer information
related to our electronic settlement services. We are also
required to notify consumers when electronic payments are made
and to indemnify consumers for damages resulting from
misappropriation of consumer information by third parties.
43
Table of Contents
We believe that we have instituted appropriate safety measures
to protect consumers against data misappropriation. To date, we
have not experienced material disputes or claims in this area.
The Act on Promotion of Information and Communications
    Network Utilization and Information Protection
Protection of personal information for users of information
and communications services.
Under this Act, we are
permitted to gather personal information relating to our
subscribers within the scope of their consent. We are, however,
generally prohibited from using personal information or
providing it to third parties beyond the purposes disclosed in
our subscriber agreements. Disclosure of personal information
without consent from a subscriber is permitted if:
•
it is necessary for the settlement of service charges;
•
the personal information is processed so that the specific
    individual is unidentifiable and is provided for compiling
    statistics, academic research or surveys; or
•
it is otherwise permitted by other law and regulations.
We are required to indemnify users for damages occurring as a
result of our violation of the foregoing restrictions, unless we
can prove the absence of willful misconduct or negligence on our
part. We believe that we have instituted appropriate measures
and are in compliance with all material restrictions regarding
internal mishandling of personal information.
The Korean Civil Code and the Telecommunication Framework
    Act
Protection of interests of online game users under
20 years of age.
Pursuant to the Korean Civil Code,
contracts entered into with persons under 20 years of age
without parental consent may be invalidated. Under the
Telecommunication Framework Act, the Korea Communications
Commission, or KCC, a regulatory agency of the MIC, was
established for, among others, deliberating issues related to
fair competition and consumer protection with respect to
telecommunication services and arbitrating disputes involving
telecommunication service carriers and their users. As a result,
telecommunication service contracts and online game user
agreements are required to specifically set forth procedures for
rescinding service contracts, which may be entered into by
persons under 20 years of age without parental consent.
In November 2003, the KCC issued an order addressed to 15 major
online game companies in Korea, including us, to regulate
certain business practices relating to the settlement of service
charges involving persons under 20 years of age. The KCC
raised concerns about the ability of persons under 20 years
of age to subscribe to online game services without parental
consent by settling charges payable to online game companies
through settlement systems operated by fixed-line or broadband
service providers. The order required online game companies to
implement more specific and effective procedures to ensure,
where relevant, that parental consent has been specifically
obtained.
Although only a small number of our current subscribers are
using the settlement options mentioned in the KCC order, we are
enhancing our age verification and parental consent procedures
for players using the relevant settlement options. We do not
expect compliance with the KCC order to be burdensome.
The Special Tax Treatment Control Law
Taxation.
We are currently entitled to a reduced
corporate income tax rate of 13.75%, which is 50% of the
statutory tax rate, under this Law. This reduced tax rate
applies to certain designated small- and medium-sized venture
companies operating in Korea for six years. We are entitled to
such reduced tax rate for the fiscal year ended
December 31, 2006. However, we do not know if we will
continue to be entitled to this reduced tax rate in 2007 and
thereafter. See Item 5.A. "Operating
Results — Overview — Income tax
expenses."
44
Table of Contents
Other related laws and regulations
Even though there are no mandatory filing or reporting
obligations, since online games generally consist of animation
based on computer program software, the Copyright Act and the
Computer Programs Protection Act also apply to online games.
Taiwan
Consumer protection
As a result of increasing disputes between online game companies
and consumers in Taiwan, on February 17, 2006, the ROC MOEA
promulgated a model consumer contract that online game companies
are encouraged to adopt and the ROC MOEA may, within its
authority, further consider promulgating certain standard
provisions that must be included in a consumer contract, which
governs the relationship between a consumer and an online game
company in the future when necessary. In general, the above
model contact and these standard provisions, once adopted by or
applied to online game companies, as the case may be, will
impose more responsibilities and liabilities on online game
companies. Deviations from this model contract or these standard
provisions may cause certain clauses to be invalidated.
Regulations of Internet content and game software
Pursuant to the Children and Juvenile Welfare Act, it is illegal
to transmit or provide children under 18 years of age with,
among other things, computer software, Internet, electronic
signal, DVD and compact disk, that contains content which
propagates violence, obscenity or similar material that may
undermine the mental health of a minor. Any person or entity
violating this Act may be subject to a fine and/or the
enterprise may be forced to cease to operate for up to one year.
In addition, according to this Act and the Regulations for the
Rating of Internet Content, or the Regulations, promulgated on
April 26, 2004 and last amended on October 17, 2005,
under this Act, Internet content shall not violate any mandatory
law and shall be classified as "restricted" and
therefore shall not be viewed by the children and juvenile under
age 18, if such content meets, among others, any of the
following circumstances and harms the physical or mental
development of children or juvenile:
•
Excessive depiction of gambling, drug abuse, drug trafficking,
    robbery, burglary, kidnapping, homicide, or other criminal
    offenses;
•
Excessive depiction of the process of suicide;
•
Plot involving terror, bloodshed, cruelty, or perversion, which
    is presented in an intense manner, yet is still acceptable to
    adults in general; or
•
Depiction of sexual acts or sexual obscenity, or exposure of
    genitals, through action, image, language, text, dialogue,
    sound, picture, photograph, or any other form, yet which does
    not embarrass or disgust adults in general.
In addition, the Regulations suggest that the Internet content
that is not rated as restricted is better to be viewed by
children under the guidance of the parents, guardians, or others
taking care of them. Internet content rated as restricted shall
be labeled in accordance with the Regulations.
Internet café regulation
Currently, there is no mandatory national legislation
specifically covering the operation of Internet cafés.
However, several municipalities and counties such as Taipei City
and Taipei County have promulgated specific ordinances imposing
restrictions on Internet cafés, which relate to the
location, building structure, facilities, business hours, age
limit of customers and the classification of Internet content.
Currently, an Internet cafés may be set up by registering
with the competent authority. However, according to the latest
public news, the ROC MOEA is considering to amend the Electronic
Game Arcade Business Regulation Act so that the Internet
cafés may be set up only after obtaining the approval of the
45
Table of Contents
authority in the future. Furthermore, according to the public
news, the ROC MOEA is considering the limit the total numbers of
the Internet cafés. The ROC MOEA has also proposed draft
legislation that, if implemented, would regulate all Internet
Cafés located in the ROC. It is unclear, however, whether
or when the above Act and draft legislation will be amended or
passed by the Legislative Yuan. In addition, pursuant to the
Public Order Maintenance Act, Internet cafés may be subject
to a fine and/or a business suspension or shut-down if minors
are found at Internet cafés during late hours.
Privacy protection
The ROC government has promulgated the Computer-Processed
Personal Data Protection Act to regulate the collection
processing, usage and transmission of computer-processed
personal data. Generally, an Internet content provider, or ICP,
will not be subject to this Act if it does not collect or
process the personal data through the computer as its main
business activity. However, an ICP may become liable for the
loss of any data so collected.
Japan
Online game companies in Japan are not currently subject to any
government regulations targeted to the industry.
Protection of personal information.
Businesses in Japan are subject to certain statutory
requirements with respect to personal information acquired
during the course of business. Pursuant to these statutory
requirements, businesses must set up procedures to appropriately
protect personal information from being used for any purpose
other than the initial purpose.
Regulations on sound upbringing of minors
In Japan, Internet and game software content is generally
regulated at the local, rather than the national, level. Many
local governments have ordinances for sound upbringing of
minors, which, among other things, empower competent authorities
to designate game software as detrimental to the sound
upbringing of minors and prohibit the sale or distribution of
such designated game software. In addition, the Computer
Entertainment Rating Organization, or CERO, a nonprofit
organization, offers rating services for home-use games,
including online games. Game developers may request a rating for
their game software from CERO, which will then review such
software and assign one of the following four ratings:
"suitable for users of all ages," "suitable for
users 12 years old or older," "suitable for users
15 years old or older," "suitable for users
17 years old or older," and "suitable only for
users 18 years old or older." The rating is based on,
among others, the degree of sex, violence and anti-social
expression in the game software content. Once a rating is
assigned, the relevant game software must prominently display
such rating.
Thailand
There is no specific law or regulation that directly governs
online games, online game companies or the industry. The online
game industry in Thailand operates under a legal regime that
generally regulates vendors of Internet cafés and game
shops rather than online game operators. Several of the
governmental agencies in Thailand work in cooperation with one
another in regulating the industry. The Thai government,
principally through the ICT Ministry with the cooperation of the
Ministry of Culture, is making efforts to regulate the
fast-growing Internet business, in particular the online game
industry. The Thai government has, since 2004, proposed measures
that would affect the online game industry, including the
restriction on the playing time of game users under
18 years of age to three hours per day, prohibition of
gambling, lottery or game item trading via online games and
mandatory Internet café registration. These measures are
pending legislative approval. The Ministry of Commerce in
Thailand is also responsible for regulating online businesses by
requiring registration.
46
Table of Contents
Registration of Internet cafés and online game
    operators
There is no specific legislation that regulates online game
operators, Internet cafés or online game shops. The
Ministry of Commerce in Thailand, however, requires that online
game operators that offer online games over websites or Internet
portals to register for
e-business
registration
and also requires Internet cafés and online game shops to
register under the Commercial Registration Act.
Regulation of business hours
Under the Control of Business Relating to Tape Cassette and
Television Material Act, computer game vendors and shops are
required to obtain a license to broadcast tape cassette and
television material, which includes CD-ROMS or digital
videodiscs. A condition to this license restricts the business
hours of game shops to generally from 10:00 a.m. to
10:00 p.m. In addition, game users under 18 years of
age would be restricted from playing for more than three hours a
day under the pending legislative proposals. The Ministry of
Culture is responsible for granting licenses. The Act is
currently applicable to only offline game shops that use
CD-ROMs, hard discs or digital videodiscs.
Restriction on access by children
Under the Child Protection Act, the Royal Thai Police has the
authority to set restricted hours for children at game shops to
limit their time spent at such shops. Under this Act, the Royal
Thai Police also prohibits any person from forcing, threatening,
inducing, advocating, causing or permitting children to
misbehave or engage in misconduct. In addition, under this Act,
the ICT Minister requests online game operators to close access
to its game server after curfew hours. Users over 18 years
of age, however, are permitted password protected access to
certain online game servers even during curfew hours by
obtaining a password available at the post office. The ICT
Minister has also implemented the Goodnet project, which
recommends that members of the computer and Internet service
provider community cooperate in restricting their business hours
to prevent children under the age of 18 from entering their
place of business during curfew hours.
Intellectual property
Under the Copyright Act, online games are classified as
copyrightable work in the category of computer program or
software, and, therefore, automatically protected in Thailand
without requiring further registration with or notification to
any governmental agency. Despite the lack of mandatory
registration or notification requirements, it is recommended
that copyright owners of online games notify the Department of
Intellectual Property, the Ministry of Commerce of their online
games to ensure that their names officially and publicly appear
in the listing of copyrighted computer software. The copyright
owner has the exclusive right to copy, modify and publish its
copyrighted work.
China
The online game industry in China operates under a legal regime
that consists of the State Council, which is the highest
authority of the executive branch of the PRC central government,
and various ministries and agencies under its leadership. These
ministries and agencies include:
•
the Ministry of Information Industry;
•
the Ministry of Culture;
•
the State Press and Publications Administration;
•
the State Copyright Bureau;
•
the Ministry of Public Security; and
•
the Bureau of State Secrecy.
47
Table of Contents
The State Council and these ministries and agencies have issued
a series of rules that regulate a number of different
substantive areas of our business, which are discussed below.
Licenses.
Online game companies are required to obtain
licenses from a variety of PRC regulatory authorities.
As an ICP business, online game companies are required to hold a
value-added telecommunications business operation license, or
ICP license, issued by the Ministry of Information Industry or
its local offices. Moreover, ICP operators providing ICP
services in multiple provinces, autonomous regions and centrally
administered municipalities may be required to obtain an
inter-regional ICP license.
Each ICP license holder that engages in the supply and servicing
of Internet cultural products, which include online games, must
obtain an additional Internet culture business operations
license from the Ministry of Culture.
The State Press and Publications Administration and the Ministry
of Information Industry jointly impose a license requirement for
any company that intends to engage in Internet publishing,
defined as any act by an Internet information service provider
to select, edit and process content or programs and to make such
content or programs publicly available on the Internet.
Furthermore, the Ministry of Information Industry has
promulgated rules requiring ICP license holders that provide
online bulletin board services to register with, and obtain an
approval from, the relevant telecommunications authorities.
Regulation of Internet content.
The PRC government has
promulgated measures relating to Internet content through a
number of ministries and agencies, including the Ministry of
Information Industry, the Ministry of Culture and the State
Press and Publications Administration. These measures
specifically prohibit Internet activities, which includes the
operation of online games, that result in the publication of any
content which is found to, among other things, propagate
obscenity, gambling or violence, instigate crimes, undermine
public morality or the cultural traditions of the PRC, or
compromise State security or secrets. If an ICP license holder
violates these measures, the PRC government may revoke its ICP
license and shut down its websites.
Regulation of information security.
Internet content in
China is also regulated and restricted from a State security
standpoint. The National People's Congress, China's
national legislative body, has enacted a law that may subject to
criminal punishment in China any effort to: (i) gain
improper entry into a computer or system of strategic
importance; (ii) disseminate politically disruptive
information; (iii) leak State secrets; (iv) spread
false commercial information or (v) infringe intellectual
property rights.
The Ministry of Public Security has promulgated measures that
prohibit use of the Internet in ways which, among other things,
result in a leakage of State secrets or a spread of socially
destabilizing content. The Ministry of Public Security has
supervision and inspection rights in this regard. If an ICP
license holder violates these measures, the PRC government may
revoke its ICP license and shut down its websites.
Import regulation.
Licensing online games from abroad and
importing them into China is regulated in several ways. Any
license agreement with a foreign licensor that involves import
of technologies, including online game software into China, is
required to be registered with the Ministry of Commerce. Without
that registration, a licensee cannot remit licensing fees out of
China to any foreign game licensor. In addition, the Ministry of
Culture requires the licensee to submit for its content review
and approval any online games to be imported. If a licensee
imports games without that approval, the Ministry of Culture may
impose penalties, including revoking the Internet culture
business operations license required for the operation of online
games in China. Moreover, imported online games are required to
be registered with the Ministry of Information Industry or its
designated agencies pursuant to the Measures Concerning
Administration of Software Products before they can be operated
in China. Furthermore, the State Copyright Bureau requires the
licensee to register copyright license agreements relating to
imported software. Without the State Copyright Bureau
registration, a licensee cannot remit licensing fees out of
China to any foreign game licensor and is not allowed to publish
or reproduce the imported game software in China.
48
Table of Contents
Intellectual property rights.
The State Council and the
State Copyright Bureau have promulgated various regulations and
rules relating to protection of software in China. Under these
regulations and rules, software owners, licensees and
transferees may register their rights in software with the State
Copyright Bureau or its local branches and obtain software
copyright registration certificates. Although such registration
is not mandatory under PRC law, software owners, licensees and
transferees are encouraged to go through the registration
process and registered software rights may receive better
protection.
Internet café regulation.
Internet cafés are
required to obtain a license from the Ministry of Culture and
the State Administration of Industry and Commerce, and are
subject to requirements and regulations with respect to minimum
registered capital, location, size, number of computers, age
limit of customers and business hours. The PRC government has
published a series of rules in recent years to intensify its
regulation of Internet cafés. In February 2004, the State
Administration of Industry and Commerce, together with other
governmental authorities, issued a notice to suspend issuance of
new Internet café licenses. Although such suspension has
generally been lifted, the aggregate number and the distribution
of Internet cafes in each province are subject to government
control.
Privacy protection.
PRC law does not prohibit Internet
content providers from collecting and analyzing personal
information from their users. PRC law prohibits Internet content
providers from disclosing to any third parties any information
transmitted by users through their networks unless otherwise
permitted by law. If an Internet content provider violates these
regulations, the Ministry of Information Industry or its local
bureaus may impose penalties and the Internet content provider
may be liable for damages caused to its users.
While we believe that our licensee is in compliance with the
applicable laws and regulations governing the online game
industry in China, we cannot assure you that our operation of
Ragnarok Online in China will not be found to be in violation of
any current or future Chinese laws and regulations. Failure by
our overseas licensees to comply with laws and regulations in
China, including obtaining and maintaining the requisite
government licenses and permits, may have a material adverse
effect on our business, financial condition and results of
operations. See Item 3.D. "Risk Factors —
Risks Relating to Our Business — In many of our
markets, we rely heavily on our overseas licensees to operate
and distribute our games."
United States
The content of video game software is not subject to federal
regulation in the United States. However, many video game
software publishers comply with the standardized rating system
established by the Entertainment Software Rating Board, or ESRB,
an independent entity established in 1994. ESRB rates video
games, websites and online games and reviews advertising by
video game publishers. Video game software publishers typically
include ESRB ratings and their meanings on their game software
packages.
Certain industry organizations may also require interactive
entertainment software publishers to provide consumers with
information on graphic violence, profanity or sexually explicit
material contained in software titles, and impose penalties for
noncompliance. Several proposals have been made for federal
legislation to regulate the interactive entertainment software,
motion picture and recording industries, including a proposal to
adopt a common rating system for interactive entertainment
software, television and music containing violence or sexually
explicit material, and the Federal Trade Commission has issued
reports with respect to the marketing of such material to
minors. Consumer advocacy groups have also opposed sales of
interactive entertainment software containing graphic violence
or sexually explicit material by pressing for legislation in
these areas (including legislation prohibiting the sale of
certain "M" rated video games to minors) and by
engaging in public demonstrations and media campaigns. If any
groups (including international, national and local political
and regulatory bodies) were to target "M" rated
titles, producers of such titles might be required to
significantly change or discontinue them.
49
Table of Contents
4.C.     Organizational Structure
The following is our organization chart:
4.D.     Property, Plants and
Equipment
As of December 31, 2005, our property and equipment mainly
consisted of (i) the land and building in which our
research institute was located at 619-4 Shinsa-Dong, Gangnam-Gu,
Seoul, 135-894, Korea, (ii) game engines,
(iii) network servers and (iv) personal computers. On
May 22, 2006, we sold the land and building where our
research institute was located to Yahoh Communication for Won
9.5 billion. As of December 31, 2005, the net book
value of our property and equipment was Won 11,863 million
(US$11,746 thousand). Because our main business is to develop
and distribute online game services, we do not own any factories
or facilities that manufacture products. There are no factories
currently under construction, and we have no plans to build any
factories in the future.
Korea
Our principal executive and administrative offices are located
at
14
th
floor
of Meritz Tower, 825-2 Yeoksam-Dong, Gangnam-Gu, Seoul, 135-934,
Korea. We currently occupy 97,767 square feet of office
space, which we lease from Meritz Fire and Marine Insurance Co.,
Ltd., pursuant to a lease that will expire on December 4,
2007 and which is renewable for one additional year. The annual
lease payment amounts to Won 1,068 million (US$1,057
thousand).
We believe that our existing facilities are adequate for our
current requirements and that additional space can be obtained
on commercially reasonable terms to meet our future requirements.
United States
The offices of GRAVITY Interactive, Inc., our wholly-owned
subsidiary in the United States, are located at 4505 Glencoe
Ave, 2nd Floor, Marina Del Ray, California. GRAVITY
Interactive occupied 5,815 square feet of office space,
leased from a third party, as of December 31, 2005. The
annual lease payment amounts to Won 96 million (US$95
thousand). We believe that the existing facilities of GRAVITY
Interactive are adequate for its current requirements and that
additional space can be obtained on commercially reasonable
terms to meet its future requirements.
50
Table of Contents
Japan
As of December 31, 2005, the registered offices of GRAVITY
Entertainment Corporation, our wholly-owned subsidiary in Japan,
were located at 18th Floor, Shinkasumigaseki Building,
I-Park 3-3-2 Kasumigaseki, Chiyoda-ku, Tokyo, Japan. GRAVITY
Entertainment occupied 355.3 square feet of office space,
leased from a third party, as of December 31, 2005. The
annual lease payment amounted to Won 34 million (US$34
thousand) for the year ended December 31, 2005. As of
March 31, 2006, Gravity Entertainment terminated the lease
at Shinkasumigaseki Building and it has not entered into any
transaction for the lease or purchase of any real property for
its operations.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion together with our
consolidated financial statements and the related notes which
appear elsewhere in this report. The following discussion is
based on our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP. Our historic
performance may not be indicative of our future results of
operations and capital requirements and resources.
5.A.     Operating Results
Overview
We are based in Korea and are a leading developer and
distributor of online games in Japan, Taiwan and Thailand based
on the number of peak concurrent users. From our inception in
April 2000 until commercialization of our first online game,
Ragnarok Online, in August 2002, our operating activities were
limited primarily to developing Ragnarok Online and rolling out
a free test, or beta-test, version of Ragnarok Online in
November 2001.
Ragnarok Online is currently commercially offered in Korea, the
United States and Canada by us and in 18 other overseas markets
by our overseas licensees, and accounted for 88.3% of our
revenues in 2005. Revenues generated from Ragnarok Online are
determined largely by the following factors: pricing and pricing
structure, the number of Ragnarok Online users and the average
number of hours users spend playing Ragnarok Online. In order to
play Ragnarok Online, users either pay a flat monthly fee or
purchase a fixed number of game hours. The pricing structure of
Ragnarok Online in a given country is determined primarily based
on the cost of publishing and operating Ragnarok Online, the
playing and payment patterns of users, the pricing of competing
games and the income per capita of consumers in that country.
The pricing of Ragnarok Online is determined by us in Korea, the
United States and Canada, and, in other countries, by our
overseas licensees after consultation with us and has remained
generally stable since its commercial launch in each of the
countries in which it is distributed. Due to competitive
pressure, we and our licensees have generally not raised prices
for Ragnarok Online following its commercial launch. The number
of Ragnarok Online users and the amount of Ragnarok Online usage
in a given country depend in part on the perceived quality of
Ragnarok Online and the level of local competition. While it is
difficult to accurately determine what accounts for the superior
quality of an online game, we believe that Ragnarok
Online's storyline, graphics and community-oriented themes,
together with our ability to timely maintain, update and enhance
the content and technical aspects of the game, have been largely
responsible for the game's commercial success to date.
In Korea, YNK Korea Inc. had the exclusive right to distribute
Ragnarok Online until July 2005, although we have managed
marketing, operation and billing activities of Ragnarok Online
since its commercial launch. In overseas markets other than the
United States and Canada, our licensees administer such
functions under a licensing agreement with us, under which we
generally receive initial license fees and royalty payments. The
term of the licensing agreements are generally two years, and
renewing licensees typically pay a lump-sum renewal fee in
addition to ongoing royalty payments. Our principal overseas
markets in which we offer Ragnarok Online through our licensees
are Japan, Taiwan and Thailand and China, and our licensees are
GungHo Online Entertainment Inc. in Japan, Soft-World
International in Taiwan, Shengqu Information Technology
(Shanghai) Co., Ltd., an affiliate of Shanda Interactive
Entertainment Limited in China and Asiasoft International in
Thailand.
51
Table of Contents
Since Ragnarok Online's initial commercial launch in August
2002, we have experienced significant growth in revenues and net
income until 2004. However, in 2005, revenues and net income
decreased significantly. Our revenues decreased by 17.1% to Won
53,384 million (US$52,856 thousand) in 2005 from Won
64,426 million in 2004 but increased by 30.1% to Won
64,426 million in 2004 from Won 49,515 million in
2003. We recorded a net loss of Won 3,030 million (US$3,000
thousand) in 2005 as compared to a net income of Won
19,140 million and Won 28,057 million in 2003 and
2004, respectively. Our gross profit margin also decreased from
85.9% in 2003 to 84.3% in 2004 and to 70.0% in 2005, and our
operating margin increased slightly from 59.8% in 2003 to 59.9%
in 2004 but turned to negative 5.0% due to an operating loss of
Won 2,668 million (US$2,641 thousand) in 2005. We attribute
our revenue growth until 2004 largely to our early entry into
additional markets since Ragnarok Online's commercial
launch and the continuing popularity of Ragnarok Online among
users in the existing markets. We attribute our margin
improvement to the scalability of the online game business. Once
a game is launched and the initial development and marketing
costs have been expensed, relatively low marginal costs are
incurred to expand into additional markets through licensing
arrangements. Our revenue growth may be adversely affected in
the future by the popularity of online games newly introduced by
our competitors. Our future success depends largely on our
ability to develop or publish commercially successful new online
games.
In January 2005, we commercially launched R.O.S.E. Online, our
second online game, in Korea. R.O.S.E. Online is currently
commercially offered in the United States and Canada by us and
in two other overseas markets by our overseas licensees. Despite
our commercial launch of R.O.S.E. Online, our revenues and net
income declined in 2005 as compared to 2004. The decrease in
revenues was primarily due to the continuing decline in
subscription revenues and royalties from Ragnarok Online due to
Ragnarok Online reaching relative maturity in our principal
markets. Our operating expenses for 2005 increased as compared
to 2004 primarily as a result of the investigation into
accounting irregularities committed by the former Chairman and
the payment of STYLIA licensing fees and increase in development
costs. Our income tax rate in 2005 was 13.75%. In September
2005, as we were designated as a venture company and were
entitled to a 50% reduction in corporate income tax in 2005. We
also expect to enjoy such income tax rate reduction for the
fiscal year ended December, 31, 2006.
Revenue recognition
We derive, and expect to continue to generate, most of our
revenues from online game subscription fees paid by users in
Korea, the United States and Canada, and royalties and license
fees paid by our licensees in the overseas markets. Our revenues
can be classified into the following four categories:
•
online games — subscription revenue;
•
online games — royalties and license fees;
•
mobile games; and
•
character merchandising, animation and other revenue.
Online games — subscription revenue
Prepaid online game subscription fees are deferred and
recognized as revenue on a monthly basis in proportion to the
number of days lapsed or based on actual hours used.
Online games — royalties and license fees
We license the right to market and distribute our games in
various countries for a license fee and receive monthly
royalties based on a percentage of the licensees' revenues
from our games. We generally are advised by each of our
licensees as to the amount of royalties earned by us from such
licensee within 15 to 25 days following the end of each
month.
The initial license fees are deferred and recognized ratably as
revenue over the license period, which generally does not exceed
two years. The guaranteed minimum royalty payments are deferred
and recognized
52
Table of Contents
as the relevant royalty is earned. For a table setting forth
details of each license agreement, see Item 4.B.
"Business Overview — Our markets —
Overseas markets." In addition, the license agreements are
renewed upon the expiration of their terms, we generally receive
renewal license fees, which are deferred and recognized ratably
over the new license period.
We also receive royalty revenues from our licensees based on an
agreed percentage of the licensee's revenues from our
games. Royalty revenues are recognized on a monthly basis after
the licensee confirms its revenues based on the licensees'
sales from our games during the month.
Mobile games revenue
Mobile games are played using mobile phones and other mobile
devices. Mobile game revenues are derived from contract prices
and a percentage of the per-download fees that users pay.
Contract prices are recognized when the products or services
have been delivered or rendered and the customers can begin its
exploitation or sale with accordance with the contractual terms,
and per-download fees are recognized in a monthly basis as they
are earned by the licensee.
Character merchandising, animation and other revenue
We license the right to commercialize or distribute our games
characters or animation in exchange for contract prices. These
contract prices are recognized when the products or services
have been delivered or rendered and the customers can begin its
exploitation or sale with accordance with the contractual terms.
In addition, we receive royalty payment based on a specified
percentage of the licensees' sales.
Cost of revenues
Our cost of revenues consists principally of the following:
•
operational expenses, server depreciation expenses, server
    maintenance costs and related personnel costs and amortization
    of development-related costs as described in
    "— Critical accounting policies —
    Capitalized software development costs"; and
•
royalty payments to Mr. Myoung-Jin Lee, on whose cartoon
    series our game Ragnarok Online is based.
In developing Ragnarok Online, we obtained an exclusive license
from Mr. Myoung-Jin Lee to use the storyline and characters
from his cartoon titled Ragnarok for the production of online
games, animation and character merchandising. In return, we paid
Mr. Lee an initial license fee of 40 million and are
required to pay royalties based on 1.0% or 1.5% of adjusted
revenues (net of value-added taxes and certain other expenses)
or 2.5%, 5% or 10% of net income generated from the use of the
Ragnarok brand, depending on the type of revenues received from
the operation or licensing of Ragnarok Online.
The cost of revenues from the payments to Mr. Myoung-Jin
Lee was Won 787 million for 2004 and Won 542 million
for 2005. This agreement expires in January 2033.
Selling, general and administrative expenses
Selling, general and administrative expenses consist of sales
commissions paid to independent promotional agents that
distribute our online games to our Internet café
subscribers in Korea, commissions paid to payment settlement
providers, administrative expenses and related personnel
expenses of executive and administrative staff, and marketing
and promotional expenses and related personnel expenses.
Research and development expenses
Research and development expenses consist primarily of payroll
and other overhead expenses which are all expensed as incurred
until technological feasibility of a game is reached. Once
technological feasibility of a game is reached, these costs are
capitalized and, once commercial operation commences, amortized
as cost of revenues. See "— Critical accounting
policies — Capitalized software development
costs."
53
Table of Contents
Interest expense
In February and April 2002, we entered into agreements with YNK
Korea, an online game publisher in Korea listed on the KOSDAQ
Market Division of the Korea Exchange, or KOSDAQ, pursuant to
which we granted it the exclusive right to distribute Ragnarok
Online for a contractual period of three years from the date
Ragnarok Online was first commercialized. In consideration, we
received a lump sum payment in the amount of Won
7,000 million at the inception of these agreements, which
we recorded as debt on our balance sheets beginning from such
year. Under the sales agency agreement that we entered into with
YNK Korea in April 2002 granting to it the exclusive
distribution right, YNK Korea owns the right to distribute
Ragnarok Online in Korea. However, in practice, we perform all
of the relevant marketing, advertising and selling activities,
and distribute Ragnarok Online from our websites and host it on
our servers. Sunny YNK changed its legal name to YNK Korea on
March 27, 2006.
As there is no interest rate stated in the agreement with YNK
Korea, the interest is imputed based on the difference between
the principal amount of the loan and the total payments expected
to be made pursuant to the agreement. Accordingly, the repayment
of principal balance to YNK Korea is variable each year in
accordance with the amount of annual revenues generated from
distribution of Ragnarok Online and deduction of annual interest
expense allocated using the interest rate method. Pursuant to
the terms of these agreements, we are obligated to make payments
to YNK Korea based on a percentage of adjusted revenues (net of
value-added taxes and certain other expenses) related to
Ragnarok Online as follows:
•
until the total payments to YNK Korea reach Won
    7,000 million, 50% of our domestic and overseas adjusted
    revenues from Ragnarok Online. This amount was paid in full as
    of March 2003; and
•
once the total payments to YNK Korea exceed Won
    7,000 million, 20% of our domestic adjusted revenues from
    Ragnarok Online and 10% of our overseas adjusted revenues from
    Ragnarok Online.
As of December 31, 2005, the outstanding balance of our
debt payable to YNK Korea was nil as our agreement with YNK
Korea expired in July 2005. Pursuant to the expiration of our
agreement with YNK Korea in July 2005, we are no longer
obligated to make payments to YNK Korea for the period
subsequent to the date of expiration for revenues attributable
to Ragnarok Online. In accordance with such agreement, we
recognized payments in the amount of Won 7,037 million and
Won 3,406 million (US$3,372 thousand) for years 2004 and
2005, respectively, to YNK Korea. Of such payments, Won
2,391 million and Won 1,150 million (US$1,139
thousand) were allocated to principal, and Won
4,646 million and Won 2,256 million (US$2,234
thousand) were allocated to interest, respectively.
In addition, pursuant to the terms of the agreement with YNK
Korea, once the cumulative royalty payments to YNK Korea reach
Won 7 billion, YNK Korea is required to use 15% of future
royalty payments, paid by us, to fund additional marketing of
the Ragnarok Online. In March 2003, cumulative royalty payments
to YNK Korea reached Won 7 billion. After January 1,
2004, such marketing activities were performed by us and,
therefore, YNK Korea reimbursed us for these costs, which was
credited to advertising expenses within selling, general and
administrative expenses in the accompanying statement of
operations.
Foreign currency effects
In 2005, 81.1% of our revenues were denominated in foreign
currencies, primarily in U.S. dollars and Japanese Yen. In
most of the countries in which our games are distributed, other
than the United States, Japan and European countries, the
revenues generated by our licensees are denominated in local
currencies, which include the NT dollar, the Thai Baht and the
Renminbi, and converted into the U.S. dollar for remittance
of monthly royalty payments to us. Depreciation of these local
currencies against the U.S. dollar will result in reduced
monthly royalty payments in U.S. dollar terms, thereby
having a negative impact on our revenues.
Although we receive our monthly royalty revenues from our
overseas licensees in foreign currencies, primarily in
U.S. dollar and Japanese Yen, in the case of the U.S. and
Japan and other local currencies, such as the NT dollar, the
Thai Baht and the Renminbi in our other principal markets,
substantially all of our costs are denominated in Won. We
receive monthly royalty payments from our overseas licensees
based on a
54
Table of Contents
percentage of revenues confirmed and recorded at the end of each
month applying the foreign exchange rate applicable on such
date. We generally receive these royalty payments 20 to
30 days after such record date (except in Europe and China,
where such payment could be received up to 60 days after
the record date). Appreciation or depreciation of the Won
against these foreign currencies during this period will result
in foreign currency losses or gains and affect our net income in
dollar terms.
In 2005, we began entering into derivatives arrangements to
hedge against the risk of foreign currency fluctuations. As of
December 31, 2005, we had no foreign currency forward
contracts outstanding. See Item 11. "Quantitative and
Qualitative Disclosures about Market Risk."
Income tax expenses
Under Korean law and regulations, certain designated venture
companies may be entitled to enjoy preferential tax treatment
from the Korean government in the form of a 50% reduction in
corporate income tax rate during the year in which they first
generated taxable income and the following five years if such
venture companies satisfy a number of financial and
non-financial criteria (including the maintenance of their
status as designated venture companies). We have had the benefit
of the 50% reduction in corporate income tax rate in 2003, 2004
and 2005. Our current applicable corporate income tax rate
(including resident surtax) is 13.75% after applying the 50% tax
reduction rate. To become a designated venture company, among
others, a company must qualify as a small-and medium- sized
enterprise under the Framework Act on Small- and Medium-Sized
Enterprises. A company that is engaged in data processing or
computer-related business may qualify as a small- and
medium-sized enterprise under the Framework Act on Small- and
Medium-Sized Enterprises if, among other things, (i) it
hires less than three hundred full-time employees or
(ii) the total revenue of such company does not exceed Won
30 billion. In 2004, we failed to satisfy both of these
tests. However, even if a company fails to satisfy both of the
preceding requirements, it will continue to enjoy its status as
a small-and medium-sized enterprise for the following three
years so long as that company neither (x) merges into, nor
consolidates with, another company nor (y) becomes an
affiliate of certain large enterprise. Accordingly, we believe
we will continue to qualify as a small- and medium-sized company
through 2007 if we neither merge into, nor consolidate with,
another company nor become affiliated with large enterprises
under Korean law.
In September 2005, we were designated as a venture company,
effective for two years, under the Act on Special Measures for
the Promotion of the Venture Business. However, the Act on
Special Measures for the Promotion of the Venture Business was
amended in March 2006 (effective in June 2006) and, according to
the amendment, some of the criteria to qualify as a designated
venture company were either deleted or amended, and the
effective period of designation was also reduced to one year.
Under the amendment, however, our status as a designated venture
company will remain effective until September 2007, unless our
status is otherwise revoked, and we would have the benefit of
the 50% reduction in corporate income tax rate in 2006. Based on
the new criteria, we are not sure whether we would qualify as a
designated venture company in September 2007.
To the extent we derive revenues from countries other than
Korea, we may be subject to income withholding in those
countries in which our products, including online games, are
distributed. Such withholding taxes are included under income
tax expenses. Such amounts are withheld by our overseas
licensees at the then-current withholding rates in such
countries. The effective withholding tax rates in our principal
overseas markets as of December 31, 2005 are 10% in Japan
and China, 20% in Taiwan and 15% in Thailand. To the extent
Korea has a tax treaty with any such country, withholding rates
prescribed by such tax treaty apply. Under the Corporation Tax
Law of Korea, we are entitled to, and recognize, a tax credit
computed based on the amount of income withheld overseas when
filing our income tax return in Korea, up to a limited amount.
Accordingly, the amount of taxes withheld overseas may be offset
against taxes payable in Korea. Adverse changes in tax treaties
between Korea and the countries from which we receive license
fees and royalties or adverse changes in Korean tax law that
prevent us from recognizing tax credits for taxes withheld
overseas could materially and adversely affect our net income.
55
Table of Contents
Recent Accounting Changes
No material change.
Critical Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these financial statements requires us to make
estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities, contingent liabilities, and
revenue and expenses during the reporting period. We evaluate
our estimates on an ongoing basis based on historical experience
and other assumptions we believe are reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. The policies
discussed below are considered by our management to be critical
because they are not only important to the portrayal of our
financial condition and results of operations but also because
application and interpretation of these policies require both
judgment and estimates of matters that are inherently uncertain
and unknown. As a result, actual results may differ materially
from our estimates.
Revenue recognition
We derive, and expect to continue to generate, most of our
revenues from online game subscription fees paid by users in
Korea, and royalties and license fees paid by our licensees in
overseas markets. Our revenues can be classified into the
following four categories: (i) online games —
subscription revenue; (ii) online games —
royalties and license fees; (iii) mobile games; and
(iv) character merchandising, animation and other revenue.
For details, see "— Overview — Revenue
recognition."
We recognize revenue in accordance with accounting principles
generally accepted in the United States, as set forth in
Securities and Exchange Commission Staff Accounting
Bulletin No. 104,
Revenue Recognition, Statement of
Position 97-2, Software Revenue Recognition
and other
related pronouncements.
Allowances for doubtful accounts
We maintain allowances for doubtful accounts receivable for
estimated losses that result from the inability of our customers
to make required payments. We base our allowances on the
likelihood of recoverability of accounts receivable based on
past experience and current collection trends. We record
allowances for doubtful accounts based on historical payment
patterns of our customers and increase our allowances as the
length of time such receivables become past due increases.
Subsequent to June 2003, pursuant to agreements with various
payment gateway providers, the payment gateway providers are
responsible for remitting to us the full subscription revenues
generated in Korea after deducting their fixed service fees and
charges, which range from approximately 9% to 13% and risk of
loss or delinquencies are borne by such payment gateway
providers so that we no longer assume any collection risk.
Capitalized software development costs
We account for capitalized software development costs in
accordance with Statement of Financial Accounting Standards
("SFAS") No. 86,
Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.
Software development costs incurred prior to the establishment
of technological feasibility are expensed when incurred and
treated as research and development, or R&D, expenses. Once
the game has reached technological feasibility, all subsequent
software development costs for that product are capitalized
until it is released for sale. Technological feasibility is
evaluated on a product-by-product basis, but generally occurs
once the online game has a proven ability to operate on a
massively multi-player level. After the game is commercially
released, the capitalized product development costs are
amortized and expensed over the game's estimated useful
life, which is deemed to be three years. This expense is
recorded as a component of cost of revenues.
56
Table of Contents
We evaluate the recoverability of capitalized software
development costs on a product-by product basis. Capitalized
costs for those products whose further development or sale is
terminated are expensed in the period of cancellation. In
addition, a charge to cost of revenues is recorded when
management's forecast for a particular game indicates that
unamortized capitalized costs exceed the net realizable value of
that asset.
Significant management judgments and estimates are required to
assess the timing of technological feasibility as well as the
ongoing recoverability of capitalized costs.
Impairment of goodwill and other intangible assets
Goodwill represents the excess of the purchase price over the
fair value of the identifiable net assets acquired in our
acquisition of TriggerSoft and NEOCYON. As of December 31,
2005, residual goodwill reflected on our balance sheet was Won
1,451 million (US$1,437 thousand). At the time of such
acquisition, we estimated that Won 8,505 million (US$8,421
thousand) of intangible assets were acquired from TriggerSoft
and NEOCYON, comprising of contract-based intangible assets. We
evaluate goodwill on an annual basis for possible impairment, in
accordance with SFAS No. 142,
Goodwill and Other
Intangible Assets
("SFAS 142"), using fair
value techniques and market comparables. We assess impairment of
our definite-lived other intangible assets in accordance with
the provisions of SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-lived Assets
("SFAS 144"), whenever events or changes in
circumstance indicate the carrying amount may not be recoverable.
The assessment of impairments under SFAS 142 and 144
requires significant judgment and requires estimates to assess
fair values. A percentage difference in cash flow projections or
discount rate used would not likely result in an impairment
write-down.
Income taxes
We account for income taxes under the provisions of
SFAS No. 109,
Accounting for Income Taxes.
Under SFAS No. 109, income taxes are accounted for
under the asset and liability method.
Management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities and the extent
to which deferred tax assets can be recognized. A valuation
allowance is provided for deferred tax assets to the extent that
it is more likely than not that such deferred tax assets will
not be realized. Realization of future tax benefits related to
the deferred tax assets is dependent on many factors, including
our ability to generate taxable income within the period during
which the temporary differences reverse, the outlook for the
economic environment in which the business operates, and the
overall future industry outlook.
As described in "— Overview — Income
tax expenses," we enjoyed in 2005 a reduced tax rate of
13.75%, which is 50% of the statutory tax rate and applied to
certain designated venture companies. As the reduced tax rate is
valid until 2006. In 2007, while we will reapply for our
designation as a venture company, it is uncertain as to whether
we will obtain this designation. However, even if we cease to
enjoy the 50% reduction in corporate income tax rate in 2007, we
will instead be entitled to a special tax exemption of 10% in
corporate income tax rate for the fiscal year 2007 by virtue of
being a small-and medium-sized company. Accordingly, deferred
income taxes as of December 31, 2005 were calculated based
on the rate of 13.75%, 24.75% and 27.50% for the amounts
expected to be realized during the fiscal year 2006, 2007 and
2008, respectively.
57
Table of Contents
Results of Operations
2005 Compared to 2004
The following table summarizes our results of operations for the
periods indicated.
Year Ended December 31,
2004
2005
2005(1)
% Change
(Unaudited)
(In millions of Won and thousands of US$)
Revenues:
Online games — subscription revenue
W
16,253
W
11,249
US$
11,138
(30.8
)%
Online games — royalties and license fees
45,101
37,375
37,005
(17.1
)
Mobile games
376
1,664
1,648
342.6
Character merchandising, animation and other revenue
2,696
3,096
3,065
14.8
Total revenues
64,426
53,384
52,856
(17.1
)
Cost of revenues
10,116
16,038
15,879
58.5
Gross profit
54,310
37,346
36,977
(31.2
)
Gross profit margin(2)
84.3
%
70.0
%
70.0
%
Operating expenses:
Selling, general and administrative
13,660
30,795
30,490
125.4
Research and development
2,029
9,219
9,128
354.4
Total operating expenses
15,689
40,014
39,618
155.0
Operating income (loss)
38,621
(2,668
)
(2,641
)
(106.9
)
Operating profit margin(3)
59.9
%
(5.0
)%
(5.0
)%
Other income (expense):
Interest income
479
2,850
2,822
495.0
Interest expense
(4,732
)
(2,158
)
(2,137
)
(54.4
)
Foreign currency gains (losses), net
(625
)
(614
)
(608
)
(1.8
)
Foreign currency forward transaction, net
—
(853
)
(845
)
N/M
Others, net
(1
)
(12
)
(12
)
N/M
Total net other expense
(4,879
)
(787
)
(780
)
(83.9
)
Income (loss) before income tax expenses, minority interest, and
    equity in loss of related joint venture
33,742
(3,455
)
(3,421
)
(110.2
)
Income tax expenses (benefit)
5,406
(817
)
(809
)
(115.1
)
Income (loss) before minority interest and equity in loss of
    related joint venture
28,336
(2,638
)
(2,612
)
(109.3
)
Minority interest(4)
(17
)
(2
)
(2
)
N/M
Equity in loss of related joint venture(5)
296
394
390
33.1
Net income (loss)
W
28,057
W
(3,030
)
US$
(3,000
)
(110.8
)%
N/ M = not meaningful
Notes:
(1)
For convenience, the Won amounts are expressed in
    U.S. dollars at the rate of Won 1,010.0 to US$1.00.
(2)
Gross profit margin for each period is calculated by dividing
    gross profit by total revenues for each period.
(3)
Operating profit margin for each period is calculated by
    dividing operating income (loss) by total revenues for each
    period.
58
Table of Contents
(4)
In 2004, represents the minority interest in GRAVITY
    Entertainment Corporation, our Japanese subsidiary. We acquired
    the remaining 50% of voting equity interest in RO Production
    (the predecessor name of GRAVITY Entertainment Corporation) in
    October 2004, resulting in RO Production becoming our
    wholly-owned subsidiary. In 2005, represents the minority
    interest in NEOCYON, Inc., a 96.11% held subsidiary purchased in
    December 2005.
(5)
Represents the losses from our 30% equity investment in
    Animation Production Committee, a Japanese joint venture formed
    in order to produce and market Ragnarok the Animation through
    GRAVITY Entertainment Corporation, our Japanese subsidiary. This
    investment was accounted for using the equity method of
    accounting.
Revenues
Our total revenues decreased by 17.1% to Won 53,384 million
(US$52,856 thousand) in 2005 from Won 64,426 million in
2004, primarily due to:
•
a 17.1% decrease in royalties and license fees to Won
    37,375 million (US$37,005 thousand) in 2005 from Won
    45,101 million in 2004, which primarily resulted from an
    decrease in royalties and license fees due to a decrease in
    revenues from royalties and license fees attributable to our
    Ragnarok Online game resulting from increasing competition and
    as a result of the relative maturity of such game in our
    principal overseas markets. Royalties and license fees from
    Ragnarok Online decreased from Won 45,101 million in 2004
    to Won 36,574 million (US$36,212 thousand) in 2005; and
•
a 30.8% decrease in subscription revenue to Won
    11,249 million (US$11,138 thousand) in 2005 from Won
    16,253 million in 2004. This 30.8% decrease resulted
    primarily from a 37.8% decrease in subscription revenue in Korea
    from Ragnarok Online to Won 7,913 million (US$7,835
    thousand) in 2005 from Won 12,724 million in 2004, and a
    24.5% decrease in the subscription revenue for Ragnarok Online
    in the United States to Won 2,665 million (US$2,639
    thousand) in 2005 from Won 3,528 million in 2004, due to a
    decrease in playing time by our users of Ragnarok Online
    resulting from increasing competition and as a result of the
    relative maturity of such game.
Such decreases in revenues were partially offset by:
•
an increase in the subscription revenue from R.O.S.E Online to
    Won 671 million (US$664 thousand) in 2005, as such game was
    commercially launched in January 2005;
•
a 14.8% increase in character merchandising, animation and other
    revenue to Won 3,096 million (US$3,065 thousand) in 2005
    from Won 2,696 million in 2004, which resulted primarily
    from a 47.78% increase in technical support revenue to Won
    467 million (US$462 thousand) from Won 316 million in
    2004 and 148.58% increase in animation revenue to Won
    614 million (US$608 thousand) from Won 247 million in
    2004; and
•
a 342.6% increase in mobile games revenue to Won
    1,664 million (US$1,648 thousand) in 2005 from Won
    376 million in 2004, which resulted primarily from increase
    in sales of mobile games in Taiwan, Japan, the Philippines,
    Singapore, Malaysia and Thailand and sales of Won
    429 million resulting from the acquisition of NEOCYON, Inc.
    in November and December 2005.
Cost of revenues
Our cost of revenues increased by 58.5% to Won
16,038 million (US$15,879 thousand) in 2005 from Won
10,116 million in 2004, primarily due to:
•
a 53.5% increase in salaries and wages to Won 6,759 million
    (US$6,692 thousand) in 2005 from Won 4,403 million in 2004,
    as a result of increased hiring of game developers and overseas
    support staff from 174 as of December 31, 2004 to 193 as of
    December 31, 2005 and payment of incentives for the success
    of Ragnarok Online and 16% increase in average salaries paid to
    our employees which became effective as of June 2005;
59
Table of Contents
•
a 18.9% increase in fee payments to Won 2,250 million
    (US$2,228 thousand) in 2005 from Won 1,893 million in 2004,
    as a result of an increase in fees we pay to Korea Internet Data
    Center for server housing fees due to the commercial launch of
    R.O.S.E. Online in January 2005;
•
a 55.4% increase in depreciation to Won 2,422 million
    (US$2,398 thousand) in 2005 from Won 1,559 million in 2004,
    as a result of the addition of servers and software in 2005 to
    better service Ragnarok Online and the addition of servers and
    software for the introduction of R.O.S.E Online; and
•
a 2,778.6% increase in stock option plan compensation expense to
    Won 806 million (US$798 thousand) in 2005 from Won
    28 million in 2004, which resulted from the increased
    amortization period to full year from 8 days in 2004.
Gross profit and margin
As a result of the foregoing, our gross profit decreased by
31.2% to Won 37,346 million (US$36,977 thousand) in 2005
from Won 54,310 million in 2004. Our gross profit margin
decreased to 70.0% in 2005 from 84.3% in 2004.
Operating expenses
Selling, general and administrative expenses.
Our
selling, general and administrative expenses increased by 125.4%
to Won 30,795 million (US$30,490 thousand) in 2005 from Won
13,660 million in 2004, primarily due to:
•
a 261.4% increase in fee payments to Won 9,570 million
    (US$9,475 thousand) in 2005 from Won 2,648 million in 2004,
    for fees and expenses incurred in connection with the
    investigation and subsequent restatement of the financial
    statements;
•
a 36.0% increase in advertising expenses to Won
    6,273 million (US$6,211 thousand) in 2005 from Won
    4,614 million in 2004, as a result of our participation in
    the Tokyo Game Show in September 2005, our participation in the
    G-star Game Show in November 2005, advertising for Ragnarok
    Online II and increase in marketing expenses related to the
    introduction of STYLIA;
•
a 80.4% increase in salaries and wages to Won 5,694 million
    (US$5,638 thousand) in 2005 from Won 3,156 million in 2004,
    primarily as a result of an increase in the number of employees
    for administrative and other support functions from 148 in 2004
    to 161 in 2005 and 16% increase in average salaries paid to our
    employees which became effective as of June 2005;
•
an increase in impairment on intangible assets to Won
    1,547 million (US$1,532 thousand) in 2005 from nil in 2004,
    as a result of recognition of impairment losses for the
    remaining balance of intangible assets recognized in connection
    with the business combination with TriggerSoft in 2005;
•
a 779.2% increase in tax and dues to Won 1,398 million
    (US$1,384 thousand) in 2005 from Won 159 million in 2004,
    as a result of having to pay back-taxes in the amount of Won
    1,060 million, representing the amount of tax benefits
    granted to us in respect of the building and land at Shinsa-dong
    in July 2004 for research and development purposes.
Research and development expenses.
Our research and
development expenses increased 354.4% to Won 9,219 million
(US$9,128 thousand) in 2005 from Won 2,029 million in 2004,
primarily due to the payment of the consideration for the right
to publish STYLIA and Time N Tales upon completion of game
development, including salaries and wages, and provision for
severance indemnities, relating to the development of Requiem
and Ragnarok Online II, as such games were in the
pre-commercialization stage and not yet considered to be
technologically feasible.
60
Table of Contents
Operating income and operating margin
As a result of the cumulative effects of the reasons stated
above, we recorded an operating loss of Won 2,668 million
(US$2,641 thousand) in 2005 compared to operating income of Won
38,621 million in 2004, and our operating margin recorded
to 59.9% in 2004 but we recorded operating loss in 2005.
Net other income (expense)
Our net other expense decreased 83.9% to Won 787 million
(US$780 thousand) in 2005 from Won 4,879 million in 2004
primarily due to:
•
a 54.4% decrease in interest expense from Won 4,732 million
    in 2004 to Won 2,158 million (US$2,137 thousand) in 2005 as
    a result of reduction in payments in connection with the loan
    from YNK Korea, due to the significant decrease in Ragnarok
    Online revenues and the expiration of the term of the contract
    with YNK Korea in July 2005;
•
an increase in interest income from Won 479 million in
    2004, to Won 2,850 million (US$2,822 thousand) in 2005
    resulting from an increase in short-term financial instruments
    in 2005;
which was partially offset by
•
an increase in net loss on foreign currency forward transactions
    of Won 853 million (US$845 thousand) in 2005 from nil in
    2004.
Income tax expenses (benefit)
We recorded income tax benefit of Won 817 million (US$809
thousand) in 2005, as compared to income tax expense of Won
5,406 million in 2004. Income tax benefit in 2005 was due
to increase in deferred income tax assets, which resulted from
foreign tax credit carryforwards in the amount of Won
4,275 million and tax credit carryforwards for research and
human resource development in the amount of Won
1,286 million in connection with decrease in our taxable
income, in particular, subscription revenue and royalties and
license fees.
Minority interest
Minority interest represents the net loss from GRAVITY
Entertainment Corporation, our Japanese subsidiary, and NEOCYON,
our 96.11%-held subsidiary acquired in December 2005,
attributable to third-party minority interest holders. We
acquired the remaining minority interest in GRAVITY
Entertainment Corporation in October 2004 and acquired 96.11% of
voting equity of NEOCYON in 2005.
Equity in loss of related joint venture
Equity in loss of related joint venture represents the 30% of
the net loss incurred from our 30% equity investment in
Animation Production Committee, a Japanese animation joint
venture which we invested through GRAVITY Entertainment
Corporation, our Japanese subsidiary. This investment was
accounted for using the equity method of accounting.
Net income (loss)
As a result of the cumulative effects of the reasons stated
above, our net income recorded net loss of Won
3,030 million (US$3,000 thousand) in 2005 as compared to
net income of Won 28,057 million in 2004.
61
Table of Contents
2004 Compared to 2003
The following table summarizes our results of operations for the
periods indicated.
Year Ended December 31,
2003
2004
% Change
(In millions of Won)
Revenues:
Online games — subscription revenue
W
18,560
W
16,253
(12.4
)%
Online games — royalties and license fees
29,727
45,101
51.7
Mobile games
43
376
N/M
Character merchandising, animation and other revenue
1,185
2,696
127.5
Total revenues
49,515
64,426
30.1
Cost of revenues
6,958
10,116
45.4
Gross profit
42,557
54,310
27.6
Gross profit margin(1)
85.9
%
84.3
%
Operating expenses:
Selling, general and administrative
11,360
13,660
20.2
Research and development
1,597
2,029
27.1
Total operating expenses
12,957
15,689
21.1
Operating income
29,600
38,621
30.5
Operating profit margin(2)
59.8
%
59.9
%
Other income (expense):
Interest income
94
479
409.6
Interest expense
(6,465
)
(4,732
)
(26.8
)
Foreign currency gains
413
430
4.1
Foreign currency losses
(278
)
(1,055
)
279.5
Others, net
26
(1
)
N/M
Total net other expense
(6,210
)
(4,879
)
(21.4
)
Income before income tax expenses, minority interest, and equity
    in loss of related joint venture
23,390
33,742
44.3
Income tax expenses
4,250
5,406
27.2
Income before minority interest and equity in loss of related
    joint venture
19,140
28,336
48.0
Minority interest(3)
—
(17
)
N/M
Equity in loss of related joint venture(4)
—
296
N/M
Net income
W
19,140
W
28,057
46.6
%
N/ M = not meaningful
Notes:
(1)
Gross profit margin is calculated as gross profit divided by
    total revenues.
(2)
Operating profit margin is calculated as operating income
    divided by total revenues.
(3)
Represents the minority interest in GRAVITY Entertainment
    Corporation, our Japanese subsidiary. We acquired the remaining
    50% of voting equity interest in RO Production in October 2004,
    resulting in RO Production becoming our wholly-owned subsidiary.
62
Table of Contents
(4)
Represents the losses from our 30% equity investment in
    Animation Production Committee, a Japanese joint venture to
    produce and market Ragnarok the Animation through GRAVITY
    Entertainment Corporation, our Japanese subsidiary. This
    investment was accounted for using the equity method of
    accounting.
Revenues
Our total revenues increased by 30.1% to Won 64,426 million
in 2004 from Won 49,515 million in 2003, primarily due to:
•
an increase in royalties and license fees from Ragnarok Online
    to Won 45,101 million in 2004 from Won 29,727 million
    in 2003, primarily as a result of an increase in royalties and
    license fees from the overseas markets in which Ragnarok Online
    had already been commercialized and the commercialization of
    Ragnarok Online in 9 new markets in 2004 compared to 4 in 2003.
    The increase in revenue attributable to existing markets was Won
    13,795 million and attributable to an entry into new
    markets was Won 1,579 million; and
•
a 127.5% increase in character merchandising, animation and
    other revenue to Won 2,696 million in 2004 from Won
    1,185 million in 2003, which resulted primarily from a
    72.9% increase in character merchandising revenue to Won
    2,028 million in 2004 from Won 1,173 million in 2003,
    a 2,330.77% increase in technical support revenue to Won
    316 million from Won 13 million in 2003 and Won
    247 million in revenue from animation in 2004 compared to
    none in 2003;
which more than offset
•
a 12.4% decrease in subscription revenue to Won
    16,253 million in 2004 from Won 18,560 million in
    2003. This 12.4% decrease resulted primarily from a 21.4%
    decrease in subscription revenue in Korea from Ragnarok Online
    to Won 12,724 million in 2004 from Won 16,186 million
    in 2003, mainly due to a decrease in playing time by our users
    of Ragnarok Online in Korea. This decrease was partially offset
    by a 48.7% increase in the subscription revenue in the United
    States to Won 3,528 million in 2004 from Won
    2,373 million in 2003.
Cost of revenues
Our cost of revenues increased by 45.4% to Won
10,116 million in 2004 from Won 6,958 million in 2003,
which was primarily due to:
•
a 63.4% increase in salaries and wages to Won 4,403 million
    in 2004 from Won 2,695 million in 2003, mainly as a result
    of an increase in hiring of game developers and overseas support
    staff from 130 as of December 31, 2003 to 174 as of
    December 31, 2004;
•
a 58.4% increase in payments to Won 1,893 million in 2004
    from Won 1,195 million in 2003, as a result of an increase
    in fees we paid to Mr. Myoung-Jin Lee and server housing
    fees we paid to the KIDC; and
•
a 41.5% increase in depreciation to Won 1,559 million in
    2004 from Won 1,102 million in 2003, which mainly resulted
    from the addition of servers and software in 2004 to better
    service Ragnarok Online.
Gross profit and margin
As a result of the foregoing, our gross profit increased by
27.6% to Won 54,310 million in 2004 from Won
42,557 million in 2003.
63
Table of Contents
Operating expenses
Selling, general and administrative expenses.
Our
selling, general and administrative expenses increased by 20.2%
to Won 13,660 million in 2004 from Won 11,360 million
in 2003, primarily due to:
•
a 81.6% increase in salaries and wages to Won 3,156 million
    in 2004 from Won 1,738 million in 2003, primarily as a
    result of an increase in the number of employees for
    administrative and other support functions from 86 in 2003 to
    148 in 2004;
•
a 174.7% increase in depreciation expense to Won
    989 million in 2004 from Won 360 million in 2003,
    which mainly resulted from depreciation attributable to
    leasehold improvements in property and the addition of servers
    for the introduction of R.O.S.E. Online; and
•
a 9.0% increase in advertising expenses to Won
    4,614 million in 2004 from Won 4,233 million in 2003,
    which resulted from the hosting of the Ragnarok World
    Championship in August 2004, a significant increase in marketing
    expenses related to the introduction of R.O.S.E. Online and our
    participation in the Tokyo Game Show in September 2004.
Research and development expenses.
Our research and
development expenses increased 27.1% to Won 2,029 million
in 2004 from Won 1,597 million in 2003, primarily due to
expensing of all costs, including salaries and wages, and
provision for severance indemnities, relating to the development
of Requiem and Ragnarok Online II.
Operating income and operating margin
As a result of the cumulative effects of the reasons stated
above, our operating income increased 30.5% to Won
38,621 million in 2004 from Won 29,600 million in
2003, and our operating margin improved to 59.9% in 2004 from
59.8% in 2003.
Net other income (expense)
Our net other expense decreased 21.4% to Won 4,879 million
in 2004 from Won 6,210 million in 2003 primarily due to:
•
a 26.8% decrease in interest expense from Won 6,465 million
    in 2003 to Won 4,732 million in 2004 as a result of
    reduction in payment rates on the loan from YNK Korea, effective
    in March 2003, from 50% of all revenues from Ragnarok Online to
    20% for domestic adjusted revenues and to 10% for overseas
    adjusted revenues from Ragnarok Online despite the significant
    increase in such revenues;
•
an increase in interest income from Won 94 million in 2003
    to W479 million in 2004 resulting from an increase in
    short-term financial instruments in 2004 which more than offset;
    and
•
an increase in loss in foreign currency transaction from Won
    278 million in 2003 to Won 1,055 million in 2004
    resulting from the appreciation of the Won against the
    U.S. dollar during the period.
Income tax expenses
We recorded income tax expenses of Won 5,406 million in
2004, as compared to Won 4,250 million in 2003. Our income
tax expenses increased as a result of an increase in our taxable
income, in particular, royalties and license fees from revenues
generated in overseas markets. In 2003 and 2004, we were
entitled to a reduced tax rate of 14.85% by virtue of the
Special Tax Treatment Control Law of Korea.
Minority interest
Minority interest represents the net loss from GRAVITY
Entertainment Corporation, our Japanese subsidiary, which is
attributable to the third-party minority interest holders in
2003 and through October 2004. We acquired the remaining
minority interest in GRAVITY Entertainment Corporation in
October 2004.
64
Table of Contents
Equity in loss of related joint venture
Equity in loss of related joint venture represents the 30% of
the net loss incurred from Animation Production Committee, the
Japanese animation joint venture in which we, through GRAVITY
Entertainment Corporation, our Japanese subsidiary, made a 30%
equity investment. This investment was accounted for using the
equity method of accounting.
Net income
As a result of the cumulative effects of the reasons stated
above, our net income increased 46.6% to Won 28,057 million
in 2004 from Won 19,140 million in 2003.
Impact of inflation
We believe that inflation in Korea and our other principal
markets has not had a material impact on our results of
operations. Inflation in Korea was 3.6% in 2003, 3.6% in 2004
and 2.7% in 2005.
Impact of foreign currency fluctuations
See Item 11. "Quantitative and Qualitative Disclosures
about Market Risk."
Government, Economic, Fiscal, Monetary or Political
    Policies or Factors
See Item 3.D. "Risk Factors — Risks Relating
to The Republic of Korea," Item 4.B. "Business
Overview — Laws and Regulations" and
Item 10.E. "Taxation."
5.B.     Liquidity and Capital
Resources
Liquidity
The following table sets forth the summary of our cash flows for
the periods indicated:
Year Ended December 31,
2003
2004
2005
2005(1)
(Unaudited)
(In millions of Won and thousands of US$)
Cash and cash equivalents at beginning of period
W
560
W
5,405
W
16,405
US$
16,243
Net cash provided by operating activities
15,823
32,642
17,928
17,750
Net cash used in investing activities
(10,564
)
(19,007
)
(79,046
)
(78,263
)
Net cash provided by (used in) financing activities
(414
)
(2,635
)
70,587
69,888
Net increase in cash and cash equivalents
4,845
11,000
9,469
9,375
Cash and cash equivalents at end of period
W
5,405
W
16,405
W
25,874
US$
25,618
Note:
(1)
For convenience, the Won amounts are expressed in
    U.S. dollars at the rate of Won 1,010.0 to US$1.00.
Prior to the commercial launch of Ragnarok Online in August
2002, our principal sources of liquidity were cash from equity
financing and incurrence of debt, including the debt we incurred
from YNK Korea. Following the commercial launch of Ragnarok
Online, our principal sources of liquidity have been cash flows
from our operating activities and equity financing and, to a
lesser extent, short-term borrowings. Net cash used in investing
activities have consisted primarily of investments in
acquisition of interests in companies which develop online games
or which provide related products and services. See Note 6
to the notes to our consolidated financial statements included
in this annual report. However, our net property and equipment
decreased from Won 14,760 million as of December 31,
2004 to Won 11,863 million (US$11,746 thousand) as of
December 31, 2005 because land and building of total Won
8,099 million was reclassified to asset held for sale.
65
Table of Contents
In order to address short-term liquidity needs that may arise
from time to time in the course of our business, we have in the
past obtained short-term borrowings at market rates from other
game developers. In February 2003, we obtained a loan of Won
3 billion at an annual interest rate of 18% from IAMBiz
Co., Ltd., which subsequently changed its name to Rhoceo Co.,
Ltd., to satisfy short-term liquidity needs relating to
marketing and promotional activities for Ragnarok Online and for
working capital. In September 2003, we fully repaid this loan
with cash flows generated from Ragnarok Online. In order to
address long-term liquidity needs, we have traditionally
resorted to the issuance of equity securities such as the rights
offering that we conducted in March 2003. Our cash investment
policy emphasizes liquidity and preservation of principal over
other portfolio considerations. We deposit our cash in demand
deposits, short-term financial instruments, which primarily
consist of time deposits with maturity of one year or less, and
money market funds with a rolling maturity of 90 days or
less. Our short-term financial instruments increased from Won
1,600 million as of December 31, 2003 to Won
8,900 million as of December 31, 2004 to Won
59,900 million (US$59,307 thousand) as of December 31,
2005 primarily as a result of increased net cash from our
operations during the period and to cash raised from issuance of
new shares in connection with our initial public offering.
Cash received in the form of initial license fees are recognized
as revenues on a monthly basis over the life of our license
agreements as described in Item 5.A.
"— Overview — Revenue
recognition." The portion of initial license fees not yet
recognized as revenues are reflected in our balance sheet as
deferred income. Our total deferred income, both short-term and
long-term, increased from Won 4,258 million as of
December 31, 2003 to Won 7,597 million as of
December 31, 2004 and to Won 8,227 million as of
December 31, 2005 primarily due to our recognizing an
increased portion of initial license fees that we received in
2003, 2004 and 2005, respectively.
Cash flows from operating activities.
Our increase in net
cash provided by operating activities from 2003 to 2004 and
decrease from 2004 to 2005 were primarily the result of our
recording net income in 2003 and 2004 compared to net losses in
2005. Our increase in net cash provided by operating activities
in 2004 compared 2003 reflected an adjustment of (i) Won
3,217 million for depreciation and amortization,
(ii) Won 3,339 million for deferred income from the
renewal of sales contract, and (iii) Won 913 million
for provision for accrued severance benefits. This increase was
partially offset by Won 1,465 million in deferred expenses
and Won 1,155 million in deferred income taxes that we
recorded in 2004. Our decrease in net cash provided by operating
activities in 2005 compared 2004 reflected an adjustment of
(i) Won 6,232 million (US$6,170 thousand) for deferred
income taxes, (ii) Won 2,288 million (US$2,265
thousand) for payment of severance benefits. This decrease was
partially offset by Won 7,482 million (US$7,408 thousand)
in Misappropriated funds receivable, Won 7,349 million
(US$7,276 thousand) in accounts payable and Won
5,370 million (US$5,317 thousand) in depreciation and
amortization that we recorded in 2005.
Cash flows from investing activities.
Our increase in net
cash used in investing activities from 2003 to 2005 reflected
purchases of property and equipment in these years in connection
with the general growth of our businesses and the increase in
payment of leasehold deposits. In addition, our net cash used in
investing activities in 2004 and 2005 reflected the following:
•
our investment in short-term financial instruments in the amount
    of Won 7,300 million in 2004 and Won 50,969 million
    (US$50,464 thousand) in 2005;
•
an investment of Won 1,243 million through our Japan
    subsidiary in the Animation Production Committee, a joint
    venture for the production and marketing of Ragnarok the
    Animation, in 2004;
•
an investment of Won 9,193 million (US$9,102 thousand) in
    TriggerSoft Corporation and NEOCYON, Inc. in 2005; and
•
our purchase of Emil Chronicle Online for Won 6,073 million
    (US$6,013 thousand) in 2005.
Cash flows from financing activities.
Our net cash
provided by financing activities has been primarily affected by
the issuance of common shares in 2003 and 2005. In February
2005, we received net proceeds of Won 71,837 million from
the sale of 1,400,000 common shares at US$13.5 per ADS
(four ADSs are equivalent to one share of our common stock). In
March 2003, we received net proceeds of Won 3,206 million
from the sale of 2,148,900 common shares at Won 1,500 per
share.
66
Table of Contents
Capital resources
As our overseas operations are conducted primarily through our
subsidiaries and our overseas licensees, our ability to finance
our operations and any debt that we or our subsidiaries may
incur depends, in part, on the payment of royalties and other
fees by our overseas licensees and, to a lesser extent, the flow
of dividends from our subsidiaries.
As of December 31, 2005, our primary source of liquidity
was Won 25,874 million (US$25,618 thousand) of cash and
cash equivalents. We believe that our available cash and cash
equivalents and net cash provided by operating activities, will
be sufficient to meet our capital needs for at least the next
12 months. However, we cannot assure you that our business
or operations will not change in a manner that would consume
available capital resources more rapidly than anticipated. We
may, however, require additional cash resources due to changed
business conditions or other future developments, including any
significant investments or acquisitions. If these sources are
insufficient to satisfy our cash requirements, we may seek to
sell additional securities either in the form of equity or debt.
In the past, we raised cash resources through the issuance of
common shares. See note 11 to our audited consolidated
financial statements as of December 31, 2004 and 2005 and
for the years ended December 31, 2003, 2004 and 2005. The
sale of additional equity securities or convertible debt
securities could result in additional dilution to our
shareholders. In the past, we also raised cash by entering into
indebtedness arrangements such as the transaction entered into
with YNK Korea as described in Item 5.A.
"— Overview — Interest expense."
In addition, we may seek to incur indebtedness through the
issuance of debt securities or by obtaining a credit facility.
The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financial
covenants that would restrict operations. As of
December 31, 2005, we have general borrowing facilities
with a limit of Won 1,533 million and have an outstanding
balance of borrowing amounting to Won 1,233 million
(US$1,221 thousand).
We expect to have capital expenditure requirements for the
ongoing expansion into other markets, including hardware
expenditures for continuous expansions and upgrades to our
existing server equipment, and also for game development,
acquiring and publishing third party game developers or games
developed by them and continuing to invest in enhancing our
technological, marketing, distribution and service capabilities.
We believe that our internal cash flow from operations, together
with our proceeds from our initial public offering in February
2005 will be sufficient to satisfy our working capital
requirements through at least the first quarter of 2007,
including our new game development expenditures for Requiem and
Ragnarok Online II.
5.C.     Research and Development,
Patents and Licenses, etc.
See Item 5.A. "Business Overview — Game
development and publishing" for our research and
development.
Our intellectual property is an essential element of our
business operations. We rely on copyright, trademark, trade
secret and other intellectual property law, as well as
non-competition, confidentiality and license agreements with our
employees, suppliers, licensees, business partners and others to
protect our intellectual property rights. Our employees are
generally required to sign agreements acknowledging that all
inventions, trade secrets, works of authorship, developments and
other processes generated by them on our behalf are our
property, and assigning to us any ownership rights that they may
claim in those works. With respect to copyrights and computer
program rights created by our employees within their employment
scope and which are made public bearing our name, we are not
required to pay any additional compensation to our employees.
In developing Ragnarok Online, we obtained an exclusive license
from Mr. Myoung-Jin Lee to use the storyline and characters
from his cartoon titled Ragnarok for the production of online
games, animation and character merchandising. See Item 4.B.
"Business Overview — Our products —
Massively multiplayer online role playing games —
Massively multiplayer online role playing games currently
offered — Ragnarok Online" above.
67
Table of Contents
We are the registered owner of two registered software
copyrights to Ragnarok Online and Arcturus, a PC-based game,
each of which we have registered with the Program Deliberation
and Mediation Committee of Korea. As of December 31, 2005,
we owned over 61 registered domain names, including our official
website and domain names registered in connection with each of
the games we offer. We also had registered trademarks and
trademark applications pending at patent and trademark offices
in 15 countries covering 12 discrete trademarks, two design
patents and three analogous design patents, which are variations
of the 11 design patents, registered with the Korea
Intellectual Property Office, and registered copyrights covering
11 game characters, in each case as of December 31,
2005.
5.D.     Trend Information
Trends, uncertainties and events which could have a material
impact on our sales, operating revenues and liquidity and
capital resources are discussed above in Item 5.A.
"— Operating Results" and Item 5.B.
"— Liquidity and Capital Resources."
5.E.     Off-Balance Sheet
Arrangements
In 2005, we began entering into derivatives arrangements to
hedge against the risk of foreign currency fluctuations. As of
December 31, 2005, we had an agreement with a financial
institution for foreign currency forward contract up to the
limit of US$5,000 thousand, although we did not have any
outstanding derivative financial instruments, off-balance sheet
guarantees, interest rate swap transactions or foreign currency
forward contracts. As of June 26, 2006, we have foreign
currency forward contracts in the amount of US$1,000 thousand.
See Item 11. "Quantitative and Qualitative Disclosures
about Market Risk."
5.F.     Contractual Obligations
The following table sets forth a summary of our contractual cash
obligations due by period as of December 31, 2005.
Payments Due by Period
Between 1
Between 3
Beyond
Up to 1 Year
and 3 Years
and 5 Years
5 Years
Total
(In millions of Won)
Long-term debt obligations
W
572
W
419
W
273
W
205
W
1,469
Operating lease obligations
3,262
2,882
—
—
6,144
Purchase obligations
2,400
—
—
—
2,400
Total
W
6,234
W
3,301
W
273
W
205
W
10,013
Long-term debt obligations.
We have financed our
operations primarily through incurrence of debt from financial
institutions, cash flows from operations as well as equity
investments by our founder and current shareholders.
Operating lease obligations.
With respect to our
operating lease obligations, the lease payments due by
December 31, 2006 are Won 3,170 million, Won
24 million, Won 4 million, Won 4 million and Won
60 million for our principal offices in Seoul, offices for
our subsidiary in the United States, offices for our subsidiary
in Japan, offices for NEOCYON and offices for Mados, Inc., a
Russian subsidiary of Cybermedia International, Inc, which is a
wholly-owned subsidiary of NEOCYON in Russia, respectively. The
lease terms expire in December 2007, April 2006, February 2006,
April 2006 and July 2006, respectively, for our principal
offices in Seoul, offices for our subsidiary in the United
States, offices for our subsidiary in Japan, offices for NEOCYON
and offices for Mados Inc., respectively. The renewal terms in
all of the leases are subject to market conditions.
Purchase obligations.
Our purchase obligations consist of
acquiring exclusive distribution rights of the online games. In
2005, we entered into publishing agreements to acquire exclusive
distribution rights of the online games, STYLIA and Time N Tales
which were under development by Sonnori Co., Ltd. and Ndoors
68
Table of Contents
Corp., respectively. The purchase obligations due by
December 31, 2005 are Won 1,000 million and Won
1,400 million for STYLIA and Time N Tales, respectively.
In December 2005, we entered into an agreement with Movida
Investment Inc., SOFTBANK CORP. and other eight companies to
invest in "Online Game Revolution
Fund No. 1" amounting to Japanese Yen
1,000 million as a limited partner with 10% interest of the
total fund and paid initial payment of Japanese Yen
100 million. Upon 30 days' prior written notice
by general partner, Movida Investment Inc., we shall pay the
outstanding portion of contribution. At December 31, 2005,
we do not estimate the time of notice. Therefore, the above
table does not include the investment obligation of Japanese Yen
900 million due as of December 31, 2005. In accordance
with the agreement, the investment term is 5 years from the
effective date, which is January 1, 2006.
For a description of our commercial commitments and contingent
liabilities, see note 10 of the Notes to our consolidated
financial statements included elsewhere in this annual report.
For a description of our legal proceedings, see Item 8.A.
"Financial Information — Legal Proceedings."
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A.     Directors and Senior
Management
The names and positions of our directors and executive officers
are set forth below. The business address of all of our
directors and executive officers is our registered office at
14th floor of Meritz Tower,
825-2
Yeoksam-Dong,
Gangnam-Gu, Seoul 135-934, Korea.
Executive Directors
Name
Position
Il Young Ryu
Chairman, President, Representative Director and Chief Executive
    Officer
Seung Taik Baik
Executive director and Chief Marketing Officer
Il Young Ryu
, our chairman of the board of directors and
President, has served as our chief executive officer since
September 21, 2005. Mr. Il Young Ryu is also currently
the chief executive officer of EZER Inc, our largest
shareholder. In 2004, he founded CJ Internet Japan and served as
its chief executive officer. In 2003, Mr. Ryu held
"Online Game Fantasy Star" event with the Softbank
group. In 2002, Mr. Ryu formed an alliance between Techno
Blood Inc. and Dasan Venture and managed Techno Blood &
Dasan, the first Korea-Japan IT Fund. In 2001, he organized a
Korea/ Japan Bridging Business for Cultural Exchange between
Korea & Japan. In 1999, Mr. Ryu founded Techno
Blood Inc.
Seung Taik Baik
, our chief marketing officer, has served
as a director since December 2005 and executive director since
March 31, 2006. Mr. Baik has also served as the chief
executive officer of NEOCYON, Inc. from 2000. Mr. Baik
served as the local representative for Northeast Asia of
Entrepreneurs Organization in 2004, and has served as the
president of the Korea branch of Entrepreneurs Organization from
2005.
Independent Directors
Under the Nasdaq listing requirements, a majority of our board
of directors is required to consist of independent directors.
The independence standards under the Nasdaq rules exclude, among
others, any person who is a current or former employee of a
company (for the current year or the past three years) or of any
of its affiliates, as well as any immediate family member of an
executive officer of a listed company or of any of its
69
Table of Contents
affiliates. The following individuals currently serve as members
of our board of directors who we believe satisfy the
independence requirements under the Nasdaq listing requirements.
Name
Position
James Jinho Chang
Independent director and audit committee member
Yongho Park
Independent director and audit committee member
Jungil Lee
Independent director and audit committee member
James Jinho Chang
was elected as our independent director
and member of the audit committee at our shareholders'
meeting in March 2006. Mr. Chang is currently an associate
professor at Yonsei University and has been in such position
since 2001. Mr. Chang has also served as an adviser of SBSi
since 2001. Mr. Chang has also worked as a research fellow
for corporate governance service in Korea Stock Exchange since
2001. Mr. Chang was the chief financial officer of SBSi
from 2000 to 2001 and an assistant professor at the Wharton
School of the University of Pennsylvania from 1998 to 2000.
Mr. Chang is a certified public accountant licensed in the
state of California.
Jungil Lee
was elected as our independent director and
member of the audit committee at our shareholders' meeting
in March 2006. Mr. Lee is currently the managing attorney
of Daesung International Law Office. Mr. Lee is a member of
both the Korean and New York bar associations. Mr. Lee is a
member of Committee to review the Citizens' Request for
Audit based on Article 40 of Anti-Corruption Act at the
Board of Audit and Inspection of Korea since February 2006.
Mr. Lee was an outside director of Pyeong Hwa Automotive
Co., Ltd. from March 2002 to March 2005.
Yongho Park
was elected as our independent director and
member of the audit committee at our shareholders' meeting
in March 2006. Mr. Park has served as chairman of Valmore
Partners, a strategic management consulting firm, since 2005.
Mr. Park was the chief executive officer and president of
Pernod Ricard Korea from 2001 to 2004 and an executive vice
president of sales at Doosan Seagram and Seagram Korea from 1998
to 2001.
Executive Officers
In addition to the executive directors who are also our
executive officers, we currently have the following executive
officers.
Name
Position
Kyu Hyeong Lee
Senior Executive Vice President of Human Resources and Chief
    Compliance Officer
James O. Kwon
Chief Financial Officer
Won Seok Choi
Chief Technology Officer
Kyu Hyeong Lee
has served as our senior executive vice
president of human resources since April 2005 and chief
compliance officer since February 2006. Mr. Lee worked as a
human resources consultant for the Interim Management Service, a
management consulting company, from August 2004 to April 2005
and as a director of human resources at Cisco Systems
Corp./Korea from June 2002 to August 2004. Mr. Lee also
worked at Tyco International Ltd./Asia Region from June 1999 to
April 2002.
James Ohsung Kwon
has served as our chief financial
officer since January 2006. Prior to joining us, Mr. Kwon
served as a principal at LG Venture Investment from January 2000
to December 2005. Mr. Kwon also was previously a consultant
with PwC Consulting in Korea from January 1997 to December 1999.
Mr. Kwon has been involved in investments over 15 Korean
venture companies.
Won Seok Choi
has served as our chief technology officer
since December 2005. Prior to joining us, Mr. Choi was the
chief executive officer and chief technology officer of Tiz Co.,
Ltd., an online game developer, from September 2002 to February
2005. Mr. Choi served as chief technology officer at
70
Table of Contents
MirionSystem Co., Ltd., an online game developer, from February
2001 to August 2002 and as team leader at Enterone Corp., an
online game developer from December 1999 to February 2001.
Having approximately ten years of experience in the online game
industry, Mr. Choi participated in the development of over
ten online games.
The registered address of our directors and executive officers
is 14th floor of Meritz Tower,
825-2
Yeoksam-Dong,
Gangnam-Gu, Seoul 135-934, Korea.
6.B.     Compensation
We have not extended any loans or credit to any of our directors
or executive officers, and we have not provided guarantees for
borrowings by any of these persons. For the year ended
December 31, 2005, the aggregate amount of compensation
paid by us to all directors and executive officers was Won
1,074 million (US$1,063 thousand), which excludes Won
141 million (US$140 thousand) set aside or accrued to
provide for retirement or similar benefits to our executive
officers. At our general meeting of shareholders held on
March 31, 2006, our shareholders approved an aggregate
amount of up to Won 1.4 billion as compensation for our
directors for 2006.
Under the Labor Standard Act and the Employee Retirement Benefit
Security Act, we are required to pay a severance amount to
eligible employees, who voluntarily or involuntarily terminate
their employment with us, including through retirement. The
severance amount for our officers and directors equals the
monthly salary at the time of his or her departure, multiplied
by the number of continuous years of service, and further
multiplied by a discretionary number set forth in our severance
payment regulation, which depending on the position of the
officer or director ranges from two to three. As of
December 31, 2005, we provided Won 588 million (US$582
thousand), being 100% of our severance liability as of such date.
We maintain a directors' and officers' liability
insurance policy covering certain potential liabilities of our
directors and officers.
6.C.     Board Practices
Board of directors
Our board of directors has the ultimate responsibility for the
administration of our affairs. Our articles of incorporation, as
currently in effect, provide for a board of directors comprised
of not less than three directors and also provide for an audit
committee, a compensation committee and a director nomination
committee. We currently have 5 members serving as members of our
board of directors. The directors are elected at a
shareholders' meeting by a majority vote of the
shareholders present or represented, which majority is not less
than one-fourth of all issued and outstanding shares with voting
rights, so long as not less than one third of all issued and
outstanding shares with voting rights are present at the
shareholders' meeting.
Each of our directors is elected for a term of three years,
which may be extended until the close of the annual general
meeting of shareholders convened in respect to the last fiscal
year of such director's term. However, directors may serve
any number of consecutive terms and may be removed from office
at any time by a special resolution adopted at a general meeting
of shareholders.
The board of directors elects one or more representative
directors from its members. A representative director is
authorized to represent and act on behalf of such company and
has the authority to bind such company. A company may have
(i) one sole representative director, (ii) two or more
co-representative directors or (iii) two or more joint
representative directors. The powers and authorities of a sole
representative director and any co-representative directors are
exactly the same while the only distinction for joint
representative directors is that they must act jointly (i.e.,
all of the joint representative directors must act together in
order to bind the company while co-representative directors may
act independently). Currently our board of directors has elected
Il Young Ryu as our representative director. Under the Korean
Commercial Code and our articles of incorporation, any director
with special interest in an agenda of a board meeting may not
exercise his voting rights in such board meeting.
71
Table of Contents
Independent directors
Our ADSs are listed on Nasdaq and we are subject to the Nasdaq
listing requirements applicable to
non-U.S.
companies.
Under the Nasdaq listing requirements, we are required to
appoint a minimum of three independent directors, unless we
receive an exemption from Nasdaq to appoint a lesser number. The
independence standards under the Nasdaq rules exclude, among
others, any person who is a current or former employee of a
company (for the current year or the past three years) or of any
of its affiliates, as well as any immediate family member of an
executive officer of a listed company or of any of its
affiliates. We also intend to comply with the Nasdaq listing
requirements regarding audit committee requirements.
Committees of the board of directors
Under our articles of incorporation, we currently have three
committees that serve under our board of directors:
•
the audit committee;
•
the director nomination committee; and
•
the compensation committee.
Audit committee
Under the U.S. Sarbanes-Oxley Act and the Nasdaq listing
requirements,
non-U.S.
issuers
such as ourselves are required to comply with the Nasdaq audit
committee requirements by July 31, 2005. To comply with the
Securities and Exchange Commission rules and regulations and the
Nasdaq listing requirements regarding the need for, and
composition of, an audit committee, we established an audit
committee at our extraordinary shareholders meeting in December
2004.
The audit committee currently consists of the following
directors: James Jinho Chang, Yongho Park, Jungil Lee, all of
whom are independent as set forth in the Nasdaq listing
requirements. All of our independent directors are financially
literate and have accounting or related financial management
expertise. Our board of directors has determined that James
Jinho Chang is an "audit committee financial expert,"
as such term is defined by the regulations of the Securities and
Exchange Commission issued pursuant to Section 407 of the
Sarbanes-Oxley Act. The audit committee is responsible for
examining internal transactions and potential conflicts of
interest and reviewing accounting and other relevant matters.
Under the Korean Commercial Code, if a company establishes an
audit committee, such company is not permitted to have a
statutory auditor. The audit committee is chaired by James Jinho
Chang.
Director nomination committee
The Director nomination committee consists of the following
three directors, James Jinho Chang, Yongho Park and Jungil Lee,
all of whom are independent as set forth in the Nasdaq listing
requirements. This committee will be responsible for
recommending and nominating candidates for our director
positions and related matters. The committee is currently
chaired by Jungil Lee.
Compensation committee
The Compensation committee consists of following three
directors, James Jinho Chang, Yongho Park, Jungil Lee, all of
whom are independent as set forth in the Nasdaq listing
requirements. This committee is responsible for reviewing and
approving the management's evaluation and compensation
programs. The committee is currently chaired by Yongho Park.
72
Table of Contents
6.D.     Employees
As of December 31, 2005, we had 507 full-time
employees, of whom 478 were located in Korea and 29 were
stationed overseas. The following table sets forth the number of
our employees by department as of the dates indicated.
December 31,
2003
2004
2005
Senior management
4
7
8
Finance
4
8
13
Marketing
18
27
43
Game development and support
225
357
443
Total
251
399
507
We do not have a labor union and none of our employees are
covered by collective bargaining agreements. We have a
labor-management council as required under the Act on the
Promotion of Workers' Participation and Cooperation. We
believe that we maintain a good working relationship with our
employees and we have not experienced any significant labor
disputes or work stoppages.
As of December 31, 2005, GRAVITY Interactive, Inc. employed
22 employees in the United States, GRAVITY Entertainment
Corporation employed two employees in Japan, TriggerSoft
employed 32 employees and NEOCYON employed 40 employees. None of
the employees of GRAVITY Interactive, GRAVITY Entertainment,
TriggerSoft or NEOCYON are represented by a labor union or
covered by a collective bargaining agreement.
We have entered into a standard annual employment contract with
most of our officers, managers and employees. These contracts
include a covenant that prohibits the officer, manager or
employee from engaging in any activities that compete with our
business during, and for six months after, the period of their
employment with our company.
Under the Labor Standard Act and the Employee Retirement Benefit
Security Act, employees with more than one year of service with
us are entitled to receive a lump sum payment upon voluntary or
involuntary termination of their employment. The amount of the
benefit equals the employee's monthly salary, calculated by
averaging the employee's daily salary for the three months
prior to the date of the employee's departure, multiplied
by the number of continuous years of employment. In addition, we
provide our registered directors with a lump sum payment upon
voluntary or involuntary termination of their employment in the
amount of two to three times the monthly salary of the departing
registered directors at the time of termination of employment.
Pursuant to the Korean National Pension Law, we are required to
pay 4.5% of each employee's annual wages to the National
Pension Corporation. Our employees are also required to pay 4.5%
of their annual wages to the National Pension Corporation. Our
employees are entitled to receive an annuity in the event they
lose, in whole or in part, their wage earning capability. The
total amount of contributions we made to the National Pension
Corporation in 2003, 2004 and 2005 was Won 268 million, Won
537 million and Won 910 million (US$901 thousand),
respectively.
6.E.     Share Ownership
Some of our directors and officers own our common shares. See
Item 7.A. "Major Shareholders."
Stock option plan
Under our articles of incorporation and the Act on Special
Measures for the Promotion of the Venture Business, we may grant
options for the purchase of our shares to certain qualified
officers, employees and third parties. Set forth below are the
details of our stock option plan as currently contained in our
articles of incorporation.
73
Table of Contents
•
Stock options may be granted to our officers and employees who
    have contributed or are qualified to contribute to our
    establishment, management, overseas business and technical
    innovation. Notwithstanding the foregoing, no stock options may
    be granted to any executive officer or employee who is
    (i) our largest shareholder, (ii) a holder of 10% or
    more of our shares outstanding, (iii) certain specially
    related persons of the person set forth in (i) and
    (ii) above, or (iv) a shareholder who would own 10% or
    more of our shares upon exercise of options granted under the
    stock option plan.
•
Stock options may be granted by a special resolution of our
    shareholders with the aggregate number of shares issuable not to
    exceed 50% of the total number of our then issued and
    outstanding common shares.
•
Upon exercise of stock options, we will deliver our common
    shares or pay in cash the difference between the market price of
    our shares and the option exercise price.
•
Stock option granted under the stock option plan, in case new
    shares are issued, will have a minimum exercise price equal to
    the higher of (i) the market price of our shares calculated
    pursuant to the method under the Inheritance and Gift Tax Law
    and (ii) the par value of our shares, and in other cases,
    will have a minimum exercise price equal to or higher than the
    market price of our shares calculated pursuant to the method
    under the Inheritance and Gift Tax Law.
•
Stock options can vest after two years from the stock option
    grant date and can be exercised up to five years from the
    vesting date. The stock option may be cancelled by a resolution
    of our board of directors if (i) the officer or employee
    who holds the option voluntarily resigns or is discharged from
    office prior to the vesting date; (ii) the officer or
    employee who holds the option causes material damage to us by
    willful misconduct or negligence; (iii) we are unable to
    deliver our shares or pay the prescribed amount due to
    bankruptcy or dissolution, or (iv) the occurrence of any
    cause for cancellation of stock options specified in the stock
    option agreement.
On December 24, 2004, our shareholders approved the
implementation of our employee stock option plan and the
granting of stock options under this plan to our directors,
officers and employees.
Each stock option confers the right on the grantee to purchase
one share of our common stock at the exercise price. The
exercise price for these stock options are, in the case of some
senior employees, Won 55,431 per share, representing the
price per share of our common shares (or ADS equivalent) offered
to the public in our initial public offering of February 2005,
and in the case of all other eligible employees, Won
45,431 per share, representing the price per share offered
to the public less Won 10,000 per share. A total of
197,400 shares of stock options were outstanding,
representing 2.8% of our total number of shares issued as of
December 31, 2005, consisting of (i) 8,000 shares
issued to directors and officers and
(ii) 189,400 shares were issued to a total of 222
eligible employees.
74
Table of Contents
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A.     Major Shareholders
The following table sets forth information known to us with
respect to the beneficial ownership of our common shares as of
June 26, 2006, by each person known to us to own
beneficially 5% or more of our common shares based on 6,948,000
of our common shares outstanding. None of our common shares
entitles the holder to any preferential voting rights.
Beneficial ownership is determined in accordance with the rules
of the Securities Exchange Commission, and includes the power to
direct the voting or the disposition of the securities or to
receive the economic benefit of the ownership of the securities.
Number of
Shares
Percentage
Beneficially
Beneficially
Name
Owned
Owned
EZER, Inc.(1)
3,640,619
52.39%
Moon Capital Master Fund LP(2)
549,296
7.90%
Ramius Capital Group, L.L.C.(3)
503,837
7.25%
Government of Singapore Investment Corporation Pte Ltd(4)
416,541
5.99%
Notes:
(1)
On August 30, 2005, Mr. Jung Ryool Kim, our former
    controlling shareholder and Chairman, sold all of our shares
    that Mr. Kim and his family members owned to EZER Inc., a
    Japanese Company ("EZER"), pursuant to a stock
    purchase agreement by and among Jung Ryool Kim, Ji Young Kim,
    Young Joon Kim, Ji Yoon Kim and EZER dated August 30, 2005.
    Pursuant to the share sale transaction, EZER became our largest
    shareholder. EZER, which is 100% owned by our Chairman and CEO,
    Il Young Ryu, is the operator of an investment fund established
    pursuant to a contractual relationship known in Japan as a
    "tokumei kumiai" ("TK Relationship") with
    Techno Groove, Inc. a Japanese company and a wholly-owned
    subsidiary of Asian Groove, Inc., a Japanese company
    ("Asian Groove"). The TK Relationship, which is
    governed by the Commercial Code of Japan, is used in Japan as a
    means of making and managing investments, and under the
    investment fund agreement for the TK Relationship (the "TK
    Agreement"), EZER acts as the operator of a fund,
    established in Japan under the name of "Asian Star
    Fund," using the capital contribution made by Techno Groove
    as an investor in the fund. Asian Star Fund was established for
    the sole purpose of investing in our shares.
In accordance with a Schedule 13/D filed by Techno Grove,
    among others, their investment in the Asian Star Fund was
    financed through a loan from Son Assets Management Inc.
    ("SAM"), a Japanese company, in the amount of Japanese
    Yen 40 billion. In exchange, Asian Groove, a Japanese
    company and the parent company of Techno Groove, pledged all of
    its shares of GungHo Entertainment Online, Inc.
    ("GungHo") in custody with Techno Groove, which in
    turn pledged such shares to SAM.
Under the terms of the TK Agreement, EZER, as the operator of
    Asian Star Fund, exercises the sole right, with respect to
    ownership and voting right of common shares of companies
    invested in by the Asian Star Fund. Asian Star Fund's sole
    investment is in our shares. Techno Groove has no voting or
    investment power with respect to the securities held by Asian
    Star Fund. The term of the TK is one year, subject to automatic
    one-year renewals, unless terminated by either party upon three
    months prior notice. Upon such termination, the assets of Asian
    Star Fund must be distributed to Techno Groove by EZER.
We have in the ordinary course of business, entered into various
    contracts with GungHo. See Item 4.B. "Information on
    the Company — Business Overview — Our
    Markets — Overseas Markets" and Item 10.C.
    "Additional Information — Material
    Contracts."
(2)
As reported in a Schedule 13D/A filed on June 1, 2006.
    Consists of shares beneficially owned by Moon Capital Master
    Fund Ltd., Moon Capital Leveraged Master Fund Ltd.,
    Moon Capital Management LP, JWM Capital LLC and John W. Moon.
(3)
As reported in Schedule 13D/A filed on June 1, 2006.
    Consists of shares beneficially owned by Starboard Value and
    Opportunity Master Fund Ltd., Parche LLC, RCG Ambrose
    Master Fund, Ltd., RCG
75
Table of Contents
Halifax Fund, Ltd., Ramius Master Fund, Ltd., Ramius
    Fund III, Ltd, Admiral Advisors, LLC, Ramius Advisors, LLC,
    Ramius Capital Group, L.L.C. Safe Harbor Master Fund, L.P., Safe
    Harbor Investment Ltd., and Jeffrey M. Solomon.
(4)
As reported in Schedule 13G/A filed on January 18,
    2006. Consists of shares beneficially owned by Government of
    Singapore Investment Corporation Pte Ltd., Government of
    Singapore and Monetary Authority of Singapore.
To the best of our knowledge, as of March 31, 2006,
approximately 41.6% of our common shares were held in the United
States (in the form of common shares or ADSs). Also to the best
of our knowledge, we had approximately 875 beneficial holders of
our shares (in the form of ADSs) in the United States as of
December 29, 2005.
7.B.  Related Party Transactions
Until December 31, 2005, we leased our headquarters space
from Mr. Jung Ryool Kim, our former largest shareholder and
chairman, at a monthly rent of Won 33 million and a monthly
management fee of approximately Won 20 million, together
with a security deposit of Won 3.8 billion. Under customary
practice in Korea, the security deposit refers to a lump-sum
refundable deposit, which essentially has the economics of an
interest-free loan, that the lessee gives to the lessor at the
beginning of the lease term in exchange for an elimination or
reduction of periodic rental payments. At the end of the lease
term, the security deposit is returned to the lessee. Normally,
the amount of the security deposit is significantly greater than
the monthly rent and therefore is entitled to protection under
Korean law in order for the lessee to secure refund of the
security deposit from the lessor. In order to secure the return
of the security deposit, we have obtained and registered a
security interest in the leased building under Korean law. This
lease was entered into on August 1, 2004 and terminated on
December 31, 2005.
Upon EZER's purchase of our shares owned by the former
Chairman and his family on August 30, 2005, we no longer
consider the former Chairman to be a related party of Gravity.
We have not, in any event, entered into any material agreements
with the former Chairman or his family members subsequent to
such change of control.
Relationship with GRAVITY Interactive, Inc.
In April 2003, we entered into an agreement with GRAVITY
Interactive, Inc., for the service and distribution of Ragnarok
Online in the United States and Canada pursuant to which GRAVITY
Interactive, Inc. agreed to remit dividends to us based on a
percentage of earnings.
Relationship with GRAVITY Entertainment Corporation and the
Animation Production Committee
From March to June 2004, we provided a series of loans in the
aggregate amount of Japanese Yen 35 million, at an annual
interest rate of 9%, to GRAVITY Entertainment Corporation,
formerly RO Production Co., Ltd., our then 50%-owned subsidiary
in Japan, for the production and marketing of Ragnarok the
Animation and for working capital purposes. These loans have
been fully repaid. In October 2004, we purchased from GungHo
Online Entertainment Inc., which at the time owned the remaining
50% interest in GRAVITY Entertainment, their ownership interest
in GRAVITY Entertainment for a purchase price of zero, making us
the 100% shareholder of GRAVITY Entertainment. GungHo Online
Entertainment Inc. is our licensee in Japan for Ragnarok Online.
Under a consortium agreement which became effective in April
2004 between GRAVITY Entertainment and other parties to
Animation Production Committee, a Japanese joint venture for the
production and marketing of Ragnarok the Animation, GRAVITY
Entertainment was obligated to contribute Japanese Yen
117 million plus a 5% tax, amounting to Japanese Yen
123 million, to the joint venture. As a shareholder of
GRAVITY Entertainment, we funded this contribution amount in
full in the form of additional capital injection.
76
Table of Contents
On October 1, 2004, we granted to the joint venture the
license for Ragnarok Online, in order for the joint venture to
produce animation based on Ragnarok Online.
Pursuant to an arrangement between GRAVITY Entertainment and the
joint venture, GRAVITY Entertainment is required to remit 70% of
the revenues from its animation business to the joint venture.
As of December 31, 2005, the amount due and payable to the
joint venture by GRAVITY Entertainment amounted to Japanese Yen
15 million.
Pursuant to an export and copyright authorization agreement,
effective in April 2004, between GRAVITY Entertainment and us,
we have the exclusive license to sell Ragnarok the Animation,
produced by the joint venture in which GRAVITY Entertainment
participates, to countries in Southeast Asia, which include
Vietnam, Laos, Cambodia, Thailand, Malaysia, Singapore,
Indonesia, the Philippines, Taiwan, China and Hong Kong.
Relationship with Rhoceo Co., Ltd.
On February 20, 2003, IAMBiz Co., Ltd, whose name was
changed to Rhoceo Co., Ltd. in November 2004, extended a loan in
the amount of Won 3 billion to us at an annual interest
rate of 18%, which we used to satisfy our short-term liquidity
needs. We repaid this loan in full in 2003 and no balance is
currently outstanding. In October 2003, we disposed of our
sticker photo division, together with mobile phones and digital
and other cameras, to IAMBiz for proceeds of Won
510 million. In December 2003, we also disposed of our
license to a horse racing game to IAMBiz for proceeds of Won
20 million.
In August 2005, the Company paid Won 200 million to Rhoceo
Co., Ltd. for licensing rights to a game under development by
Rhoceo Co., Ltd. and recorded the payment as research and
development expense. Rhoceo Co., Ltd., which was under the
control of the former Chairman, ceased to be our related party
on August 30, 2005 upon the change of control by the former
Chairman.
Relationship with TriggerSoft Corporation
On May 2, 2005, we made a one-year loan in the amount of
Won 500 million to TriggerSoft Corporation, the developer
of our R.O.S.E. Online game, at an annual interest rate of 9%
payable monthly in arrears. On August 26, October 26, 2005,
April 10, 2006, and June 9, 2006, we made loans in the
amount of Won 300 million, Won 500 million, Won
40 million and Won 60 million, respectively, at an
annual interest of 9% payable monthly in arrears with one-year
term to TriggerSoft.
Relationship with NEOCYON, Inc.
We acquired 96.11% of the outstanding common stocks of NEOCYON
for an aggregate purchase price of Won 7,716 million in
cash pursuant to a series of share purchase transactions which
took place in November and December 2005. Mr. Seung Taik
Baik, our director and chief marketing officer, has been the
chief executive officer of NEOCYON.
We extended a loan in the amount of US$1.5 million to
Mados, Inc., a Russian subsidiary of Cybermedia International
Inc, which is a subsidiary of NEOCYON, on February 28,
2006, at an annual interest rate of 4.9% payable monthly in
arrears.
Relationship with Rople-net
In 2003, we invested Won 1,000 million in the mobile
business of Rople-net Co., Ltd. which was a subsidiary of Rhoceo
Co., Ltd., and recovered Won 223 million and gave up our
rights to the remainder of investment, and purchased right to
software, among other assets, totaling Won 123 million from
Rople-net. In August 2004, we also acquired tangible assets
totaling Won 53 million from Rople-net. Rople-net., in
turn, under the control of the former Chairman, is no longer
deemed to be our affiliate as a result of the sale of our shares
by the former Chairman to EZER.
77
Table of Contents
7.C.     Interests of Experts and
Counsel
Not applicable
ITEM 8.
FINANCIAL INFORMATION
8.A.
Consolidated Statements and Other Financial Information
Financial Statements
All relevant financial statements are included in
"Item 18. Financial Statements."
Legal Proceedings
Class action complaints
In May 2005, a number of putative class action complaints were
filed against us and certain of our directors and executive
officers in the United States District Court for the Southern
District of New York on behalf of all purchasers of our ADSs
traceable to the prospectus and registration statement prepared
and distributed in connection with our initial public offering
and/or purchasers of our ADSs in the open market during the
period from February 7, 2005 to May 12, 2005. Each of
the complaints alleges that certain statements made in the
prospectus and the registration statement and our subsequent
press releases were materially false and misleading in violation
of certain provisions of the federal securities laws in that we
failed to disclose and/or misrepresented: (i) that our core
product, Ragnarok Online, which traditionally has accounted for
approximately 95% of our revenue, was, at the time of the
initial public offering, suffering from declining customer
demand, increased competition and, contrary to the appearance of
the growth presented in the prospectus, in a material state of
decline in terms of sales; (ii) that our mobile animation
business was then being negatively impacted by material adverse
trends and had substantially disintegrated; and (iii) that
our royalties and license fees business was then being
negatively impacted by certain material adverse trends in our
operations in China, which was in a state of decline despite the
growth potential of the overall Chinese market for online games
as presented in the prospectus. The plaintiffs seek unspecified
compensatory and rescissory damages, costs and expenses from the
defendants. We believe these suits are without merit, and intend
to defend against them vigorously.
Dividend Policy
Since our inception, we have not declared or paid any dividends
on our common shares. Any decision to pay dividends in the
future will be subject to a number of factors, including cash
requirements for future capital expenditures and investments,
and other factors our board of directors may deem relevant. We
have no intention to pay dividends in the near future.
Consequently, we cannot give any assurance that any dividends
may be declared and paid in the future.
Holders of outstanding common shares on a dividend record date
will be entitled to the full dividend declared without regard to
the date of issuance of the common shares or any subsequent
transfer of the common shares. Payment of annual dividends in
respect of a particular year, if any, will be made in the
following year after approval by our shareholders at the annual
general meeting of shareholders, and payment of interim
dividends, if any, will be made in the same year after approval
by our board of directors, in each case, subject to certain
provisions of our articles of incorporation and the Korean
Commercial Code. See Item 10.B. "Articles of
Incorporation — Description of Capital
Stock — Dividend Rights."
Subject to the terms of the deposit agreement for the ADSs, you
will be entitled to receive dividends on common shares
represented by ADSs to the same extent as the holders of common
shares, less the fees and expenses payable under the deposit
agreement in respect of, and any Korean tax applicable to, such
dividends. See Item 10.E. "Taxation — Korean
Taxes — Taxation of Dividends." The depositary
will generally convert the Won it receives into
U.S. dollars and distribute the U.S. dollar amounts to
you. For a description of the U.S. federal income tax
consequences of dividends paid to our shareholders, see 10.E.
"Taxation — U.S. Federal Income Tax
Consideration for U.S. Persons — Equity
Securities — Taxation of Dividends."
78
Table of Contents
8.B.
Significant Changes
Not Applicable.
ITEM 9.
THE OFFER AND LISTING
9.A.
Offer and Listing Details
Common Stock
Our common shares are not listed on any stock exchange or
organized trading market, including in Korea. There is no public
market for our common shares, although a small number of our
common shares are traded in off-market transactions involving
private sales primarily in Korea.
ADSs
Following our initial public offering on February 8, 2005,
the ADSs have been issued by The Bank of New York as depositary
and are listed on the Nasdaq Stock Market's National Market
under the symbol "GRVY." Each ADS represents
one-fourth of one share of our common stock. As of June 29,
2006, 11,714,056 ADSs representing 2,928,514 shares of our
common stock were outstanding.
The table below shows the high and low trading prices on the
Nasdaq for the outstanding ADSs since January 1, 2005. Each
ADS represents one-quarter of one share of our common stock.
Price
Period
High
Low
(In US$)
2005
First Quarter
13.77
8.04
January
N/A
N/A
February
13.77
10.30
March
11.90
8.04
Second Quarter
9.72
5.30
April
9.50
8.02
May
9.72
5.30
June
8.70
6.30
Third Quarter
12.14
5.90
July
10.05
6.01
August
12.14
5.90
September
10.95
7.70
Fourth Quarter
8.64
6.10
October
8.64
6.70
November
7.15
6.24
December
7.25
6.10
2006 (through June 29, 2006)
First Quarter
9.75
6.00
January
7.37
6.63
February
7.58
6.65
March
9.75
6.00
Second Quarter (through June 29, 2006)
9.75
6.83
April
9.75
8.10
May
9.05
7.50
June (through June 29, 2006)
8.03
6.83
79
Table of Contents
9.B.
Plan of Distribution
Not applicable.
9.C.
Markets
See Item 9.A. "Offering and Listing Details."
9.D.
Selling Shareholders
Not applicable.
9.E.
Dilution
Not applicable.
9.F.
Expenses of the Issue
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
10.A.
Share Capital
See Item 10.B. "Articles of Incorporation."
10.B.
Articles of Incorporation
The section below provides summary information relating to the
material terms of our capital stock and our articles of
incorporation. It also includes a brief summary of certain
provisions of the Korean Commercial Code and related Korean law,
all as currently in effect.
General
Our total authorized share capital is 40,000,000 shares,
which consists of common shares and non-voting preferred shares,
each with a par value of Won 500 per share. Under our
articles of incorporation, holders of non-voting preferred
shares are entitled to dividends of not less than 1% and up to
15% of the par value of such shares, the exact rate to be
determined by our board of directors at the time of issuance,
provided that the holders of preferred shares shall be entitled
to receive dividends at a rate not lower than that determined
for holders of common shares. Under our articles of
incorporation, we may not issue any class of shares which are
redeemable.
Under our articles of incorporation, we are authorized to issue
non-voting preferred shares up to 2,000,000 shares.
As of June 29, 2006, 6,948,900 common shares were issued
and outstanding. We have not issued any equity securities other
than common shares. All of the issued and outstanding shares are
fully paid and non-assessable and are in registered form.
Pursuant to our articles of incorporation, we may issue
additional common shares without further shareholder approval.
The unissued shares remain authorized until an amendment to our
articles of incorporation changes the status of the authorized
shares to unauthorized shares.
Dividends
We may pay dividends to our shareholders in proportion to the
number of shares owned by each shareholder. The common shares
represented by the ADSs have the same dividend rights as our
other common shares.
We may declare dividends at the annual general meeting of
shareholders which is held within three months after the end of
each fiscal year. We pay the annual dividend shortly after the
annual general meeting
80
Table of Contents
declaring such dividends. We may distribute the annual dividend
in cash or in shares. However, a dividend in shares must be
distributed at par value, and dividends in shares may not exceed
one-half of the annual dividends.
Under the Korean Commercial Code, we may pay an annual dividend
only out of the excess of our net assets, on a non-consolidated
basis, over the sum of (i) our stated capital,
(ii) the total amount of our capital surplus reserve and
legal reserve accumulated up to the end of the relevant dividend
period and (iii) the legal reserve to be set aside for the
annual dividend. We may not pay an annual dividend unless we
have set aside as legal reserve an amount equal to at least 10%
of the cash portion of the annual dividend, or unless we have an
accumulated legal reserve of not less than one-half of our
stated capital. We may not use our legal reserves to pay cash
dividends but may transfer amounts from our legal reserves to
capital stock or use our legal reserves to reduce an accumulated
deficit.
In addition to annual dividends, under the Korean Commercial
Code and our articles of incorporation, we may pay interim
dividends once during each fiscal year in case we earn more
retained earning as of the end of the first half of such year
than the retained earning not disposed of at the time of the
general shareholder meeting with respect to the immediately
preceding fiscal year. Unlike annual dividends, the decision to
pay interim dividends can be made by a resolution of the board
of directors and is not subject to shareholder approval. Any
interim dividends must be paid in cash to the shareholders of
record as of June 30 of the relevant fiscal year.
The total amount of interim dividends payable in a fiscal year
shall not be more than the net assets on the balance sheet of
the immediately preceding fiscal year, after deducting
(i) our capital in the immediately preceding fiscal year,
(ii) the aggregate amount of our capital reserves and legal
reserves accumulated up to the immediately preceding fiscal
year, (iii) the amount of earnings for dividend payments
confirmed at the general meeting of shareholders with respect to
the immediately preceding fiscal year, (iv) the amount of
voluntary reserves accumulated up to the immediately preceding
fiscal year for special purposes pursuant to our articles of
incorporation or a resolution by our shareholders and
(v) the amount of legal reserves that should be set aside
for the current fiscal year following the interim dividend
payment. Furthermore, the rate of interim dividends for
non-voting preferred shares must be the same as that for our
common shares.
We have no obligation to pay any dividend unclaimed for five
years from the dividend payment date.
Since our inception, we have not declared or paid any dividends
on our common shares. Any decision to pay dividends in the
future will be subject to a number of factors, including cash
requirements for future capital expenditures and investments,
and other factors our board of directors may deem relevant. We
currently have no intention to pay dividends in the near future.
Distribution of free shares
In addition to paying dividends in shares out of our retained or
current earnings, we may also distribute to our shareholders an
amount transferred from our capital surplus or legal reserve to
our stated capital in the form of bonus shares issued free of
charge, or free shares. We must distribute such free shares to
all our shareholders in proportion to their existing
shareholdings. Since our inception, we have not distributed any
free shares. We currently have no intention to make such
distribution in the near future.
Preemptive rights and issuance of additional shares
We may issue authorized but unissued shares at the times and,
unless otherwise provided in the Korean Commercial Code, on such
terms as our board of directors may determine. We must offer new
shares on uniform terms to all shareholders who have preemptive
rights and are listed on our shareholders' register as of
the relevant record date.
81
Table of Contents
We may issue new shares pursuant to a board resolution to
persons other than existing shareholders, who in these
circumstances will not have preemptive rights if the new shares
are issued:
•
through a general public offering pursuant to a resolution of
    the board of directors of no more than 50% of the total number
    issued and outstanding shares;
•
to the members of the employee stock ownership association;
•
upon exercise of a stock option in accordance with our articles
    of incorporation;
•
in the form of depositary receipts of no more than 50% of the
    total number issued and outstanding shares;
•
to induce foreign direct investment necessary for business in
    accordance with the Foreign Investment Promotion Act of no more
    than 50% of the total number issued and outstanding shares;
•
to domestic or overseas financial institutions, corporations or
    individuals for the purpose of raising funds on an emergency
    basis;
•
as necessary for the inducement of technology, to certain
    companies under an alliance arrangement with us; or
•
by a public offering or subscribed for by the underwriters for
    the purpose of listing on the Stock Market Division or KOSDAQ
    Market Division of the Korea Exchange of no more than 50% of the
    total number issued and outstanding shares.
We must give public notice of preemptive rights regarding new
shares and their transferability at least two weeks before the
relevant record date. We will notify the shareholders who are
entitled to subscribe for newly issued shares of the deadline
for subscription at least two weeks prior to such deadline. If a
shareholder fails to subscribe by the deadline, the
shareholder's preemptive rights lapse. Our board of
directors may determine how to distribute fractional shares or
shares for which preemptive rights have not been exercised.
In the case of ADS holders, the depositary will be treated as
the shareholder entitled to preemptive rights.
General meeting of shareholders
We hold the annual general meeting of shareholders within three
months after the end of each fiscal year. Subject to a board
resolution or court approval, we may hold an extraordinary
general meeting of shareholders:
•
as necessary,
•
at the request of shareholders holding an aggregate of 3% or
    more of our outstanding shares, or
•
at the request of our audit committee.
We must give shareholders written notice or electronic document
setting out the date, place and agenda of the meeting at least
two weeks prior to the general meeting of shareholders. The
agenda of the general meeting of shareholders is determined at
the meeting of the board of directors. In addition, a
shareholder holding an aggregate of 3% or more of the
outstanding shares may propose an agenda for the general meeting
of shareholders. Such proposal should be made in writing at
least six weeks prior to the meeting. The board of directors may
decline such proposal if it is in violation of the relevant law
and regulations or our articles of incorporation. Shareholders
not on the shareholders' register as of the record date are
not entitled to receive notice of the general meeting of
shareholders or attend or vote at the meeting. Holders of
non-voting preferred shares, unless enfranchised, are not
entitled to receive notice of or vote at general meeting of
shareholders.
Our shareholders' meetings are held in Seoul, Korea or
other adjacent areas as deemed necessary.
Voting rights
Holders of our common shares are entitled to one vote for each
common share. However, common shares held by us (i.e., treasury
shares) or by any corporate entity in which we have, directly or
indirectly, greater
82
Table of Contents
than a 10% interest, do not have voting rights. Unless the
articles of incorporation explicitly state otherwise, the Korean
Commercial Code permits cumulative voting pursuant to which each
common share entitles the holder thereof to multiple voting
rights equal to the number of directors to be elected at such
time. A holder of common shares may exercise all voting rights
with respect to his or her shares cumulatively to elect one
director. However, our shareholders have decided not to adopt
cumulative voting.
Our shareholders may adopt resolutions at a general meeting by
an affirmative majority vote of the voting shares present or
represented at the meeting, where the affirmative votes also
represent at least one-third of our total voting shares then
issued and outstanding. However, under the Korean Commercial
Code and our articles of incorporation, the following matters
require approval by the holders of at least two-thirds of the
voting shares present or represented at the meeting, where the
affirmative votes also represent at least one-third of our total
voting shares then issued and outstanding:
•
amending our articles of incorporation;
•
removing a director;
•
effecting a capital reduction;
•
effecting any dissolution, merger or consolidation with respect
    to us;
•
transferring all or any significant part of our business;
•
acquiring all of the business of any other company or a part of
    the business of any other company having a material effect on
    our business;
•
issuing new shares at a price below the par value; or
•
any other matters for which such resolution is required under
    relevant law and regulations.
In general, holders of non-voting preferred shares (other than
enfranchised non-voting preferred shares) are not entitled to
vote on any resolution or receive notice of any general meeting
of shareholders. However, in the case of amendments to our
articles of incorporation, any merger or consolidation, capital
reductions or in some other cases that affect the rights or
interests of the non-voting preferred shares, approval of the
holders of such class of shares is required. We must obtain the
approval, by a resolution, of holders of at least two-thirds of
the non-voting preferred shares present or represented at a
class meeting of the holders of such class of shares, where the
affirmative votes also represent at least one-third of the total
issued and outstanding shares of such class. In addition, if we
are unable to pay dividends on non-voting preferred shares as
provided in our articles of incorporation, the holders of
non-voting preferred shares will become enfranchised and will be
entitled to exercise voting rights until the dividends are paid.
The holders of enfranchised non-voting preferred shares have the
same rights as holders of voting shares to request, receive
notice of, attend and vote at a general meeting of shareholders.
Shareholders may exercise their voting rights by proxy. Under
our articles of incorporation, the person exercising the proxy
does not have to be a shareholder. A person with a proxy must
present a document evidencing its power of attorney in order to
exercise voting rights.
Holders of ADSs will exercise their voting rights through the
ADS depositary. Subject to the provisions of the deposit
agreement, holders of ADSs will be entitled to instruct the
depositary how to vote the common shares underlying their ADSs.
Rights of dissenting shareholders
In some limited circumstances, including the transfer of all or
any significant part of our business and our merger or
consolidation with another company, dissenting shareholders have
the right to require us to purchase their shares. To exercise
this right, shareholders must submit to us a written notice of
their intention to dissent before the applicable general meeting
of shareholders. Within 20 days after the relevant
resolution is passed, the dissenting shareholders must request
us in writing to purchase their shares. We are obligated to
purchase the shares of dissenting shareholders within two months
after receiving such request. The purchase
83
Table of Contents
price for the shares is required to be determined through
negotiations between the dissenting shareholders and us. If an
agreement is not attained within 30 days since the receipt
of the request, we or the shareholder requesting the purchase of
shares may request the court to determine the purchase price.
Holders of ADSs will not be able to exercise dissenter's
rights unless they withdraw the underlying common shares and
become our direct shareholders.
Register of shareholders and record dates
Our transfer agent, Hana Bank, maintains the register of our
shareholders at its office in Seoul, Korea. It registers
transfers of shares on the register of shareholders on
presentation of the share certificates.
The record date for annual dividends is December 31 of each
year. For the purpose of determining shareholders entitled to
annual dividends, the register of shareholders will be closed
for the period from January 1 to January 31 of each year.
Further, for the purpose of determining the shareholders
entitled to some other rights pertaining to the shares, we may,
on at least two weeks' public notice, set a record date
and/or close the register of shareholders for not more than
three months. The trading of shares and the delivery of share
certificates may continue while the register of shareholders is
closed.
Annual report
At least one week before the annual general meeting of
shareholders, we must make our annual business report,
auditor's report and audited non-consolidated financial
statements available for inspection at our principal office and
at all of our branch offices. In addition, copies of such
reports, financial statements and any resolutions adopted at the
general meeting of shareholders will be available to our
shareholders.
Transfer of shares
Except for the procedural requirements which obligate a
non-citizen or non-residents of Korea to file a report to the
relevant government authority of Korea at the time of
acquisition or transfer of the Company's shares, there is
no restriction on transfer or sale of our shares applicable to
our shareholders or holders of ADSs under our articles of
incorporation and the relevant laws.
Under the Korean Commercial Code, the transfer of shares is
effected by delivery of share certificates. However, to assert
shareholders' rights against us, the transferee must have
his name and address registered on our register of shareholders.
For this purpose, a shareholder is required to file his name,
address and seal with our transfer agent. A non-Korean
shareholder may file a specimen signature in place of a seal,
unless he is a citizen of a country with a sealing system
similar to that of Korea. In addition, a non-resident
shareholder must appoint an agent authorized to receive notices
on his or her behalf in Korea and file a mailing address in
Korea. The above requirement does not apply to the holders of
ADSs.
Under current Korean regulations, Korean securities companies
and banks, including licensed branches of non-Korean securities
companies and banks, investment trust companies, futures trading
companies, internationally recognized foreign custodians and the
Korea Securities Depository may act as agents and provide
related services for foreign shareholders. Certain foreign
exchange controls and securities regulations apply to the
transfer of shares by non-residents or non-Koreans. See
Item 10.D. "Exchange Controls."
Our transfer agent is Hana Bank, located at 101-1, Euljiro 1-ga,
Jung-gu, Seoul, Korea.
Acquisition of our shares
We may not acquire our own common shares except in limited
circumstances, such as reduction of capital and acquisition of
our own common shares for the purpose of granting stock options
to our officers and employees. Under the Korean Commercial Code,
except in the case of a capital reduction (in which case we must
retire the common shares immediately), we must resell any common
shares acquired by us to a third party (including to a stock
option holder who exercised his or her stock option) within a
reasonable time. Except in limited circumstances, corporate
entities in which we own a 50% or greater equity interest may
not acquire our common shares.
84
Table of Contents
Except for the procedural requirements which obligate a
non-citizen or non-residents of Korea to file a report to the
relevant government authority of Korea at the time of
acquisition or transfer of the Company's shares, there
exists no provision which limits the rights to own our shares or
exercise voting rights on our shares due to their status as a
non-resident or non-Korean under our articles of incorporation
and the applicable Korean laws.
Liquidation rights
In the event of our liquidation, after payment of all debts,
liquidation expenses and taxes, our remaining assets will be
distributed among shareholders in proportion to their
shareholdings.
Other provisions
Under our articles of incorporation, there exists no provision
(i) which may delay or prevent a change in control of us
and that is triggered only in the event of a merger, acquisition
or corporate restructuring, (ii) which requires disclosure
of ownership above a certain threshold or (iii) that
governs the change in capital that is more stringent than
required by the applicable laws in Korea.
10.C.
Material Contracts
We have not entered into any material contracts other than in
the ordinary course of business and other than those described
below or otherwise as described in Item 4.
"Information About the Company" or elsewhere in this
annual report.
Agreement, dated October 7, 2004, between Myoung-Jin Lee
and GRAVITY Co., Ltd.
On October 7, 2004, we entered into an agreement with
Myoung-Jin Lee, under which the royalty payment schedule set
forth in the Agreement on Ragnarok Game Services and Related
Matters, dated January 22, 2003, between Mr. Lee and
us, was amended, among others, to reduce the rates of royalty
payable to Mr. Lee as percentages of the revenues we derive
from the sale or licensing of Ragnarok-related products.
Share Purchase Agreement between Moon Kyu Kim and GRAVITY
Co., Ltd.
On May 3, 2005, we entered into an agreement with each of
three shareholders of TriggerSoft Corporation, including
Mr. Moon Kyu Kim, a 45.5% shareholder of TriggerSoft
Corporation, to purchase from such shareholders an aggregate of
75% of the equity interest in TriggerSoft for Won
1.36 billion in cash. On May 12, 2005, we entered into
agreements with two other shareholders of TriggerSoft to acquire
an additional 13% equity interest in TriggerSoft for Won
254 million.
Amendment to Ragnarok License and Distribution Agreement
between GungHo Online Entertainment Inc. and GRAVITY Co.,
Ltd.
On September 23, 2004, we entered into an amendment
agreement with GungHo Online Entertainment Inc., our licensee in
Japan, under which the term of the Ragnarok License and
Distribution Agreement, dated July 24, 2002, between GungHo
Online Entertainment Inc., formerly ONSALE Japan K.K, and us was
extended until August 31, 2006.
Fourth Amendment to the Exclusive Ragnarok Online License and
Distribution Agreement between Soft-World International
Corporation and GRAVITY Co., Ltd.
On October 19, 2004, we entered into an amendment agreement
with Soft-World International Corporation, our licensee in
Taiwan and Hong Kong, under which the term of the Ragnarok
Exclusive License and Distribution Agreement, dated May 20,
2002, between Soft-World International Corporation and us was
extended until October 22, 2006. The amendment agreement
also provided for an extension fee of US$2,300,000 and an
increase in monthly royalty payments from 30% to 33% of the
licensee's monthly revenue from the Ragnarok Online
subscription.
85
Table of Contents
Fourth Amendment to the Exclusive Ragnarok License and
Distribution Agreement among Soft-World International
Corporation, Value Central Corporation and GRAVITY Co., Ltd.
On May 18, 2005, we entered into an amendment agreement
with Value Central Corporation, our licensee in China, and
Soft-World International Corporation, the parent of Value
Central, under which the term of the Exclusive Ragnarok License
and Distribution Agreement with Soft-World and Value Central was
extended for three months until August 18, 2005.
Amendment to the Exclusive Ragnarok Online License and
Distribution Agreement between Asiasoft International Co., Ltd.
and GRAVITY Co., Ltd.
On October 27, 2004, we entered into an amendment agreement
with Asiasoft International Co., Ltd., our licensee in Thailand,
under which the term of the Ragnarok License and Distribution
Agreement, dated June 13, 2002, between Asiasoft and us was
extended until March 4, 2007. The amendment agreement also
provided for an extension fee of US$1,000,000 and an increase in
monthly royalty payments from 30% to 35% of the licensee's
revenue from the Ragnarok Online subscription beginning March
2005.
Third Amendment to the Exclusive Ragnarok Online License and
Distribution Agreement between Level Up! Inc. and GRAVITY
Co., Ltd.
On February 18, 2005, we entered an amendment agreement
with Level Up! Inc., our licensee in the Philippines, to
extend the term of the Exclusive Ragnarok License and
Distribution Agreement, dated March 25, 2003, between
Level Up! Inc. for one year until August 31, 2006.
Amendment to the Exclusive Ragnarok Online License and
Distribution Agreement between PT. Lyto Datarindo Fortuna
(licensee in Indonesia) and GRAVITY Co., Ltd.
On October 29, 2004, we entered into an amendment agreement
with PT. Lyto Datarindo Fortuna, our licensee in Indonesia,
under which the term of the Exclusive Ragnarok License and
Distribution Agreement, dated April 2, 2004, PT. Lyto
Datarindo Fortuna and us was extended until February 26,
2007. The amendment agreement also provided for an extension fee
of US$250,000 and an increase in monthly royalty payments from
30% to 32% of the licensee's revenue from the Ragnarok
Online subscription.
Second Amendment to the Exclusive Ragnarok License and
Distribution Agreement between Burda Holding International GmbH
(licensee in Germany, Austria, Switzerland, Italy and Turkey)
and GRAVITY Co., Ltd.
On November 18, 2004, we entered into an amendment
agreement with Burda Holding International GmbH, under which the
Exclusive Ragnarok License and Distribution Agreement, dated
November 26, 2003, between Burda Holding and us was amended
to reduce the initial license fee from US$250,000 to US$150,000
and the monthly royalty payment from 33% to 30% of Burda
Holding's monthly revenue from the Ragnarok Online
subscription.
Exclusive Ragnarok License and Distribution Agreement between
Ongamenet PTY Ltd. and GRAVITY Co., Ltd.
On July 16, 2004, we entered into an agreement with
Ongamenet PTY Ltd., our licensee in Australia and New Zealand,
under which we granted Ongamenet an exclusive right to license
from us, and sublicense to parties approved by us, the
distribution rights for Ragnarok Online in Australia and New
Zealand for an initial license fee of US$250,000 payable and a
monthly royalty payment, payable in U.S. dollars, equal to
30% of the licensee's monthly revenue from Ragnarok Online
subscription. The term of the agreement is for two years from
the date of commercialization of Ragnarok Online, subject to
renewal on a yearly basis. The agreement may be terminated in
the event of bankruptcy of or a material breach by either party,
including the licensee's failure to pay licensing fee in a
timely manner.
86
Table of Contents
Exclusive Ragnarok License and Distribution Agreement between
Level Up! Interactive S.A. and GRAVITY Co., Ltd.
On August 15, 2004, we entered into an agreement with
Level Up! Interactive SA, our licensee in Brazil, under
which we granted Level Up! Interactive S.A. an exclusive
right to license from us, and sublicense to third parties
approved by us, the distribution rights for Ragnarok Online in
Brazil for an initial license fee of US$250,000 payable and a
monthly royalty payment, payable in U.S. dollars, equal to
25% of the licensee's monthly revenue from Ragnarok Online
subscription. The term of the agreement is for two years from
the date of commercialization of Ragnarok Online in Brazil,
subject to renewal on a yearly basis. The agreement may be
terminated in the event of bankruptcy of or a material breach by
either party, including the licensee's failure to pay
licensing fee in a timely manner.
Exclusive Ragnarok Software License Agreement Level Up!
Network India Pvt. Ltd. and GRAVITY Co., Ltd.
On May 24, 2004, we entered into an agreement with
Level Up! Network India Pvt. Ltd., our licensee in India,
under which we granted Level Up! Network India Pvt. Ltd. an
exclusive right to license from us, and sublicense to third
parties approved by us, the distribution rights for Ragnarok
Online in India for an initial license fee of US$250,000 payable
and a monthly royalty payment, payable in U.S. dollars,
equal to 25% of the licensee's monthly revenue from
Ragnarok Online subscription. The term of the agreement is for
two years from the date of commercialization of Ragnarok Online
in India, subject to renewal on a yearly basis. The agreement
may be terminated in the event of bankruptcy of or a material
breach by either party, including the licensee's failure to
pay licensing fee in a timely manner.
Lease Agreement, dated August 1, 2004, between Jung
Ryool Kim and GRAVITY Co., Ltd.
On August 1, 2004, we entered into a lease agreement with
Jung Ryool Kim, our chairman and largest shareholder, under
which we lease our headquarters space at a monthly rent of Won
33 million and a monthly management fee of approximately
Won 20 million, together with a security deposit of Won
3.8 billion. The lease agreement expired on
December 31, 2005.
Software Licensing Agreement, dated December 22, 2005,
and Software Purchase Agreement, dated December 22, 2005,
between GungHo Online Entertainment, Inc. and GRAVITY Co.,
Ltd.
On December 22, 2005, we entered into with GungHo Online
Entertainment, Inc. (i) a Software Licensing Agreement
("Software Licensing Agreement") for the exclusive
right to publish Emil Chronicle Online outside of Japan for a
term of three years, and (ii) a Software Purchase Agreement
("Software Purchase Agreement") for the purchase of
all rights to Emil Chronicle Online. We made a payment of Won
6,073 million (US$6,013 thousand) to GungHo in connection
with the Software Purchase Agreement.
Limited Partnership Agreement of Online Game Revolution
Fund No. 1, dated December 26, 2005.
On December 26, 2005, we entered into a Limited Partnership
Agreement of Online Game Revolution Fund No. 1, a fund
with a total proposed investment size of Japanese Yen
10 billion, which has an investment objective of investing
in companies which develop online games in Japan. Movida
Investment Inc., a Japanese company and an affiliate of SOFTBANK
CORP., will operate the fund as the general partner of the fund.
The fund as a term of five years, and we have agreed to
contribute a total of Japanese Yen 1,000 million, which
represents 10% of the total capital commitment in the fund by
limited partners. As of December 31, 2005, we have made a
capital contribution of Japanese Yen 100 million to the
fund.
Series D Preferred Stock Purchase Agreement dated
May 11, 2006 by and between Perpetual Entertainment, Inc.
and Gravity Co., Ltd.
On May 11, 2006, we entered into a stock purchase agreement
with Perpetual Entertainment, Inc. ("Perpetual"), an
online game developer based in the United States, whereby we
agreed to purchase Series D Preferred Stock issued by
Perpetual for US$9 million. Pursuant to the agreement, we
were granted the right to appoint one member to the board of
directors of Perpetual.
87
Table of Contents
Lease Agreement dated October 9, 2005 by and between
Meritz Marine & Fire Insurance Co., Ltd. and Gravity
Co., Ltd., as amended by Amendment dated November 17,
2005
On October 9, 2005, we entered into a lease agreement with
Meritz Marine & Fire Insurance Co., Ltd
("Meritz") for our principal executive and
administrative offices, located on five floors of Meritz Tower,
825-2, Yeoksam-Dong, Gangnam-Gu, Seoul 135-934, Korea. The term
of the lease commenced on December 5, 2005 and expires on
December 4, 2007, with an option to renew for additional
term of one year. The lease may be terminated upon 6 months
prior written notice by either party. The monthly rent is Won
176 million (US$174 thousand), with a monthly maintenance
fee of Won 82 million (US$82 thousand) and we have paid a
security deposit in the amount of Won 1,786 million
(US$1,768 thousand).
Real Estate Sale Agreement dated May 22, 2006 by and
between Yahoh Communication and Gravity Co., Ltd. for the sale
of the Gravity Building
On May 22, 2006, we entered into a real estate sale
agreement with Yahoh Communication, a Korean company, to sell
our building located at 619-4 Shinsa-Dong, Gangnam-Gu, Seoul,
Korea. We received Won 9.5 billion (US$9.4 million) as
the proceeds of sale from the transaction.
10.D.
Exchange Controls
General
The Foreign Exchange Transaction Law and the Presidential Decree
and regulations under such Law and Decree, or the Foreign
Exchange Transaction Laws, regulate investment in Korean
securities by non-residents and issuance of securities outside
Korea by Korean companies. Under the Foreign Exchange
Transaction Laws, non-residents may invest in Korean securities
only to the extent specifically allowed by such laws or
otherwise permitted by the Foreign Exchange authorities,
including the Minister of Finance and Economy, or the MOFE. The
Financial Supervisory Commission, or FSC, has also adopted,
pursuant to its authority under the Korean Securities and
Exchange Act, regulations that restrict investment by foreigners
in Korean securities and regulate issuance of securities outside
Korea by Korean companies.
Under the Foreign Exchange Transaction Laws, (i) if the
Korean government deems that it is inevitable due to the
outbreak of natural calamities, wars, conflict of arms or grave
and sudden changes in domestic or foreign economic circumstances
or other situations equivalent thereto, the MOFE may temporarily
suspend payment, receipt or the whole or part of transactions to
which the Foreign Exchange Transaction Laws apply, or impose an
obligation to safe-keep, deposit or sell means of payment in or
to certain Korean governmental agencies or financial
institutions; and (ii) if the Korean government deems that
the international balance of payments and international finance
are confronted or are likely to be confronted with serious
difficulty or the movement of capital between Korea and abroad
brings or is likely to bring on serious obstacles in carrying
out currency policies, exchange rate policies and other
macroeconomic policies, the MOFE may take measures to require
any person who intends to perform capital transactions to obtain
permission or to require any person who performs capital
transactions to deposit part of the means of payment acquired in
such transactions in certain Korean governmental agencies or
financial institutions, in each case subject to certain
limitations thereunder.
Filing with the Korean government in connection with the
issuance of ADSs
In order for us to issue common shares represented by ADSs in an
amount exceeding US$30 million, we are required to file a
prior report of the issuance with the MOFE through the
designated foreign exchange bank. No further Korean governmental
approval is necessary for the initial offering and issuance of
the ADSs.
Under current Korean law and regulations, the depositary is
required to obtain our prior consent for the number of common
shares to be deposited in any given proposed deposit which
exceeds the difference between (i) the aggregate number of
common shares deposited by us for the issuance of ADSs
(including deposits in connection with the initial and all
subsequent offerings of ADSs and stock dividends or other
distributions related to these ADSs), and (ii) the number
of common shares on deposit with the depositary at
88
Table of Contents
the time of such proposed deposit. We have agreed to consent to
any deposit so long as the deposit would not violate our
articles of incorporation or applicable Korean law and the total
number of our common shares on deposit with the depositary would
not exceed.
Furthermore, prior to making an investment of 10% or more of the
outstanding voting shares of a Korean company, foreign investors
are generally required under the Foreign Investment Promotion
Law to submit a report to a Korean bank (including a Korean
branch of a foreign bank). Subsequent sales of such shares by
foreign investors will also require a prior report to such
Korean bank.
Certificates of the shares must be kept in custody with an
eligible custodian
Under Korean law, certificates evidencing shares of Korean
companies must be kept in custody with an eligible custodian in
Korea, which certificates may in turn be required to be
deposited with the Korea Securities Depository, or KSD, if they
are designated as being eligible for deposit with the KSD. Only
the KSD, foreign exchange banks (including domestic branches of
foreign banks), securities companies (including domestic
branches of foreign securities companies), asset management
companies established under the Indirect Investment Asset
Management Business Act ("IIAMBA"), futures trading
companies and internationally recognized foreign custodians are
eligible to act as a custodian of shares for a non-resident or
foreign investor. However, a foreign investor may be exempted
from complying with this deposit requirement with the approval
of the Governor of the Financial Supervisory Service in
circumstances where such compliance is made impracticable,
including cases where such compliance would contravene the laws
of the home country of such foreign investor.
A foreign investor may appoint one or more standing proxies from
among the Korea Securities Depository, foreign exchange banks
(including domestic branches of foreign banks), securities
companies (including domestic branches of foreign securities
companies), asset management companies established under
the IIAMBA, futures trading companies and internationally
recognized foreign custodians, which have obtained a license to
act as a standing proxy to exercise shareholders' rights or
perform any matters related thereto if the foreign investor does
not perform these activities himself. However, a foreign
investor may be exempted from complying with these standing
proxy rules with the approval of the Governor of the Financial
Supervisory Service in circumstances where such compliance is
made impracticable, including cases where such compliance would
contravene the laws of the home country of such foreign investor.
Restrictions on ADSs and shares
Once the report to the MOFE is filed in connection with the
issuance of ADSs, no further Korean governmental approval is
necessary for the sale and purchase of ADSs in the secondary
market outside Korea or for the withdrawal of shares underlying
ADSs and the delivery inside Korea of shares in connection with
such withdrawal. In addition, persons who have acquired shares
as a result of the withdrawal of shares underlying the ADSs may
exercise their preemptive rights for new shares, participate in
free distributions and receive dividends on shares without any
further governmental approval.
A foreign investor may receive dividends on the shares and remit
the proceeds of the sale of the shares through a foreign
currency account and a Won account exclusively for stock
investments by the foreign investor which are opened at a
foreign exchange bank designated by the foreign investor without
being subject to any procedural restrictions under the Foreign
Exchange Transaction Laws. No approval is required for
remittance into Korea and deposit of foreign currency funds in
the foreign currency account. Foreign currency funds may be
transferred from the foreign currency account at the time
required to place a deposit for, or settle the purchase price
of, a stock purchase transaction to a Won account opened at a
securities company. Funds in the foreign currency account may be
remitted abroad without any governmental approval.
Dividends on shares are paid in Won. No Korean governmental
approval is required for foreign investors to receive dividends
on, or the Won proceeds of the sale of, any such shares to be
paid, received and retained in Korea. Dividends paid on, and the
Won proceeds of the sale of, any such shares held by a
non-resident of Korea must be deposited either in a Won account
with the investor's securities company or his Won account.
Funds in the investor's Won account may be transferred to
his foreign currency account or withdrawn for local
89
Table of Contents
living expenses up to certain limitations. Funds in the
investor's Won account may also be used for future
investment in shares or for payment of the subscription price of
new shares obtained through the exercise of preemptive right.
See Item 12.D. "American Depositary Shares —
Dividends and other distributions."
Securities companies are allowed to open foreign currency
accounts with foreign exchange banks exclusively for
accommodating foreign investors' securities investments in
Korea. Through such accounts, these securities companies may
enter into foreign exchange transactions on a limited basis,
such as conversion of foreign currency funds and Won funds,
either as a counterparty to or on behalf of foreign investors,
without such investors having to open their own Won and foreign
currency accounts with foreign exchange banks.
10.E.
Taxation
Korean taxation
The following is a discussion of material Korean tax
consequences to owners of our ADSs and common shares that are
non-resident individuals or non-Korean corporations without a
permanent establishment in Korea to which the relevant income is
attributable. Such non-resident individuals or non-Korean
corporations will be referred to as non-resident holders below.
The statements regarding Korean tax laws set forth below are
based on the laws in force and as interpreted by the Korean
taxation authorities as of the date hereof. This discussion is
not exhaustive of all possible tax considerations which may
apply to a particular investor, and prospective investors are
advised to satisfy themselves as to the overall tax consequences
of the acquisition, ownership and disposition of our common
shares, including specifically the tax consequences under Korean
law, the laws of the jurisdiction of which they are resident,
and any tax treaty between Korea and their country of residence,
by consulting their own tax advisors.
Dividends on the shares or ADSs
We will deduct Korean withholding tax from dividends paid to you
(whether in cash or in shares) at a rate of 27.5% (including
resident surtax). If you are a resident of a country that has
entered into a tax treaty with Korea, you may qualify for an
exemption or a reduced rate of Korean withholding tax according
to the tax treaty. If we distribute to you free distributions of
shares representing a capitalization of certain capital surplus
reserves or asset revaluation reserves, such distribution may be
subject to Korean withholding taxes.
In order to obtain a reduced rate of withholding tax pursuant to
an applicable tax treaty, you must submit to us, prior to the
dividend payment date, such evidence of tax residence as the
Korean tax authorities may require in order to establish your
entitlement to the benefits of the applicable tax treaty. See
Item 12.D. "American Depositary Shares —
Payment of taxes." If you hold ADSs, evidence of tax
residence may be submitted to us through the depositary. Please
see the discussion under "— Tax treaties"
below for discussion on treaty benefits.
Taxation of capital gains
In general, capital gains earned by you upon the transfer of our
common shares or ADSs are subject to Korean withholding tax at
the lower of (i) 11% (including resident surtax) of the
gross proceeds realized and (ii) 27.5% (including resident
surtax) of the net realized gains (subject to the production of
satisfactory evidence of the acquisition costs and the
transaction costs), unless you are exempt from Korean income
taxation under the applicable Korean tax treaty with your
country of tax residence. Please see "— Tax
treaties" below for a discussion on treaty benefits. Even
if you do not qualify for any exemption under a tax treaty, you
will not be subject to the foregoing withholding tax on capital
gains if you qualify for the relevant Korean domestic tax law
exemptions discussed in the following paragraphs.
With respect to our common shares, you will not be subject to
Korean income taxation on capital gains realized upon the
transfer of such common shares, (i) if our common shares
are listed on either the Market Division of the Korea Exchange
or the KOSDAQ Division of the Korea Exchange, (ii) if you
have no permanent establishment in Korea and (iii) if you
did not own or have not owned (together with any shares owned by
any entity which you have a certain special relationship with
and possibly including the shares
90
Table of Contents
represented by the ADSs) 25% or more of our total issued and
outstanding shares at any time during the calendar year in which
the sale occurs and during the five calendar years prior to the
calendar year in which the sale occurs.
With respect to ADSs, there are uncertainties as to whether they
should be viewed as securities separate from our common shares
underlying such ADSs or as the underlying shares themselves for
capital gains tax purposes, as discussed in more detail in the
following paragraph. However, in either case, you will be
eligible for exemptions for capital gains available under Korean
domestic tax law (in addition to the exemption afforded under
income tax treaties) if certain conditions discussed below are
satisfied. Under a tax ruling issued by the Korean tax authority
in 1995 (the "1995 tax ruling"), ADSs are treated as
securities separate from the underlying shares represented by
such ADSs and, based on such ruling (i) capital gains
earned by you from the transfer of ADSs to another non-resident
(other than to such transferees' permanent establishment in
Korea) have not been subject to Korean income taxation and
(ii) capital gains earned by you (regardless whether you
have a permanent establishment in Korea) from the transfer of
ADSs outside Korea have been exempt from Korean income taxation
by virtue of the Special Tax Treatment Control Law of Korea, or
the STTCL, provided that the issuance of the ADSs is deemed to
be an overseas issuance under the STTCL.
However, according to a recent tax ruling issued in 2004 by the
Korean tax authorities regarding the securities transaction tax
(the "2004 tax ruling"), depositary receipts
constitute share certificates the transfer of which is subject
to the securities transaction tax. Even though the 2004 tax
ruling addresses the securities transaction tax and not the
income tax on capital gains, it gives rise to a question as to
whether depositary shares (such as ADSs) should be viewed as the
underlying shares for capital gains tax purposes. In that case,
exemptions afforded under domestic Korean tax law to capital
gains from transfers of ADSs based on the treatment of ADSs as
securities separate from the underlying shares would no longer
apply (including those referred to in the 1995 tax ruling), but,
instead, exemptions for capital gains from transfers of
underlying shares would apply. Under such an exemption relevant
to this case, capital gains from transfers of ADSs should be
exempt from Korean income tax under the STTCL if (i) the
ADSs are listed on an overseas securities market that is similar
to the Market Division of the Korea Exchange or the KOSDAQ
Division of the Korea Exchange and (ii) the transfer of
ADSs is made through such securities market. We believe that
Nasdaq would satisfy the condition described in (i) above.
If you are subject to tax on capital gains with respect to the
sale of ADSs, or of our common shares which you acquired as a
result of a withdrawal, the purchaser or, in the case of the
sale of common shares on the KRX or through a licensed
securities company in Korea, the licensed securities company, is
required to withhold Korean tax from the sales price in an
amount at the lower of (i) 11% (including resident surtax)
of the gross realization proceeds and (ii) 27.5% (including
resident surtax) of the net realized gains (subject to the
production of satisfactory evidence of acquisition costs and the
transaction costs for the common shares or the ADSs) and to make
payment of these amounts to the Korean tax authority, unless you
establish your entitlement to an exemption under an applicable
tax treaty or domestic tax law. To obtain the benefit of an
exemption from tax pursuant to a tax treaty, you must submit to
the purchaser or the securities company, or through the ADS
depositary, as the case may be, prior to or at the time of
payment, such evidence of your tax residence as the Korean tax
authorities may require in support of your claim for treaty
benefits. Please see the discussion under "— Tax
treaties" below for an additional explanation on claiming
treaty benefits.
Tax treaties
Korea has entered into a number of income tax treaties with
other countries (including the United States), which would
reduce or exempt Korean withholding tax on dividends on, and
capital gains on transfer of, our common shares or ADSs. For
example, under the Korea-United States income tax treaty,
reduced rates of Korean withholding tax of 16.5% or 11.0%
(respectively, including resident surtax, depending on your
shareholding ratio) on dividends and an exemption from Korean
withholding tax on capital gains are available to residents of
the United States that are beneficial owners of the relevant
dividend income or capital gains. However, under Article 17
(Investment or Holding Companies) of the Korea-United States
income tax treaty, such reduced rates and exemption do not apply
if (i) you are a United States corporation, (ii) by
91
Table of Contents
reason of any special measures, the tax imposed on you by the
United States with respect to such dividends or capital gains is
substantially less than the tax generally imposed by the United
States on corporate profits,
and
(iii) 25% or more
of your capital is held of record or is otherwise determined,
after consultation between competent authorities of the United
States and Korea, to be owned directly or indirectly by one or
more persons who are not individual residents of the United
States. Also, under Article 16 (Capital Gains) of the
Korea-United States income tax treaty, the exemption on capital
gains does not apply if you are an individual, and (a) you
maintain a fixed base in Korea for a period or periods
aggregating 183 days or more during the taxable year and
your ADSs or common shares giving rise to capital gains are
effectively connected with such fixed base or (b) you are
present in Korea for a period or periods of 183 days or
more during the taxable year.
You should inquire for yourself whether you are entitled to the
benefit of an income tax treaty with Korea. It is the
responsibility of the party claiming the benefits of an income
tax treaty in respect of dividend payments or capital gains to
submit to us, the purchaser or the securities company, as
applicable, a certificate as to its tax residence. In the
absence of sufficient proof, we, the purchaser or the securities
company, as applicable, must withhold tax at the normal rates.
Further, effective from July 1, 2002, in order for you to
obtain the benefit of a tax exemption on certain Korean source
income (e.g., dividends and capital gains) under an applicable
tax treaty, Korean tax law requires you (or your agent) to
submit the application for tax exemption along with a
certificate of your tax residency issued by a competent
authority of your country of tax residence. Such application
should be submitted to the relevant district tax office by the
ninth day of the month following the date of the first payment
of such income.
Furthermore, with the amendments of Article 2-2 of the
International Tax Adjustment Law, Article 98-5 of the
Corporate Tax Law and Article 156-4 of the Personal Income
Tax Law, Korea adopted the New Anti-Treaty Shopping Rules
("New Rules"), which will take effect on July 1,
2006. According to the New Rules, even if a tax treaty provides
for either an exemption from or reduction of the applicable
income tax, the company or person paying dividends, interest,
royalty or consideration for share purchase to an offshore
entity established in a tax haven jurisdiction designated by the
Minister of Finance and Economy, or MOFE, must initially
withhold the applicable tax on such income under the applicable
tax law. If, however, the National Tax Service of Korea has
granted prior approval upon application for an exemption or
reduction of tax pursuant to a relevant tax treaty, the
withholding requirement under the New Rules will not apply. So
far, the MOFE has not designated the tax haven jurisdictions
under the New Rules.
Inheritance tax and gift tax
Korean inheritance tax is imposed upon (i) all assets
(wherever located) of the deceased if he or she was domiciled in
Korea at the time of his or her death and (ii) all property
located in Korea which passes on death (irrespective of the
domicile of the deceased). Gift tax is imposed in similar
circumstances to the above (based on the donee's place of
domicile in the case of (i) above). The taxes are imposed
if the value of the relevant property is above a limit and vary
from 10% to 50% at sliding scale rate according to the value of
the relevant property and the identity of the parties involved.
Under the Korean inheritance and gift tax laws, shares issued by
Korean corporations are deemed located in Korea irrespective of
where the share certificates are physically located or by whom
they are owned. If the tax authority's interpretation of
treating depositary receipts as the underlying share
certificates under the 2004 tax ruling applies in the context of
inheritance and gift taxes as well, you may be treated as the
owner of the common shares underlying the ADSs.
At present, Korea has not entered into any tax treaty relating
to inheritance or gift taxes.
Securities transaction tax
If you transfer the common shares and the common shares are
listed on neither the Market Division of the Korea Exchange or
the KOSDAQ Division of the Korea Exchange, you will be subject
to securities transaction tax at the rate of 0.5%.
92
Table of Contents
With respect to transfers of ADSs, depositary receipts (which
the ADSs fall under) constitute share certificates subject to
the securities transaction tax according to the 2004 tax ruling;
provided that, under the Securities Transaction Tax Law, the
transfer of depositary receipts listed on, among others, the New
York Stock Exchange or Nasdaq is exempt from the securities
transaction tax.
According to tax rulings issued by the Korean tax authorities in
2000 and 2002, foreign stockholders are not subject to
securities transaction tax upon the deposit of underlying share
and receipt of depositary securities or upon the surrender of
depositary securities and withdrawal of the originally deposited
underlying share, but there remained uncertainties as to whether
holders of ADSs other than initial holders will not be subject
to securities transaction tax when they withdraw common shares
upon surrendering the ADSs. However, the holding of the 2004 tax
ruling referred to above seems to view the ADSs as the
underlying shares at least for the purpose of the securities
transaction tax and, though not specifically stated, could be
read to imply that the securities transaction tax should not
apply to deposits of common shares in exchange of ADSs or
withdrawals of common shares upon surrender of the ADSs
regardless of whether the holder is the initial holder because
the transfer of ADSs by the initial holder to a subsequent
holder would have already been subject to securities transaction
tax under such tax ruling.
In principle, the securities transaction tax, if applicable,
must be paid by the transferor of the shares or the rights to
subscribe to such shares. When the transfer is effected through
a securities settlement company, such settlement company is
generally required to withhold and pay the tax to the tax
authorities. When such transfer is made through a securities
company only, such securities company is required to withhold
and pay the tax. Where the transfer is effected by a
non-resident without a permanent establishment in Korea, other
than through a securities settlement company or a securities
company, the transferee is required to withhold and pay the
securities transaction tax.
U.S. federal income tax considerations
The following summary describes certain U.S. federal income
tax consequences of the purchase, ownership or disposition of
our common shares and ADSs as of the date hereof. The discussion
set forth below is applicable to U.S. Holders (as defined
below) (i) who are residents of the United States for
purposes of the current United States/Korea Income Tax Treaty,
(ii) whose common shares or ADSs are not, for purposes of
the treaty, effectively connected with a permanent establishment
in Korea and (iii) who otherwise qualify for the full
benefits of the treaty. Except where noted, it deals only with
our common shares and ADSs held as capital assets and does not
deal with special situations, such as those of:
•
dealers in securities or currencies;
•
financial institutions;
•
regulated investment companies;
•
real estate investment trusts;
•
tax-exempt entities;
•
insurance companies;
•
traders in securities that elect to use the
mark-to
-market method
    of accounting for their securities;
•
persons holding our common shares or ADSs as part of a hedging,
    integrated, conversion or constructive sale transaction or a
    straddle;
•
persons owning (or treated as owning) 10% or more of our voting
    stock;
•
persons liable for alternative minimum tax;
•
investors in pass-through entities; or
•
persons whose "functional currency" is not the United
    States dollar.
93
Table of Contents
The discussion below is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the
"Code"), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities
may be repealed, revoked or modified so as to result in
U.S. federal income tax consequences different from those
discussed below. In addition, this summary assumes that the
deposit agreement, and all other related agreements, will be
performed in accordance with their terms.
Persons considering the purchase, ownership or disposition of
our common shares or ADSs should consult their own tax advisors
concerning U.S. federal income tax consequences in light of
their particular situation as well as any other tax consequences
arising under the laws of any taxing jurisdiction.
As used herein, the term "U.S. Holder" means a
beneficial holder of our common share or ADS that is for
U.S. federal income tax purposes:
•
an individual citizen or resident of the United States;
•
a corporation (or other entity treated as a corporation for
    U.S. federal income tax purposes) created or organized in
    or under the laws of the United States, any state thereof or the
    District of Columbia;
•
an estate the income of which is subject to U.S. federal
    income taxation regardless of its source; or
•
a trust:
•
that is subject to the primary supervision of a court within the
    United States and the control of one or more United States
    persons as described in section 7701(a)(30) of the
    Code, or
•
that has a valid election in effect under applicable
    U.S. Treasury regulations to be treated as a United States
    person.
If a partnership holds our common shares or ADSs, the tax
treatment of a partner will generally depend upon the status and
the activities of the partner and the partnership. If you are a
partner of a partnership holding our common shares or ADSs, you
should consult your tax advisors.
ADSs
If you hold our ADSs, for U.S. federal income tax purposes,
you generally will be treated as the owner of the underlying
common shares that are represented by such ADSs. Accordingly,
deposits or withdrawals of our common shares for ADSs generally
will not be subject to U.S. federal income tax.
Taxation of dividends
Subject to the passive foreign investment company rules
described below, the gross amount of distributions on our ADSs
or common shares (including amounts withheld to reflect Korean
withholding taxes) will be taxable as dividends, to the extent
paid out of our current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. Such
income (including withheld taxes) will be includable in your
gross income as ordinary income on the day actually or
constructively received by you, in the case of our common
shares, or by the depositary, in the case of our ADSs. Such
dividends will not be eligible for the dividends received
deduction allowed to corporations under the Code. With respect
to non-corporate U.S. Holders, certain dividends received
in taxable years beginning before January 1, 2011 from a
qualified foreign corporation may be subject to reduced rates of
taxation. A qualified foreign corporation includes a foreign
corporation (other than a passive foreign investment company)
that is eligible for the benefits of a comprehensive income tax
treaty with the United States which the United States Treasury
Department determines to be satisfactory for these purposes and
which includes an exchange of information provision. The United
States Treasury Department has determined that the current
income tax treaty between the United States and Korea meets
these requirements. A foreign corporation (other than a foreign
passive investment company) is also treated as a qualified
foreign corporation with respect to dividends paid by that
corporation on shares (or ADSs backed by such shares) that are
readily tradable on an established securities market in the
United States. Our common shares generally will not be
considered readily tradable for these purposes. United States
Treasury Department guidance indicates that our ADSs, which will
be listed on
94
Table of Contents
Nasdaq, are readily tradable on an established securities market
in the United States. There can be no assurance that our ADSs
will be considered readily tradable on an established securities
market in later years. Non-corporate holders that do not meet a
minimum holding period requirement during which they are not
protected from the risk of loss or that elect to treat the
dividend income as "investment income" pursuant to
section 163(d)(4) of the Code will not be eligible for the
reduced rates of taxation regardless of our status as a
qualified foreign corporation. In addition, the rate reduction
will not apply to dividends if the recipient of a dividend is
obligated to make related payments with respect to positions in
substantially similar or related property. This disallowance
applies even if the minimum holding period has been met.
The amount of any dividend paid in Won will equal the United
States dollar value of the Won received calculated by reference
to the exchange rate in effect on the date the dividend is
received by you, in the case of our common shares, or by the
Depositary, in the case of our ADSs, regardless of whether the
Won are converted into United States dollars. If the Won
received as a dividend are not converted into United States
dollars on the date of receipt, you will have a basis in the Won
equal to their United States dollar value on the date of
receipt. Any gain or loss realized on a subsequent conversion or
other disposition of the Won generally will be treated as
U.S. source ordinary income or loss.
Subject to certain conditions and limitations, Korean
withholding taxes on dividends may be treated as foreign taxes
eligible for credit against your U.S. federal income tax
liability. Instead of claiming a credit, you may, at your
election, deduct such otherwise creditable Korean taxes in
computing your taxable income, subject to generally applicable
limitations under U.S. federal income tax law. For purposes
of calculating the foreign tax credit, dividends paid on our
ADSs or common shares generally will be treated as income from
sources outside the United States and generally will constitute
"passive income" (or, for taxable years beginning
after December 31, 2006, "passive category
income"). Further, in certain circumstances, if you:
•
have held our ADSs or common shares for less than a specified
    minimum period during which you are not protected from risk of
    loss; or
•
are obligated to make payments related to the dividends;
you will not be allowed a foreign tax credit for foreign taxes
imposed on dividends paid on our ADSs or common shares. The
rules governing the foreign tax credit are complex. You are
urged to consult your tax advisors regarding the availability of
the foreign tax credit under your particular circumstances.
To the extent that the amount of any distribution exceeds our
current and accumulated earnings and profits for a taxable year,
as determined under U.S. federal income tax principles, the
distribution will first be treated as a tax-free return of
capital, causing a reduction in the adjusted basis of our ADSs
or common shares (thereby increasing the amount of gain, or
decreasing the amount of loss, to be recognized by you on a
subsequent disposition of our ADSs or common shares), and the
balance in excess of adjusted basis will be taxed as capital
gain recognized on a sale or exchange. Consequently, such
distributions in excess of our current and accumulated earnings
and profits would generally not give rise to foreign source
income and you would generally not be able to use the foreign
tax credit arising from any Korean withholding tax imposed on
such distribution unless such credit can be applied (subject to
applicable limitations) against U.S. federal income tax due
on other foreign source income in the appropriate category for
foreign tax credit purposes.
Distributions of our ADSs, common shares or preemptive rights to
subscribe for our common shares that are received as part of a
pro rata distribution to all of our common shareholders
generally will not be subject to U.S. federal income tax.
Consequently such distributions will not give rise to foreign
source income, and you will not be able to use the foreign tax
credit arising from any Korean withholding tax imposed on such
distributions unless such credit can be applied (subject to
applicable limitations) against U.S. federal income tax due
on other income derived from foreign sources. The basis of our
new ADSs, common shares or rights so received will generally be
determined by allocating your adjusted basis in our old ADSs or
common shares between our old ADSs or common shares and our new
ADSs, common shares or rights received, based on
95
Table of Contents
their relative fair market values on the date of distribution.
However, the basis of the rights to subscribe our common shares
generally will be zero if:
•
the fair market of such rights is less than 15 percent of
    the fair market value of our old ADSs or common shares at the
    time of distribution, unless you elect to determine the basis of
    our old ADSs or common shares and of such rights by allocating
    your adjusted basis of our old ADSs or common shares between our
    old ADSs or common shares and such rights, based on their
    relative fair market values on the date of distribution; or
•
such rights are not exercised and thus expire.
Taxation of capital gains
Subject to the passive foreign investment company rules
described below, for U.S. federal income tax purposes, you
will recognize taxable gain or loss on any sale or other
disposition of our ADSs or common shares in an amount equal to
the difference between the amount realized for our ADSs or
common shares and your tax basis in our ADSs or common shares.
Such gain or loss will generally be capital gain or loss.
Capital gains of individuals derived with respect to capital
assets held for more than one year are eligible for reduced
rates of taxation. The deductibility of capital losses is
subject to limitations. Any gain or loss recognized by you will
generally be treated as United States source gain or loss.
Any Korean securities transaction tax imposed on the sale or
other disposition of our common shares or ADSs will not be
treated as a creditable foreign tax for U.S. federal income
tax purposes, although you may be entitled to deduct such tax,
subject to applicable limitations under the Code.
Passive foreign investment companies
In general, we will be a passive foreign investment company
("PFIC") for U.S. federal income tax purposes for
any taxable year in which:
•
at least 75% of our gross income is passive income; or
•
on average at least 50% of the value (determined on a quarterly
    basis) of our assets is attributable to assets that produce or
    are held for the production of passive income.
For this purpose, passive income generally includes dividends,
interest, royalties, rents (other than rents and royalties
derived in the active conduct of a trade or business and not
derived from a related person). If we own, directly or
indirectly, at least 25% by value of the stock of another
corporation, we will be treated, for purposes of the PFIC tests,
as owning our proportionate share of the other
corporation's assets and receiving our proportionate share
of the other corporation's income.
The determination of whether we are a PFIC is made annually at
the end of each taxable year and is dependent upon a number of
factors, some of which are uncertain or beyond our control,
including the value of our assets, ADSs and common shares and
the amount and type of our income. In light of the nature of our
business activities and our holding of a significant amount of
cash, short-term investments and other passive assets after our
initial public offering in 2005, we may have been in 2005, and
may be in subsequent years, a PFIC. If we are a PFIC for any
taxable year during which you hold our ADSs or our common
shares, you could be subject to adverse U.S. federal income
tax consequences as discussed below.
If we are a PFIC for any taxable year during which you hold our
ADSs or common shares, you will be subject to special tax rules
with respect to any "excess distribution" received and
any gain realized from a sale or other disposition (including a
pledge) of our ADSs or common shares. Distributions received in
a taxable year that are greater than 125% of the average annual
distributions received during the shorter of the three preceding
taxable years or your holding period for our ADSs or common
shares will be treated as excess distributions. Under these
special tax rules:
•
the excess distribution or gain will be allocated ratably over
    your holding period for our ADSs or common shares;
96
Table of Contents
•
the amount allocated to the current taxable year, and any
    taxable year prior to the first taxable year in which we were a
    PFIC, will be treated as ordinary income; and
•
the amount allocated to each other year will be subject to tax
    at the highest tax rate in effect for that year and the interest
    charge generally applicable to underpayments of tax will be
    imposed on the resulting tax attributable to each such year.
In addition, non-corporate U.S. Holders will not be
eligible for reduced rates of taxation on any dividends received
from us prior to January 1, 2011, if we are a PFIC in the
taxable year in which such dividends are paid or in the
preceding taxable year. If we are a PFIC, you will be required
to file Internal Revenue Service Form 8621 for each taxable
year in which, among other circumstances, you receive a
distribution from, or recognize gain from a sale or other
disposition of, our ADSs or common shares.
In certain circumstances, in lieu of being subject to the excess
distribution rules discussed above, a shareholder may make an
election to include gain on the stock of a PFIC as ordinary
income under a
mark-to
-market method
provided that such stock is regularly traded on a qualified
exchange. Under current law, the
mark-to
-market election
may be available for holders of our ADSs because our ADSs will
be listed on Nasdaq which constitutes a qualified exchange as
designated in the Internal Revenue Code, although there can be
no assurance that our ADSs will be "regularly traded"
for purposes of the
mark-to
-market
election. The
mark-to
-market election
may not be available for holders of our common shares.
If you make an effective
mark-to
-market
election, you will include in each year as ordinary income the
excess of the fair market value of our ADSs or common shares at
the end of the year over your adjusted tax basis in our ADSs or
common shares. You will be entitled to deduct as an ordinary
loss each year the excess of your adjusted tax basis in our ADSs
or common shares over their fair market value at the end of the
year, but only to the extent of the net amount previously
included in income as a result of the
mark-to
-market
election. In addition, any gain or (subject to the foregoing
limitation) loss from a sale or other disposition of our ADSs or
common shares generally will be ordinary rather than capital.
Your adjusted tax basis in our ADSs or common shares will be
increased by the amount of any income inclusion and decreased by
the amount of any deductions under the
mark-to
-market rules.
If you make a
mark-to
-market election
it will be effective for the taxable year for which the election
is made and all subsequent taxable years unless our ADSs or
common shares are no longer regularly traded on a qualified
exchange or the Internal Revenue Service consents to the
revocation of the election. You are urged to consult your tax
advisor about the availability of the
mark-to
-market
election, and whether making the election would be advisable in
your particular circumstances.
Alternatively, the rules described above could be avoided if an
election to treat us as a "qualified electing fund"
under section 1295 of the Code were available. This option
is not available to you because we do not intend to comply with
the requirements necessary to permit you to make this election.
You are urged to consult your own tax advisors concerning the
U.S. federal income tax consequences of holding our ADSs or
common shares if we are considered a PFIC in any taxable year.
Information reporting and backup withholding
In general, information reporting will apply to dividends
(including distributions of interest on shareholders'
equity) in respect of our ADSs or common shares and the proceeds
from the sale, exchange or redemption of our ADSs or common
shares that are paid to you within the United States (and in
certain cases, outside the United States), unless you are an
exempt recipient such as a corporation. A backup withholding tax
may apply to such payments if you fail to provide a taxpayer
identification number or certification of exempt status or fail
to report in full dividend and interest income. Any amounts
withheld under the backup withholding rules will be allowed as a
refund or a credit against your U.S. federal income tax
liability provided the required information is furnished to the
Internal Revenue Service.
97
Table of Contents
10.F.
Dividends and Paying Agents
See Item 8.A. "Consolidated Statements and Other
Financial Information — Dividend Policy,"
Item 10.B. "Articles of Incorporation —
Description of Capital Stock — Dividend rights"
and Item 12.D. "American Depositary Shares —
Dividends and other distributions."
The Bank of New York, as depositary of the ADSs, has agreed to
pay to the holders of ADSs the cash dividends or other
distributions it or the custodian receives on shares or other
deposited securities, after deducting its fees and expenses. See
Item 12.D. "American Depositary Shares —
Dividends and other distributions."
10.G.
Statement by Experts
Not applicable.
10.H.
Documents on Display
We have filed this annual report on
Form
20-F,
including exhibits, with the Securities and Exchange Commission.
As allowed by the Securities and Exchange Commission, in
Item 19 of this annual report, we incorporate by reference
certain information we filed with the Securities and Exchange
Commission. This means that we can disclose important
information to you by referring you to another document filed
separately with the Securities and Exchange Commission. The
information incorporated by reference is considered to be part
of this annual report. You may inspect and copy this annual
report, including exhibits, and documents that are incorporated
by reference in this annual report at the Public Reference Room
maintained by the Securities and Exchange Commission at 100 F
Street, N.E., Washington, D.C. 20549. Please call the
Securities and Exchange Commission at
1-800-SEC-0330
for
further information on the operation of the Public Reference
Room. Any filings we make electronically will be available to
the public over the Internet at the website of the Securities
and Exchange Commission at http://www.sec.gov.
10.I.
Subsidiary Information
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
11.A.
Quantitative Information about Market Risk
In the normal course of our business, we are subject to market
risk associated with currency movements on non-Won denominated
assets and liabilities and license and royalty revenues and
interest rate movements.
Foreign currency risk
We conduct our business primarily in Won, which is also our
functional and reporting currency. However, we have exposure to
some foreign currency exchange-rate fluctuations on cash flows
from our overseas licensees. The primary foreign currencies to
which we are exposed are the U.S. dollar, the Japanese Yen,
and the NT dollar. Fluctuations in these exchange rates may
affect our revenues from license fees and royalties and result
in exchange losses and increased costs in Won terms.
As of December 31, 2005, we had Japanese Yen denominated
accounts receivable of Won 1,464 million, which represented
30% of our total consolidated accounts receivable balance, and
U.S. dollar denominated accounts receivable of Won
1,642 million, which represented 34% of our total
consolidated accounts receivable balance. We also had Japanese
Yen denominated accounts payable of Won 407 million, which
represented 4% of our total consolidated accounts payable
balance, and U.S. dollar denominated accounts payable of
Won 1,928 million, which represented 17% of our total
consolidated accounts payable balance. As these balances all
have short maturities, exposure to foreign currency fluctuations
on these balances is not significant. For example, a
hypothetical 10% appreciation of the Won against the Japanese
Yen, the U.S. dollar and the NT dollar, in the aggregate,
would reduce our cash flows by Won 77 million.
98
Table of Contents
In 2005, Won 43,291 million of our revenue was derived from
currencies other than the Won: primarily the Japanese Yen, Won
17,246 million; the NT dollar, Won 10,582 million; the
Thai Baht, Won 4,933 million; and the U.S. dollar, Won
2,701 million. A hypothetical 10% depreciation in the
exchange rates of these foreign currencies against the Won in
2005 would have reduced our revenue by Won 3,546 million.
Since 2005, we have begun entering into derivatives arrangements
to hedge against the risk of foreign currency fluctuation. As of
December 31, 2005, we had no outstanding foreign currency
forward contracts. As of June 26, 2006, we have foreign
currency forward contracts outstanding in the amount of US$1,000
thousand. We may in the future continue to enter into hedging
transactions in an effort to reduce our exposure to foreign
currency exchange risks, but we may not be able to successfully
hedge our exposure at all. In addition, our currency exchange
losses may be magnified by Korean exchange control regulations
that restrict our ability to convert the Won into
U.S. dollars, Japanese Yen or the Euro under certain
emergency circumstances.
Interest rate risk
Our exposure to risk for changes in interest rates relates
primarily to our investments in short-term financial instruments
and other investments. Investments in both fixed rate and
floating rate interest earning instruments carry some interest
rate risk. The fair value of fixed rate securities may fall due
to a rise in interest rates, while floating rate securities may
produce less income than expected if interest rates fall. As
substantially all of our cash equivalents consist of bank
deposits and short-term money market instruments, we do not
expect any material change with respect to our net income as a
result of a 10% hypothetical interest rate change. We do not
believe that we are subject to any material market risk exposure
on our short-term financial instruments, as they are readily
convertible to cash and have short maturities. We do not have
any derivative financial instruments.
The above discussion and the estimated amounts generated from
the sensitivity analyses referred to above include
"forward-looking statements," which assume for
analytical purposes that certain market conditions may occur.
Accordingly, such forward-looking statements should not be
considered projections by us of future events or losses.
11.B.
Qualitative Information about Market Risk
See Item 11.A. "Quantitative Information about Market
Risk."
11.C.
Interim Periods
Not applicable.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY
    SECURITIES
12.A.
Debt Securities
Not applicable.
12.B.
Warrants and Rights
Not applicable.
12.C.
Other Securities
Not applicable.
12.D.
American Depositary Shares
The Bank of New York, as depositary, executes and delivers the
American Depositary Receipts, or ADRs. Each ADR is a certificate
evidencing a specific number of American Depositary Shares, also
referred to as ADSs. Each ADS will represent one fourth of one
common share (or a right to receive one fourth of one
99
Table of Contents
common share) deposited with Korea Securities Depository, as
custodian for the depositary in Korea. Each ADS will also
represent any other securities, cash or other property which may
be held by the depositary under the deposit agreement referred
to below. The depositary's office at which the ADRs will be
administered is located at 101 Barclay Street, New York, New
York 10286.
A holder of ADSs may hold ADSs either directly (by having an ADR
registered in its name) or indirectly through its broker or
other financial institution. If a holder of ADSs holds ADSs
directly, it is an ADS holder. This description assumes the
holders of ADSs hold their ADSs directly. If the holders of ADSs
hold the ADSs indirectly, they must rely on the procedures of
their broker or other financial institution to assert the rights
of ADS holders described in this section. The holders of ADSs
should consult with their broker or financial institution to
find out what those procedures are.
We will not treat the holders of ADSs as one of our shareholders
and they will not have shareholder rights. Korean law governs
shareholder rights. The depositary will be the holder of the
shares underlying the ADSs. A holder of ADSs will have ADS
holder rights. A deposit agreement among us, the depositary, ADS
holders and the beneficial owners of ADSs set out ADS holder
rights as well as the rights and obligations of the depositary.
New York law governs the deposit agreement and the ADSs.
The following is a summary of the material provisions of the
deposit agreement. For more complete information, holders of
ADSs should read the entire deposit agreement and the form of
ADR. Directions on how to obtain copies of those documents are
provided elsewhere in this annual report under the caption
"Where You Can Find More Information."
Dividends and other distributions
How will a holder of ADSs receive dividends and other
    distributions on the shares?
The depositary has agreed to pay to holders of ADSs the cash
dividends or other distributions it or the custodian receives on
shares or other deposited securities, after deducting its fees
and expenses. Holders of ADSs will receive these distributions
in proportion to the number of shares their ADSs represent.
•
Cash.
The depositary will convert any cash dividend or
    other cash distribution we pay on the shares into
    U.S. dollars, if it can do so on a reasonable basis and can
    transfer the U.S. dollars to the United States. If
    that is not possible or if any government approval is needed and
    cannot be obtained, the deposit agreement allows the depositary
    to distribute the foreign currency only to those ADS holders to
    whom it is possible to do so. It will hold the foreign currency
    it cannot convert for the account of the ADS holders who have
    not been paid. It will not invest the foreign currency and it
    will not be liable for any interest.
Before making a distribution, the depositary will deduct any
withholding taxes that must be paid. See Item 10.E.
"Taxation — Korean taxation." It will
distribute only whole U.S. dollars and cents and will round
fractional cents to the nearest whole cent. If the exchange
rates fluctuate during a time when the depositary cannot convert
the foreign currency, holders of ADSs may lose some or all of
the value of the distribution.
•
Shares.
The depositary may distribute additional ADSs
    representing any shares we distribute as a dividend or free
    distribution. The depositary will only distribute whole ADSs. It
    will try to sell shares which would require it to deliver a
    fractional ADS and distribute the net proceeds in the same way
    as it does with cash. If the depositary does not distribute
    additional ADRs, the outstanding ADSs will also represent the
    new shares.
•
Rights to purchase additional shares.
If we offer holders
    of our securities any rights to subscribe for additional shares
    or any other rights, the depositary may make these rights
    available to holders of ADSs. If the depositary decides it is
    not legal and practical to make the rights available but that it
    is practical to sell the rights, the depositary may sell the
    rights and distribute the proceeds in the same way as it does
    with cash. The depositary will allow rights that are not
    distributed or sold to lapse. In that case, holders of ADSs will
    receive no value for them.
100
Table of Contents
If the depositary makes rights available to holders of ADSs, it
will exercise the rights and purchase the shares on their
behalf. The depositary will then deposit the shares and deliver
ADSs to holders of ADSs. It will only exercise rights if holders
of ADSs pay it the exercise price and any other charges the
rights require them to pay.
U.S. securities laws may restrict transfers and
cancellation of the ADSs represented by shares purchased upon
exercise of rights. For example, holders of ADSs may not be able
to trade these ADSs freely in the United States. In this case,
the depositary may deliver restricted depositary shares that
have the same terms as the ADRs described in this section except
for changes needed to put the necessary restrictions in place.
•
Other Distributions.
The depositary will send to holders
    of ADSs anything else we distribute on deposited securities by
    any means it thinks is legal, fair and practical. If it cannot
    make the distribution in that way, the depositary has a choice.
    It may decide to sell what we distributed and distribute the net
    proceeds, in the same way as it does with cash. Or, it may
    decide to hold what we distributed, in which case ADSs will also
    represent the newly distributed property. However, the
    depositary is not required to distribute any securities (other
    than ADSs) to holders of ADSs unless it receives satisfactory
    evidence from us that it is legal to make that distribution.
The depositary is not responsible if it decides that it is
unlawful or impractical to make a distribution available to any
ADS holders. We have no obligation to register ADSs, shares,
rights or other securities under the Securities Act. We also
have no obligation to take any other action to permit the
distribution of ADRs, shares, rights or anything else to ADS
holders. This means that holders of ADSs may not receive the
distributions we make on our shares or any value for them if it
is illegal or impractical for us to make them available to
holders of ADSs.
Deposit and withdrawal
How are ADSs issued?
The depositary will deliver ADSs if holders of ADSs or their
brokers deposit shares or evidence of rights to receive shares
with the custodian. Upon payment of its fees and expenses and of
any taxes or charges, such as stamp taxes or stock transfer
taxes or fees, the depositary will register the appropriate
number of ADSs in the names holders of ADSs request and will
deliver the ADRs at its office to the persons holders of ADSs
request.
Holders of ADSs may deposit common shares with the custodian for
the depositary and obtain ADSs, and may surrender ADSs to the
depositary and receive common shares, subject in each case to
certain conditions. However, under current Korean laws and
regulations, the depositary is required to obtain our prior
consent for a deposit to the extent that, after giving effect to
the deposit, the total number of common shares on deposit would
exceed the maximum amount previously approved by us. As of the
date of this annual report, such maximum amount approved by us
is the total number of common shares representing the ADSs
issued in the initial public offering.
How do ADS holders cancel an ADR and obtain shares?
Holders of ADSs may surrender their ADRs at the
depositary's office. Upon payment of its fees and expenses
and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, the depositary will deliver the shares
and any other deposited securities underlying the ADR to holders
of ADSs or persons holders of ADSs designate at the office of
the custodian. Or, at the request, risk and expense of holders
of ADSs, the depositary will deliver the deposited securities at
its office, if feasible.
Voting rights
How do holders of ADSs vote?
Upon receipt of the necessary voting materials, holders of ADSs
may instruct the depositary to vote the number of shares their
ADSs represent. The depositary will notify holders of ADSs of
shareholders' meetings
101
Table of Contents
and arrange to deliver our voting materials to holders of ADSs
when we deliver them to the depositary with sufficient time
under the terms of the deposit agreement. Those materials will
describe the matters to be voted on and explain how holders of
ADSs may instruct the depositary how to vote. For instructions
to be valid, they much reach the depositary by a date set by the
depositary.
The depositary will try, as far as practical, subject to Korean
law and the provisions of our constitutive documents, to vote
the number of shares or other deposited securities represented
by the ADSs of their holders as they instruct. The depositary
will only vote or attempt to vote as holders of ADSs instruct.
If there is a delay, we cannot ensure that holders of ADSs will
receive voting materials or otherwise learn of an upcoming
shareholders' meeting in time to ensure that they can
instruct the depositary to vote their shares. In addition, the
depositary and its agents are not responsible for failing to
carry out voting instructions or for the manner of carrying out
voting instructions.
Payment of taxes
The depositary may deduct the amount of any taxes owed from any
payments to holders of ADSs. It may also sell deposited
securities, by public or private sale, to pay any taxes owed.
Holders of ADSs will remain liable if the proceeds of the sale
are not enough to pay the taxes. If the depositary sells
deposited securities, it will, if appropriate, reduce the number
of ADSs to reflect the sale and pay to holders of ADSs any
proceeds, or send to them any property, remaining after it has
paid the taxes.
Reclassifications, recapitalizations and mergers
If We:
Then:
• Change the nominal or par value of our shares
• Reclassify, split up or consolidate any of the
    deposited securities
The cash, shares or other securities received by the depositary
    will become deposited securities. Each ADS will automatically
    represent its equal share of the new deposited securities.
• Distribute securities on the shares that are not
    distributed to holders     of ADSs
• Recapitalize, reorganize, merge, liquidate, sell all
    or substantially all     of our assets, or
    take any similar action
The depositary may distribute some or all of the cash, shares or
    other securities it received. It may also deliver new ADRs or
    ask holders of ADSs to surrender their outstanding ADRs in
    exchange for new ADRs identifying the new deposited securities.
Fees and expenses
Persons Depositing Shares or ADR Holders Must Pay:
For:
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
•
Issuance of ADSs, including issuances resulting from a
    distribution of shares or rights or other property
•
Cancellation of ADSs for the purpose of withdrawal, including if
    the deposit agreement terminates
US$.02 (or less) per ADS
•
Any cash distribution to holders of ADSs
A fee equivalent to the fee that would be payable if securities
    distributed to holders of ADSs had been shares and the shares
    had been deposited for issuance of ADSs
•
Distribution of securities distributed to holders of deposited
    securities which are distributed by the depositary to ADR holders
US$.02 (or less) per ADSs per calendar year (if the depositary
    has not collected any cash distribution fee during that year)
•
Depositary services (The depositary may collect these fees at
    the sole discretion of the depositary, by billing the holders of
    ADSs for such charge or by deducting such charge from one or
    more cash dividends or other cash distributions.)
102
Table of Contents
Persons Depositing Shares or ADR Holders Must Pay:
For:
Registration or transfer fees
Expenses of the depositary in converting foreign currency to
    U.S. dollars
•
Transfer and registration of shares on our share register to or
    from the name of the depositary or its agent when holders of
    ADSs deposit or withdraw shares
Expenses of the depositary
Taxes and other governmental charges the depositary or the
    custodian have to pay on any ADR or share underlying an ADR, for
    example, stock transfer taxes, stamp duty or withholding taxes
•
Cable, telex and facsimile transmissions (when expressly
    provided in the deposit agreement)
Any charges incurred by the depositary or its agents for
    servicing the deposited securities
•
No charges of this type are currently made in the Korean market
    (The depositary may collect these fees at the sole discretion of
    the depositary, by billing the holders of ADSs for such charge
    or by deducting such charge from one or more cash dividends or
    other cash distributions.)
Amendment and termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement
and the ADRs without consent of holders of ADSs for any reason.
If an amendment adds or increases fees or charges, except for
taxes and other governmental charges or expenses of the
depositary for registration fees, facsimile costs, delivery
charges or similar items, or prejudices a substantial right of
ADR holders, it will not become effective for outstanding ADRs
until 30 days after the depositary notifies ADR holders of
the amendment.
At the time an amendment becomes effective,
holders of ADSs are considered, by continuing to hold their
ADSs, to agree to the amendment and to be bound by the ADRs and
the deposit agreement as amended.
How may the deposit agreement be terminated?
The depositary will terminate the deposit agreement if we ask it
to do so. The depositary may also terminate the deposit
agreement if the depositary has told us that it would like to
resign and we have not appointed a new depositary bank within
60 days. In either case, the depositary must notify holders
of ADSs at least 30 days before termination.
After termination, the depositary and its agents will do the
following under the deposit agreement but nothing else:
(1) advise holders of ADSs that the deposit agreement is
terminated, (2) collect distributions on the deposited
securities, (3) sell rights and other property, and
(4) deliver shares and other deposited securities upon
surrender of ADRs. One year or more after termination, the
depositary may sell any remaining deposited securities by public
or private sale. After that, the depositary will hold the money
it received on the sale, as well as any other cash it is holding
under the deposit agreement for the
pro rata
benefit of
the ADR holders that have not surrendered their ADRs. It will
not invest the money and has no liability for interest. The
depositary's only obligations will be to account for the
money and other cash. After termination our only obligations
will be to indemnify the depositary and to pay fees and expenses
of the depositary that we agreed to pay.
103
Table of Contents
Limitations on obligations and liability
Limits on our obligations and the obligations of the
    depositary; limits on liability to holders of ADSs
The deposit agreement expressly limits our obligations and the
obligations of the depositary. It also limits our liability and
the liability of the depositary. We and the depositary:
•
are only obligated to take the actions specifically set forth in
    the deposit agreement without negligence or bad faith;
•
are not liable if we or the depositary is prevented or delayed
    by law or circumstances beyond our or its control from
    performing our or its obligations under the deposit agreement;
•
are not liable if we or the depositary exercises discretion
    permitted under the deposit agreement;
•
have no obligation to become involved in a lawsuit or other
    proceeding related to the ADRs or the deposit agreement on
    behalf of holders of ADSs or on behalf of any other person;
•
may rely upon any documents we or the depositary believes in
    good faith to be genuine and to have been signed or presented by
    the proper party.
In the deposit agreement, we agree to indemnify the depositary
for acting as depositary, except for losses caused by the
depositary's own negligence or bad faith, and the
depositary agrees to indemnify us for losses resulting from its
negligence or bad faith.
Requirements for depositary actions
Before the depositary will deliver or register a transfer of an
ADR, make a distribution on an ADR, or permit withdrawal of
shares or other property, the depositary may require:
•
payment of stock transfer or other taxes or other governmental
    charges and transfer or registration fees charged by third
    parties for the transfer of any shares or other deposited
    securities;
•
satisfactory proof of the identity and genuineness of any
    signature or other information it deems necessary; and
•
compliance with regulations it may establish, from time to time,
    consistent with the deposit agreement, including presentation of
    transfer documents.
The depositary may refuse to deliver ADRs or register transfers
of ADRs generally when the transfer books of the depositary or
our transfer books are closed or at any time if the depositary
or we think it advisable to do so.
ADS holder's right to receive the shares underlying its
ADSs
Holders of ADSs have the right to cancel their ADSs and withdraw
the underlying shares at any time except:
•
When temporary delays arise because: (i) the depositary has
    closed its transfer books or we have closed our transfer books;
    (ii) the transfer of shares is blocked to permit voting at
    a shareholders' meeting; or (iii) we are paying a
    dividend on our shares.
•
When holders of ADSs seeking to withdraw shares owe money to pay
    fees, taxes and similar charges.
•
When it is necessary to prohibit withdrawals in order to comply
    with any laws or governmental regulations that apply to ADSs or
    to the withdrawal of shares or other deposited securities.
This right of withdrawal may not be limited by any other
provision of the deposit agreement.
104
Table of Contents
Pre-release of ADRs
The deposit agreement permits the depositary to deliver ADRs
before deposit of the underlying shares. This is called a
pre-release of the ADR. The depositary may also deliver shares
upon surrender of pre-released ADRs (even if the ADRs are
surrendered before the pre-release transaction has been closed
out). A pre-release is closed out as soon as the underlying
shares are delivered to the depositary. The depositary may
receive ADRs instead of shares to close out a pre-release. The
depositary may pre-release ADRs only under the following
conditions: (1) before or at the time of the pre-release,
the person to whom the pre-release is being made represents to
the depositary in writing that it or its customer (a) owns
the shares or ADRs to be deposited, (b) assigns all
beneficial right, title and interest in such shares or ADRs to
the depositary for the benefit of the owners and (c) will
not take any action with respect to such shares or ADRs that is
inconsistent with the transfer of beneficial ownership;
(2) the pre-release is fully collateralized with cash or
other collateral that the depositary considers appropriate; and
(3) the depositary must be able to close out the pre-
release on not more than five business days' notice. In
addition, the depositary will limit the number of ADSs that may
be outstanding at any time as a result of pre-release, although
the depositary may disregard the limit from time to time, if it
thinks it is appropriate to do so.
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
    AND USE OF PROCEEDS
Not applicable.
ITEM 15.
CONTROLS AND PROCEDURES
At the time of the filing of our Annual Report on
Form
20-F
for the
year ended December 31, 2004, our then Chief Executive and
Chief Financial Officers concluded that the design and operation
of our disclosure controls and procedures as of
December 31, 2004 were effective. In connection with the
preparation of the restated financial statements as of and for
the years ended December 31, 2002, 2003 and 2004, and the
preparation and filing of Amendment No. 1 to our Annual
Report on
Form
20-F
for the
year ended December 31, 2004, the Company, under the
supervision and with the participation of the Company's
current management, including the Company's Chief Executive
Officer (the "CEO") and Chief Financial Officer (the
"CFO") (the CEO and the CFO, collectively, "the
Certifying Officers") in consultation with the
Company's accounting and other management team, carried out
an evaluation of the effectiveness of its "disclosure
controls and procedures" (as the term is defined in the
Exchange Act
Rules
13a-15(e)
and
15d-15(e))
as those
controls existed as of December 31, 2004. As defined under
Rules
13a-15(e)
and
15d-15(e)
promulgated under the Exchange Act, as amended, the term
"disclosure controls and procedures" means controls
and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and
Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure
that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer's management,
including its principal executive officer or officers and
principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions
regarding required disclosure. Based on this evaluation, the CEO
and the CFO concluded that the Company's disclosure
controls and procedures were not effective.
105
Table of Contents
Material Weaknesses in Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such term
is defined in Exchange Act
Rule
13a-15(f).
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements.
A material weakness as defined under the Standards of the Public
Accounting Oversight Board (United States) is a control
deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of
the annual or interim financial statements will not be prevented
or detected. Management identified the material weaknesses set
forth below in our internal control over financial reporting (as
defined under Standards of the Public Accounting Oversight
Standard Board (United States) as of December 31, 2005.
We did not maintain an effective control environment.
Specifically, the Company did not maintain a control environment
adequate to encourage the prevention or detection of the
override of our controls or intentional misconduct, including
the embezzlement of revenues due to the Company, improper
payment for assets not otherwise purchased for the benefit of
the Company, the intentional and inappropriate early recognition
of revenue and the preparation of false management reports,
accounting records, financial statements and documents together
with forged invoices. The absence of effective control
environment allowed the former Chairman to take inappropriate
actions that resulted in certain transactions not being properly
reflected in our consolidated financial statements for the years
ended December 31, 2002, 2003 and 2004. Such intentional
misconduct by the former Chairman included the preparation of
false accounting records and documents to deceive accounting
personnel under his supervision, other members of senior
management, our Board of Directors and our independent
registered public accountants. Additionally, the lack of an
effective control environment allowed our lines of communication
among, and our monitoring of, our operations and accounting
personnel, including the former Chairman, to be ineffective in
preventing or detecting these instances of intentional
misconduct. Taken as a whole, our control environment did not
adequately emphasize appropriate judgment, skepticism and
objectivity, which the Company believes contributed to the
events which necessitated the restatements.
This control environment material weakness contributed to the
fraudulent activity described above, which in turn resulted in
the restatement of our consolidated financial statements for the
years ended December 31, 2004, 2003 and 2002 and
adjustments to our 2005 consolidated financial statements.
Additionally, this control environment material weakness could
result in misstatements of any of our financial statement
accounts that would result in a material misstatement to the
annual consolidated financial statements that would not be
prevented or detected. Accordingly, our management has
determined that this control deficiency constitutes a material
weakness. This material weakness in our control environment
contributed to the existence of the following additional
material weaknesses:
•
Lack of independent oversight and supervision controls.
The Company's Audit Committee and the system of internal
    control over financial reporting established by the Audit
    Committee failed to recognize and detect the fraudulent
    activities by the former Chairman and certain member of the
    senior management. The Company did not have adequate controls
    related to the prevention and detection of fraud, for example,
    corporate compliance programs and whistleblower hotlines.
•
Lack of controls over the reported revenues from our overseas
    licensees.
The Company did not have controls designed to
    detect under-reporting of amounts due to the Company by overseas
    licensees.
•
Lack of controls over bank accounts.
The former Chairman
    was able to open overseas bank accounts, with the help of a
    Company employee without appropriate monitoring, which
    contributed to the former Chairman's ability to carry on
    fraudulent activities without being detected. In addition, the
    former Chairman had access to the Company's accounts
    without oversight, which allowed him to use Company accounts and
    transfer funds out of such accounts without proper authorization.
•
Lack of sufficient complement of personnel.
The Company
    did not maintain a sufficient complement of personnel with an
    appropriate level of accounting knowledge, experience and
    training in the selection, application and implementation of
    U.S. GAAP commensurate with the Company's financial
    reporting requirements under the Exchange Act.
106
Table of Contents
•
Lack of controls over the purchase and accounting for fixed
    assets.
The Company did not have adequate authorization
    controls to ensure that assets purchased and paid for by the
    Company were in fact for the benefit of the Company and did not
    have adequate controls to verify and ensure that assets recorded
    in the Company's balance sheet were in fact in possession
    of the Company.
•
Lack of controls over the financial close and reporting
    process.
We did not maintain effective controls, including
    monitoring, over our financial close and reporting process.
    Specifically, we do not have adequately designed controls to
    ensure the completeness, accuracy and restricted access to
    spreadsheets used in the period-end financial closing process.
    This control deficiency could result in errors in the
    performance of consolidations and the preparation of
    U.S. GAAP financial statements and allow our employees
    manipulate financial results and override controls.
The control deficiencies described above resulted in the
restatement of the Company's consolidated financial
statements for the years ended December 31, 2004, 2003 and
2002 and adjustments to our 2005 consolidated financial
statements. Accordingly, the Company's management has
determined that each of these control deficiencies constitute
material weaknesses.
Remediation of Material Weaknesses
The Company's management is committed to addressing the
material weaknesses identified above by implementing various
remedial measures to the Company's internal control over
financial reporting. During the year ended December 31,
2005 and to the date of the filing of this annual report, our
management, including the Certifying Officers and the Audit
Committee, have executed a range of actions to address the
material weaknesses in our internal control over financial
reporting, including implementing the following:
•
Change in oversight.
We have, since the discovery of the
    events which led to the Investigation, replaced the members of
    the Audit Committee in its entirety with three new independent
    directors and have terminated or removed from office those
    individuals the Company believes were responsible for the
    actions which led to the Investigation. In addition, we have
    created a new position of chief compliance officer, whose
    mandate is to ensure that the Company's policies regarding
    ethics is strictly enforced and to put in place a culture of
    accountability and independent monitoring to address any
    potential for such failures happening in the future, including
    for example the audit and review of database entries of the
    Company's major licensees. The chief compliance officer
    (CCO) reports to both the CEO and to the Audit Committee.
•
Retain outside consulting firm.
We retained the
    consulting services of a Korean affiliate of a major
    international accounting firm in June 2005 to enhance our
    internal control system and to develop an evaluation system to
    enable our management to evaluate the effectiveness of our
    internal control over financial reporting (as defined under
    Rules
13a-15(c)
and
15d-15(c)
under the
    Exchange Act) and to assist the Company in the preparation of
    its financial statement under U.S. GAAP. The accounting
    firm has recommended various remedial measures and the Company
    along with our senior management and accounting team are in the
    process of implementing such recommendations.
•
Software and systems upgrade.
We are in the process of
    implementing an enterprise resource program, or ERP, with the
    ultimate aim to provide to senior management integrated and
    timely reporting of the Company's financial results and
    financial condition while minimizing the ability to override
    established protocols. In addition, the aim of the ERP system
    will be to segregate duties of various persons and departments
    to help minimize unauthorized actions and to provide a check to
    ensure that any irregularities are detected and reported in a
    timely manner. Also, the Company believes that such a system
    will minimize errors which were more likely when the Company
    relied on spreadsheet programs. The Company is in the process of
    implementing such system and expects to have the system
    operational by the end of 2006.
•
Code of ethics.
The Company has recently amended its code
    of ethics to emphasize the need for senior management and all of
    the employees of the Company to comply with the ethics standards
    as set forth in the Company's code of ethics. All new
    employees are to receive training on the code of ethics.
107
Table of Contents
Also, the code of ethics includes a whistle blower process,
    whereby employees can communicate on an anonymous basis with the
    CCO or CEO, who are to report such matters to any member of the
    Audit Committee regarding fraudulent or suspicious activities.
The Company's management, in particular, its CEO and CFO
along with the Audit Committee, is in the process of addressing
the material weaknesses and will seek to put in place a system
of internal control over financial reporting which will
remediate such material weaknesses as expeditiously as possible.
All disclosure controls and procedures, no matter how well
designed, however, have inherent limitations including the
possibility of human error and the circumvention or overriding
of the controls and procedures. A company's internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company's internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the
financial statements. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect all misstatements.
Changes In Internal Control Over Financial Reporting
There were no changes in the Company's "internal
control over financial reporting," as that term is defined
in Rules
13a-15(f)
and
15d-15(f)
promulgated under the Exchange Act that occurred during the year
ended December 31, 2005 that has materially affected or is
reasonably likely to materially affect the Company's
internal control over financial reporting. However, in
connection with the material weaknesses in internal control over
financial reporting discussed above, the Company is currently in
the process of taking remedial measures described above to
address the material weaknesses.
ITEM 16.
16.A.  Audit Committee Financial Expert
Our board of directors has determined that Mr. James Jinho
Chang, our outside director and the chairman of our Audit
Committee, is an "audit committee financial expert,"
as such term is defined by the regulations of the Securities and
Exchange Commission issued pursuant to Section 407 of the
Sarbanes-Oxley Act. Mr. Chang is an independent director as
such term is defined under Section 301 of the
Sarbanes-Oxley Act.
16.B.  Code of Ethics
Pursuant to the requirements of the Sarbanes-Oxley Act, we have
previously adopted a Code of Ethics applicable to all our
employees, including our chief executive officer, chief
financial officer and all other directors and executive
officers. We have recently adopted an amended Code of Ethics,
applicable to all our directors and officers and employees,
which is being filed as Exhibit 8.1 to this annual report.
The amendment was made to more clearly set forth the principles
underlying the Code in order to assist our directors, officers
and employees in connection with their adherence to the
guideline for ethical behavior described in the Code.
108
Table of Contents
16.C.  Principal Accountant Fees and Services
The following table sets forth the aggregate fees billed for
each of the years ended December 31, 2005 for professional
services rendered by our principal accountants Samil
PricewaterhouseCoopers, the Korean member firm of
PricewaterhouseCoopers, depending on the various types of
services and a brief description of the nature of such services.
Aggregate Fees
Billed During
the Year Ended
December 31,
Type of Services
2004
2005
Nature of Services
(In millions of
Won)
Audit Fees
853
1,913
Audit service for Company and its subsidiaries, including
    restatement audit.
Audit-Related Fees
—
250
Accounting advisory service.
Tax Fees
6
25
Tax return and consulting advisory service.
All Other Fees
—
—
All other services which do not meet the three categories above.
Total
859
2,188
United States law and regulations in effect since May 6,
2003 generally require all engagements of the principal
accountants be pre-approved by an independent audit committee
or, if no such committee exists with respect to an issuer, by
the entire board of directors. Our Board of Directors has
adopted the following policies and procedures for consideration
and approval of requests to engage our principal accountants to
perform audit and non-audit services. Engagement requests of
audit and non-audit services for us and our subsidiaries must in
the first instance be submitted to our Treasury Department
subject to reporting to our Chief Financial Officer. If the
request relates to services that would impair the independence
of our principal accountants, the request must be rejected. If
the engagement request relates to audit and permitted non-audit
services, it must be forwarded to our Board of Directors for
consideration.
Additionally, United States law and regulations in effect since
May 6, 2003 permit the pre-approval requirement to be
waived with respect to engagements for non-audit services
aggregating no more than five percent of the total amount of
revenues we paid to our principal accountants, if such
engagements were not recognized by us at the time of engagement
and were promptly brought to the attention of our Board of
Directors or a designated member thereof and approved prior to
the completion of the audit. In 2005, the percentage of the
total amount of revenue we paid to our principal accountants
represented by non-audit services in each category that were
subject to such a waiver was less than 5%.
16.D.  Exemptions from the Listing Standards for
Audit Committee
Not applicable.
16.E.  Purchases of Equity Securities by the Issuer
and Affiliated Purchasers
Neither we nor any "affiliated purchaser," as defined
in
Rule
10b-18(a)(3)
of the Exchange Act, purchased any of our equity securities
during the period covered by this annual report.
109
Table of Contents
PART III
ITEM 17.
FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this
item.
ITEM 18.
FINANCIAL STATEMENTS
Reference is made to Item 19 "Exhibits" for a
list of all financial statements and schedules filed as part of
this annual report.
ITEM 19.
EXHIBITS
(a) Financial Statements filed as part of this annual
report
The following financial statements and related schedules,
together with the reports of independent accountants thereon,
are filed as part of this annual report:
Page
Index to Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
F-2
Consolidated balance sheets as of December 31, 2004 and 2005
F-3
Consolidated statements of income for the years ended
    December 31, 2003, 2004 and 2005
F-4
Consolidated statements of changes in shareholders' equity
    for the years ended December 31, 2003, 2004 and 2005
F-5
Consolidated statements of cash flows for the years ended
    December 31, 2003, 2004 and 2005
F-7
Notes to the consolidated financial statements
F-8
(b) Exhibits filed as part of this annual report
1
.1*
Articles of Incorporation (English translation)
2
.1*
Form of Stock Certificate of Registrant's common stock, par
    value Won 500 per share
2
.1**
Form of Deposit Agreement among Registrant, The Bank of New
    York, as depositary, and all holders and beneficial owners of
    American depositary shares evidenced by American depositary
    receipts, including the form of American depositary receipt**
4
.1*
Agreement on the Development of RAGNAROK Online, dated
    June 26, 2000, between Myoung-Jin Lee and Registrant
    (translation in English)
4
.2*
Agreement on the Exclusive License of Copyright Regarding
    Ragnarok Game Services, dated June 26, 2000, between
    Myoung-Jin Lee and Registrant (translation in English)
4
.3*
Cooperation Agreement on Ragnarok Game Services, dated
    May 31, 2002, between Myoung-Jin Lee and Registrant
    (translation in English)
4
.4*
Agreement on Factual Matters, dated November 19, 2002,
    between Myoung-Jin Lee and Registrant (translation in English)
4
.5*
Agreement on Ragnarok Game Services and Related Matters, dated
    January 22, 2003, between Myoung-Jin Lee and Registrant
    (translation in English)
4
.6*
Agreement, dated June 3, 2003, between Myoung-Jin Lee and
    Registrant (translation in English)
4
.7*
Agreement, dated October 27, 2004, between Myoung-Jin Lee
    and Registrant (translation in English)
4
.8*
Investment Agreement, dated February 19, 2002, between
    Sunny YNK Inc. and Registrant (translation in English)
4
.9*
Agreement, dated February 21, 2002, between Sunny YNK Inc.
    and Registrant (translation in English)
110
Table of Contents
4
.10†
Share Purchase Agreement, dated May 3, 2005, between
    Mr. Moon Kyu Kim and Registrant (translation in English)
4
.11*
Ragnarok License and Distribution Agreement, dated July 24,
    2002, between GungHo Online Entertainment Inc. (formerly ONSALE
    Japan K.K.) (licensee in Japan) and Registrant
4
.12*
Amendment to Ragnarok License and Distribution Agreement, dated
    September 23, 2004, between GungHo Online Entertainment
    Inc. (licensee in Japan) and Registrant
4
.13*
Ragnarok Exclusive License and Distribution Agreement, dated
    May 20, 2002, between Soft-World International Corporation
    (licensee in Taiwan and Hong Kong) and Registrant
4
.14*
Fourth Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated October 19, 2004, between
    Soft-World International Corporation (licensee in Taiwan and
    Hong Kong) and Registrant
4
.15*
Exclusive Ragnarok License and Distribution Agreement, dated
    October 21, 2002, among Soft-World International
    Corporation, Value Central Corporation (licensee in China) and
    Registrant
4
.16†
Fourth Amendment to the Exclusive Ragnarok License and
    Distribution Agreement, dated May 18, 2005, among
    Soft-World International Corporation, Value Central Corporation
    (licensee in China) and Registrant
4
.17*
Ragnarok License and Distribution Agreement, dated June 13,
    2002, between Asiasoft International Co., Ltd. (licensee in
    Thailand) and Registrant
4
.18*
Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated October 27, 2004, between
    Asiasoft International Co., Ltd. (licensee in Thailand) and
    Registrant
4
.19*
Exclusive Ragnarok License and Distribution Agreement, dated
    May 12, 2003, among Soft-World International Corporation,
    Value Central Corporation (licensee in Malaysia and Singapore)
    and Registrant
4
.20*
Exclusive Ragnarok License and Distribution Agreement, dated
    March 25, 2003, between Level Up! Inc. (licensee in
    the Philippines) and Registrant
4
.21†
Third Amendment to the Exclusive Ragnarok License and
    Distribution Agreement, dated February 18, 2005, between
    Level Up! Inc. (licensee in the Philippines) and Registrant
4
.22*
Exclusive Ragnarok License and Distribution Agreement, dated
    April 2, 2004, between PT. Lyto Datarindo Fortuna (licensee
    in Indonesia) and Registrant
4
.23*
Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated October 29, 2004, between PT.
    Lyto Datarindo Fortuna (licensee in Indonesia) and Registrant
4
.24*
Exclusive Ragnarok Online License and Distribution Agreement,
    dated November 26, 2003, between Burda Holding
    International GmbH (licensee in Germany, Austria, Switzerland,
    Italy and Turkey) and Registrant
4
.25*
Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated December 2, 2003, between
    Burda Holding International GmbH (licensee in Germany, Austria,
    Switzerland, Italy and Turkey) and Registrant
4
.26*
Second Amendment to the Exclusive Ragnarok License and
    Distribution Agreement, dated November 18, 2004, between
    Burda Holding International GmbH (licensee in Germany, Austria,
    Switzerland, Italy and Turkey) and Registrant
4
.27†
Exclusive Ragnarok License and Distribution Agreement, dated
    July 16, 2004, between Ongamenet PTY Ltd. (licensee in
    Australia and New Zealand) and Registrant
4
.28†
Exclusive Ragnarok License and Distribution Agreement, dated
    August 15, 2004, between Level Up! Interactive SA
    (licensee in Brazil) and GRAVITY Co., Ltd.
4
.29*
Exclusive Ragnarok Software License Agreement, dated
    May 24, 2004, between Level Up Network India Pvt. Ltd.
    (licensee in India) and GRAVITY Co., Ltd.
4
.30*
Lease Agreement, dated August 1, 2004, between Jung Ryool
    Kim and Registrant (translation in English)
4
.31*
Equipment Sales Agreement, dated December 1, 2003, between
    GRAVITY Interactive LLC and Registrant
111
Table of Contents
4
.32*
Service and Distribution of Earnings and Profit Agreement, dated
    April 1, 2003, between GRAVITY Interactive, LLC and
    Registrant
4
.33*
Loan Agreement, dated January 1, 2004, between GRAVITY
    Entertainment Corporation, formerly RO Production Ltd., and
    Registrant (translation in English)
4
.34*
Share
(syusshi-mochiban)
Assignment Agreement, dated
    October 25, 2004, between GungHo Online Entertainment Inc.
    and Registrant
4
.35*
Joint Project Agreement for TV Animation "Ragnarok,"
    dated October 1, 2004, among GRAVITY Entertainment
    Corporation, formerly RO Production Ltd., GDH Co., Ltd., TV
    Tokyo Medianet Co., Ltd., Amuse Soft Entertainment Co., Ltd. and
    GNG Entertainment Inc (translation in English)
4
.36*
Ragnarok Sales Agency Agreement, dated April 10, 2002,
    between Sunny YNK Inc. and Registrant (translation in English)
4
.37
Lease Agreement, dated October 19, 2005, between GRAVITY
    Co., Ltd. and Meritz Fire & Marine Insurance Co., Ltd.
4
.38
Real Estate Sale Agreement, dated May 22, 2006, between
    GRAVITY Co., Ltd. and Yahoh Communication Ltd.
4
.39
Global Publishing Agreement, dated November 7, 2005,
    between GRAVITY Co., Ltd. and Ndoors Corporation.
4
.40
Global Publishing Agreement, dated November 15, 2005,
    between GRAVITY Co., Ltd. and Sonnori Co., Ltd.
8
.1
List of Registrant's subsidiaries
11
.1
Registrant's Code of Ethics (amended)
12
.1
CEO Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002
12
.2
CFO Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002
13
.1
CEO Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002
13
.2
CFO Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002
*
Incorporated by reference to Registrant's Registration
    Statement on Form F-1 (File No. 333-122159)
**
Incorporated by reference to Registrant's Registration
    Statement on Form F-6 (File No. 333-122160)
†
Previously filed as exhibits to our annual report on Form 20-F
    filed on June 30, 2005.
112
Table of Contents
SIGNATURES
The registrant hereby certifies that it meets all of the
requirements for filing on
Form
20-F
and that
it has duly caused and authorized the undersigned to sign this
annual report on its behalf.
GRAVITY CO., LTD
By:
/s/ Il Young Ryu
Name:
Il Young Ryu
Title:
Representative Director and Chief
Executive Officer
Date: June 30, 2006
113
Table of Contents
INDEX TO FINANCIAL STATEMENTS
Page
Index to Financial Statements
F-1
Report of Independent Registered Public
    Accounting Firm
F-2
Consolidated balance sheets as of December
    31, 2004 and 2005
F-3
Consolidated statements of income for the
    years ended December 31, 2003, 2004 and 2005
F-4
Consolidated statements of changes in
    shareholders' equity for the years ended December 31, 2003,
    2004 and 2005
F-5
Consolidated statements of cash flows for
    the years ended December 31, 2003, 2004 and 2005
F-7
Notes to Consolidated Financial
    Statements
F-8
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of
GRAVITY Co., Ltd.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of changes in
shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of GRAVITY Co.,
Ltd. and its subsidiaries (the "Company") as of
December 31, 2004 and 2005 and the results of their
operations and their cash flows for the years ended
December 31, 2003, 2004 and 2005 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Samil PricewaterhouseCoopers
Samil PricewaterhouseCoopers
Seoul, KOREA
June 28, 2006
F-2
Table of Contents
GRAVITY Co., Ltd.
Consolidated Balance Sheets
December 31, 2004 and 2005
(Note 3)
2004
2005
2005
(Unaudited)
(In millions of Korean Won and
in thousands of US dollars,
except share and per share data)
ASSETS
Current assets
Cash and cash equivalents
W
16,405
W
25,874
$
25,618
Short-term financial instruments
8,900
59,900
59,307
Accounts receivable, net
7,377
4,784
4,737
Deferred expenses
2,588
1
1
Misappropriated funds receivable
7,482
—
—
Assets held for sale
—
8,099
8,019
Other current assets
4,116
10,770
10,663
Total current assets
46,868
109,428
108,345
Property and equipment, net
14,760
11,863
11,746
Leasehold and other deposits
4,192
3,402
3,368
Intangible assets
549
12,750
12,624
Goodwill
—
1,451
1,437
Other non-current assets
2,275
5,963
5,903
Total assets
W
68,644
W
144,857
$
143,423
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable
W
3,742
W
11,279
$
11,167
Deferred income
5,639
5,233
5,181
Income tax payable
1,172
552
547
Current portion of long-term debt
1,150
—
—
Tax withholdings
28
1,198
1,186
Other current liabilities
490
1,186
1,174
Total current liabilities
12,221
19,448
19,255
Long-term deferred income
1,958
2,994
2,964
Leasehold deposit received
2,000
—
—
Accrued severance benefits
960
588
582
Long-term accounts payable
1,063
135
134
Other non-current liabilities
7
908
900
Total liabilities
18,209
24,073
23,835
Commitments and contingencies
Minority interest
—
22
22
Shareholders' equity
Preferred shares, W500 par value, 2,000,000 shares
    authorized, and no shares issued and outstanding at
    December 31, 2004 and 2005, respectively
—
—
—
Common shares, W500 par value, 38,000,000 shares
    authorized, and 5,548,900 and 6,948,900 shares issued and
    outstanding at December 31, 2004 and 2005, respectively
2,774
3,474
3,440
Additional paid-in capital
2,181
74,902
74,160
Retained earnings
45,617
42,587
42,165
Accumulated other comprehensive income (loss)
(137
)
(201
)
(199
)
Total shareholders' equity
50,435
120,762
119,566
Total liabilities and shareholders' equity
W
68,644
W
144,857
$
143,423
The accompanying notes are an integral part of these financial
statements.
F-3
Table of Contents
GRAVITY Co., Ltd.
Consolidated Statements of Operations
Years Ended December 31, 2003, 2004 and 2005
(Note 3)
2003
2004
2005
2005
(Unaudited)
(In millions of Korean Won and in thousands of
US dollars, except share and per share data)
Revenues
Online games-subscription revenue
W
18,560
W
16,253
W
11,249
$
11,138
Online games-royalties and license fees
29,727
45,101
37,375
37,005
Mobile games
43
376
1,664
1,648
Character merchandising, animation and other revenue
1,185
2,696
3,096
3,065
Total net revenues
49,515
64,426
53,384
52,856
Cost of revenues
6,958
10,116
16,038
15,879
Gross profit
42,557
54,310
37,346
36,977
Operating expenses
Selling, general and administrative
11,360
13,660
30,795
30,490
Research and development
1,597
2,029
9,219
9,128
Operating income (loss)
29,600
38,621
(2,668
)
(2,641
)
Other income (expenses)
Interest income
94
479
2,850
2,822
Interest expense
(6,465
)
(4,732
)
(2,158
)
(2,137
)
Foreign currency gains (losses), net
135
(625
)
(614
)
(608
)
Foreign currency forward transaction, net
—
—
(853
)
(845
)
Others, net
26
(1
)
(12
)
(12
)
Income (loss) before income tax expenses, minority interest and
    equity in loss of related joint venture
23,390
33,742
(3,455
)
(3,421
)
Income tax expenses (benefit)
4,250
5,406
(817
)
(809
)
Income (loss) before minority interest and Equity in loss of
    related joint venture
19,140
28,336
(2,638
)
(2,612
)
Minority interest
—
(17
)
(2
)
(2
)
Equity in loss of related joint venture
—
296
394
390
Net income (loss)
W
19,140
W
28,057
W
(3,030
)
$
(3,000
)
Earnings (losses) per share
Basic and diluted
W
3,730
W
5,056
W
(445
)
$
(0.44
)
Weighted average number of shares outstanding
Basic and diluted
5,130,895
5,548,900
6,803,147
6,803,147
The accompanying notes are an integral part of these financial
statements.
F-4
Table of Contents
GRAVITY Co., Ltd.
Consolidated Statements of Changes in Shareholders'
Equity
Years Ended December 31, 2003, 2004 and 2005
Accumulated
Retained
Other
No. of
Additional
Earnings
Comprehensive
Common
Common
Paid-In
(Accumulated
Income
Shares
Shares
Capital
Deficit)
(Loss)
Total
(In millions of Korean Won and in thousands of US dollars, except number of shares)
Balance at January 1, 2003
3,400,000
W
1,700
W
-
W
(1,580
)
W
(210
)
W
(90
)
Issuance of common shares
2,148,900
1,074
2,132
—
—
3,206
Comprehensive income (loss)
Unrealized gains on available-for-sale securities
—
—
—
—
218
218
Cumulative effect of foreign currency translation
—
—
—
—
(10
)
(10
)
Net income
—
—
—
19,140
—
19,140
Total comprehensive income
19,348
Balance at December 31, 2003
5,548,900
2,774
2,132
17,560
(2
)
22,464
Amortization of deferred stock compensation
—
—
49
—
—
49
Comprehensive income (loss)
Unrealized losses on available-for-sale securities
—
—
—
—
(11
)
(11
)
Cumulative effect of foreign currency translation
—
—
—
—
(124
)
(124
)
Net income
—
—
—
28,057
—
28,057
Total comprehensive income
27,922
Balance at December 31, 2004
5,548,900
2,774
2,181
45,617
(137
)
50,435
Issuance of common shares, net
1,400,000
700
71,137
—
—
71,837
Amortization of deferred stock compensation
—
—
1,584
—
—
1,584
Comprehensive income (loss)
Unrealized gains on available-for-sale securities
—
—
—
—
3
3
Cumulative effect of foreign currency translation
—
—
—
—
(67
)
(67
)
Net loss
—
—
—
(3,030
)
—
(3,030
)
Total comprehensive loss
(3,094
)
Balance at December 31, 2005
6,948,900
W
3,474
W
74,902
W
42,587
W
(201
)
W
120,762
F-5
Table of Contents
GRAVITY Co., Ltd.
Consolidated Statements of Changes in Shareholders'
Equity
Years Ended December 31, 2003, 2004 and 2005
Accumulated
Other
No. of
Additional
Comprehensive
(Note 3)
Common
Common
Paid-In
Retained
Income
(Unaudited)
Shares
Shares
Capital
Earnings
(Loss)
Total
(In millions of Korean Won and in thousands of
US dollars, except number of shares)
Balance at December 31, 2004
5,548,900
$
2,747
$
2,160
$
45,165
$
(136
)
$
49,936
Issuance of common shares, net
1,400,000
693
70,432
—
—
71,125
Amortization of deferred stock compensation
—
—
1,568
—
—
1,568
Comprehensive income (loss)
Unrealized gains on available-for-sale securities
—
—
—
—
3
3
Cumulative effect of foreign currency translation
—
—
—
—
(66
)
(66
)
Net loss
—
—
—
(3,000
)
—
(3,000
)
Total comprehensive loss
(3,063
)
Balance at December 31, 2005
6,948,900
$
3,440
$
74,160
$
42,165
$
(199
)
$
119,566
The accompanying notes are an integral part of these financial
statements.
F-6
Table of Contents
GRAVITY Co., Ltd.
Consolidated Statements of Cash Flows
December 31, 2003, 2004 and 2005
(Note 3)
2003
2004
2005
2005
(Unaudited)
(In millions of Korean Won and in thousands of
US dollars)
Cash flows from operating activities
Net income (loss)
W
19,140
W
28,057
W
(3,030
)
$
(3,000
)
Adjustments to reconcile net income (loss) to net cash provided
    by operating activities
Depreciation and amortization
1,619
3,217
5,370
5,317
Loss from impairment on investment
777
—
—
—
Loss on impairment of intangible asset
—
—
1,547
1,532
Provision for accrued severance benefits
363
913
1,464
1,450
Stock compensation expense
—
49
1,584
1,568
Equity in loss of related joint venture
—
296
394
390
Deferred income taxes
(912
)
(1,155
)
(6,232
)
(6,170
)
Other
256
15
387
383
Changes in operating assets and liabilities
Accounts receivable
(1,251
)
(498
)
3,035
3,005
Deferred expense
122
(1,465
)
2,592
2,566
Proceeds from joint venture
—
—
401
397
Misappropriated funds receivable
(6,050
)
(28
)
7,482
7,408
Other assets
(1,248
)
(973
)
(2,231
)
(2,209
)
Accounts payable
553
1,221
7,349
7,276
Deferred income
1,508
3,339
867
858
Accrued interest
(310
)
(417
)
(318
)
(315
)
Income tax payable
898
63
(619
)
(613
)
Long-term accounts payable
434
4
(928
)
(919
)
Payment of severance benefits
(114
)
(144
)
(2,288
)
(2,265
)
Other current liabilities
38
148
1,102
1,091
Net cash provided by operating activities
15,823
32,642
17,928
17,750
Cash flows from investing activities
Increase in short-term financial instruments
(1,600
)
(7,300
)
(50,969
)
(50,464
)
Decrease (increase) of available-for-sale and other investments,
    net
(1,793
)
151
500
495
Purchase of equity investments
—
(1,243
)
—
—
Purchase of property and equipment
(4,749
)
(12,324
)
(8,459
)
(8,375
)
Disposal of property and equipment
510
22
78
77
Cash paid for acquisition of subsidiaries, net of cash acquired
—
—
(9,193
)
(9,102
)
Purchase of intangible asset
(78
)
(35
)
(6,134
)
(6,073
)
Payment of leasehold deposits
(3,527
)
(279
)
(5,089
)
(5,039
)
Proceeds from leasehold deposits
710
2,000
212
210
Others, net
(37
)
1
8
8
Net cash used in investing activities
W
(10,564
)
W
(19,007
)
W
(79,046
)
$
(78,263
)
Cash flows from financing activities
Issuance of common stock, net
W
3,206
W
—
W
71,837
$
71,125
Repayment of capital lease liabilities
(500
)
(104
)
—
—
Proceeds from borrowings
8,615
—
39
39
Repayment of long-term debt
(3,135
)
(2,527
)
(1,150
)
(1,138
)
Repayment of borrowings
(8,600
)
(4
)
(139
)
(138
)
Net cash provided by (used in)
Financing activities
(414
)
(2,635
)
70,587
69,888
Net increase in cash and cash equivalents
4,845
11,000
9,469
9,375
Cash and cash equivalents
Beginning of year
560
5,405
16,405
16,243
End of the year
W
5,405
W
16,405
W
25,874
$
25,618
The accompanying notes are an integral part of these financial
statements.
F-7
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial Statements
December 31, 2004 and 2005
1.
Description of Business
GRAVITY Co., Ltd. ("GRAVITY") was incorporated on
April 4, 2000 and is engaged in developing and distributing
online games and other related businesses principally in the
Republic of Korea and in other countries within Asia, America
and Europe. GRAVITY's principal product, a multi-player
online role playing game, "Ragnarok", was commercially
launched in August 2002. In addition, "R.O.S.E.
Online" game was commercially launched in January 2005.
GRAVITY founded GRAVITY Interactive, LLC, a limited liability
company incorporated in the State of California
("Interactive"), as a wholly owned subsidiary, on
March 14, 2003. On January 20, 2004, GRAVITY acquired
50% of the voting shares of RO Production Co., Ltd., a company
incorporated under the laws of Japan. On October 25, 2004,
the Company acquired the remaining 50% of the voting shares of
RO Production Co., Ltd. The Company changed its corporate
name to GRAVITY Entertainment Corp. on February 5, 2005. In
April and May, 2005, GRAVITY acquired an aggregate of 88.15% of
the voting shares of TriggerSoft Corp., a game developer of
"R.O.S.E. Online" which was serviced by GRAVITY from
January 20, 2005. In November and December, 2005, GRAVITY
acquired an aggregate of 96.11% of the voting shares of NEOCYON,
Inc. which provides mobile multimedia and online game
distribution services in Korea and Russia.
GRAVITY registered 8,000,000 shares of American Depository
Shares ("ADS") on the NASDAQ National Market in the
United States of America on February 8, 2005. Of the total
shares registered, the Company sold 5,600,000 shares of
ADSs, and the existing shareholders sold 2,400,000 shares
of ADSs. The total cash proceeds to GRAVITY after the issuance
cost was W71,837 million. Four ADS are equivalent to one
common share.
On August 30, 2005, EZER, Inc. ("EZER") acquired
52.39% ownership of GRAVITY from Mr. Jung-Ryool Kim, the
former Chairman, and four other shareholders through a stock
purchase agreement.
In connection with this acquisition, EZER entered into an
investment fund agreement, or "Tokumei Kumiai
Agreement" ("TK Agreement") with Techno Groove,
Co., Ltd. ("Techno Groove"). The acquisition by EZER
of 52.39% of GRAVITY was made through Asian Star Fund
("Asian Star") which is an investment fund for which
EZER is the management company. EZER exercises all exclusive
rights with respect to ownership and voting related to
EZER's 52.39% ownership in GRAVITY. The funds used by Asian
Star to acquire EZER's shareholding in GRAVITY were
provided to Asian Star by Techno Groove, a subsidiary of Asian
Groove, Inc. ("Asian Groove") and the sole investor in
Asian Star. Asian Groove is an affiliate of GungHo Online
Entertainment, Inc. ("GungHo"), a licensee of the
Company's online game, Ragnarok and from whom the Company
has purchased the rights to an online game, "Emil Chronicle
Online" (see Notes 2 and 10).
GRAVITY conducts its business within one industry
segment — the business of developing and distributing
online game, software licensing and other related services.
2.
Significant Accounting Policies
Basis of presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America ("US GAAP").
Significant accounting policies followed by the Company in the
preparation of the accompanying consolidated financial
statements are summarized below.
F-8
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of GRAVITY and the following subsidiaries (collectively
referred to as "the Company"). All significant
intercompany transactions and balances have been eliminated in
the consolidation.
Year of
Year of
Obtaining
Ownership
Subsidiary
Establishment
Control
Percentage (%)
GRAVITY Interactive, LLC
2003
2003
100.00
GRAVITY Entertainment Corp.
2003
2004
100.00
TriggerSoft Corp.
1997
2005
88.15
NEOCYON, Inc.
2000
2005
96.11
Cybermedia International Inc.(*)
2005
2005
100.00
Mados, Inc.(**)
2005
2005
100.00
*
Cybermedia International Inc. is a subsidiary of NEOCYON, Inc.,
    which was incorporated as a holding company of Mados, Inc.
**
Mados, Inc. is a subsidiary of Cybermedia International Inc.,
    which was incorporated in Russia to provide online game
    distribution services.
Investments in entities where the Company holds more than a 20%
but less than a 50% ownership interest and have the ability to
significantly influence the operations of the investee are
accounted for using the equity method of accounting and our
share of the investee's operation is included in equity
method investee. The Company follows the equity method of
accounting for investment in its joint venture of Animation
Production Committee. The Company records its initial investment
at cost and records its pro rata share of the earnings in or
losses in the results of operations of the joint venture.
Stock split
On November 22, 2003, the Company's shareholders
approved a
10-for-1
stock split, which became effective on December 25, 2003.
The accompanying consolidated financial statements, including
all share and per share data, have been restated as if the stock
split had occurred as of the earliest period presented.
Use of estimates
The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates
and assumptions that affect the amounts reported in the
accompanying consolidated financial statements and related
disclosures. Although these estimates are based on
management's best knowledge of current events and actions
that the Company may undertake in the future, actual results may
differ from these estimates.
Risks and Uncertainties
The industry in which the Company operates is subject to a
number of industry-specific risks, including, but not limited
to, rapidly changing technologies; significant numbers of new
competitive entrants; dependence on key individuals; competition
from similar products from larger companies; customer
preferences; the need for the continued successful development,
marketing, and selling of its products and services; and the
need for positive cash flows from operations. The Company
depends on one key product, Ragnarok and has a limited operating
history and as a result, the Company is subject to risks
associated with early stage companies in new and rapidly
evolving markets.
F-9
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
During the years ended December 31, 2003, 2004 and 2005,
the Company generated 95%, 94% and 91% of its revenues from
countries in Asia, respectively. Any economic downturn or crisis
in Asia would have a significant negative impact on the Company.
The following table summarizes licensees representing 10% or
more of the total accounts receivable at December 31, 2004
and 2005, and total revenues for the years ended
December 31, 2003, 2004, and 2005, respectively:
2003
2004
2005
Accounts
Accounts
Country
Licensee
Revenues
Receivable
Revenues
Receivable
Revenues
Japan
GungHo(*)
25%
21%
29%
28
%
31%
Taiwan and Honkong
Soft-world International Corporation
24%
30%
23%
9
%
20%
Korea
YNK Korea, Inc. (formerly known as "Sunny YNK
    Inc.")
33%
28%
20%
—
9%
(*)
At December 31, 2005, Asian Groove owns directly and
    indirectly 24.5% of the common stock of GungHo and exercises
    significant influence. The Company's accounts receivable
    relating to GungHo was W1,513 million and
    W1,343 million as of December 31, 2004 and 2005,
    respectively.
Revenue recognition
Online games-subscription revenue
Prepaid online game subscriptions are deferred and recognized
when actually used.
Online games-royalties and license fees
The Company licenses the right to sell and distribute its games
in exchange for an initial prepaid license fee and guaranteed
minimum royalty payments. The prepaid license fee revenues are
deferred and recognized ratably over the license period. The
guaranteed minimum royalty payments are deferred and recognized
as the royalties are earned. In addition, the Company receives a
royalty payment based on a specified percentage of the
licensees' sales. These royalties, that exceed the
guaranteed minimum royalty, are recognized on a monthly basis,
as the related revenues are earned by the licensees.
In February and April 2002, the Company entered into agreements
with YNK Korea, Inc. ("YNK Korea") pursuant to
which the Company granted it the exclusive right to distribute
Ragnarok in Korea for a contractual period of three years from
the date Ragnarok was first commercialized. The Company acts as
the primary obligor with the end-user, and in the majority of
situations the end-user is not aware of the existence of YNK
Korea. The game is marketed and branded by the Company, and it
takes full responsibility for any customer complaints,
questions, support and is responsible to fix any bugs that are
identified. The Company develops content and maintains legal
ownership of the copyrights to the games. It hosts the delivery
of the games on its servers and can refuse end-users from
participating in game play. The Company has the right to stop
providing services to support the game at any time. In
accordance with Emerging Issues Task Force ("EITF")
No. 99-19,
Reporting Revenue Gross versus Net
, the
Company presents the entire revenue derived from the YNK Korea
license arrangement in its statement of operations.
The related agreements with YNK Korea expired in July 2005.
F-10
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
Cash and cash equivalents
Cash equivalents consist of highly liquid investments with an
original maturity date of three months or less.
Short-term financial instruments
Short-term financial instruments include time deposits, with
maturities greater than three months but less than a year.
Available-for-sale investments
Available-for-sale securities are carried at fair value, with
the unrealized gains and losses, net of tax, reported as a
separate component of comprehensive income in shareholders'
equity.
Allowance for doubtful accounts
The Company maintains allowances for doubtful accounts
receivable based upon the following information: an aging
analysis of its accounts receivable balances, historical bad
debt rates, repayment patterns and creditworthiness of its
customers, and industry trend analysis.
Subsequent to June 2003, pursuant to agreements with various
payment gateway providers, the payment gateway providers are
responsible for remitting to the Company the full subscription
revenues generated in Korea after deducting their fixed service
fees and charges, which range from approximately 9% to 13% and
risk of loss or delinquencies are borne by such payment gateway
providers.
Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation for property and equipment is
computed using the straight-line method over the following
estimated useful lives:
Building
40 years
Computer and equipment
4 years
Furniture and fixtures
4 years
Software
3 years
Vehicles
4 years
Leasehold improvements are depreciated on a straight-line basis
over the estimated useful life of the assets or the lease term,
whichever is shorter.
Routine maintenance and repairs are charged to expense as
incurred. Expenditures which enhance the value or extend the
useful lives of the related assets are capitalized.
Accounting for the impairment of long-lived assets
Long-lived assets and intangible assets that do not have
indefinite lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. When the aggregate of future
cash flows (undiscounted and without interest charges) is less
than the carrying value of the asset, an impairment loss is
recognized based on the fair value of the asset.
Capitalized software development costs
The Company capitalizes certain software development costs
relating to online games that will be distributed through
subscriptions or licenses. The Company accounts for software
development in accordance
F-11
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
with Statements of Financial Accounting Standards
("SFAS") No. 86,
Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.
Software development costs incurred prior to the establishment
of technological feasibility are expensed when incurred and are
included in research and development expense. Once a software
product has reached technological feasibility, then all
subsequent software development costs for that product are
capitalized until the product is commercially launched.
Technological feasibility is evaluated on a product-by-product
basis, but typically occurs when the online game has a proven
ability to operate in a massively multi-player format.
Technological feasibility of a product encompasses both
technical design documentation and game design documentation.
For products where proven technology exists, this may occur
early in the development cycle.
After an online game is released, the capitalized product
development costs are amortized over the game's estimated
useful life, which is deemed to be three years. This expense is
recorded as a component of cost of revenues.
Capitalized software development costs net of accumulated
amortization at December 31, 2004 and 2005 was
W468 million and W6,370 million, respectively, which
is included in the intangible assets of the accompanying balance
sheets. Amortization expense for fiscal years ended
December 31, 2003, 2004 and 2005 was W157 million,
W199 million and W253 million respectively.
The Company evaluates the recoverability of capitalized software
development costs on a product-by-product basis. The
recoverability of capitalized software development costs is
evaluated based on the expected performance of the specific
products for which the costs relate. Criteria used to evaluate
expected product performance include: historical performance of
comparable products using comparable technology; orders for the
product prior to its release; and estimated performance of a
sequel product based on the performance of the product on which
the sequel is based. Capitalized costs for those products that
are cancelled are expensed in the period of cancellation. In
addition, a charge to cost of revenues is recorded when
management's forecast for a particular game indicates that
unamortized capitalized costs exceed the net realizable value of
that asset. Significant management judgments and estimates are
utilized in the assessment of when technological feasibility is
established, as well as in the ongoing assessment of the
recoverability of capitalized costs. In evaluating the
recoverability of capitalized costs, the assessment of expected
product performance utilizes forecasted sales amounts and
estimates of additional development costs to be incurred. If
revised forecasted or actual product sales are less than and/or
revised forecasted or actual costs are greater than the original
forecasted amounts utilized in the initial recoverability
analysis, the actual impairment charge may be larger than
originally estimated in any given period.
Research and development costs
Research and development costs consist primarily of payroll,
depreciation expense and other overhead expenses which are all
expensed as incurred until technological feasibility is reached.
Goodwill
Goodwill is accounted for under SFAS No. 142,
Goodwill and Other Intangible Assets
,
("SFAS 142"), which requires that goodwill and
indefinite-lived intangible assets no longer be amortized, but
instead be tested for impairment at the reporting unit level, at
least annually.
Definite-lived other Intangible assets
Definite-lived intangible assets are amortized over their
estimated useful life according to the nature and
characteristics of each intangible assets. The Company
continually evaluates the reasonableness of the useful lives of
these assets. Definite-lived intangible assets that are subject
to amortization shall be reviewed for
F-12
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
impairment in accordance with under SFAS No. 144,
"Accounting for the impairment or Disposal of Long-Lived
Assets".
Advertising
The Company expenses advertising costs as incurred. Advertising
expense was approximately W4,233 million,
W4,614 million and W6,273 million for the years ended
December 31, 2003, 2004 and 2005, respectively. Pursuant to
the terms of the agreement with YNK Korea, once the cumulative
royalty payments to YNK Korea reached W7 billion, it is
required to use 15% of future royalty payments, paid by the
Company, to fund additional marketing of the Ragnarok game. In
March 2003, cumulative royalty payments to YNK Korea reached
W7 billion. After January 1, 2004, these marketing
activities were performed by the Company and therefore, YNK
Korea reimbursed the Company for these costs in compliance with
the agreed terms, which was credited to advertising expenses
within selling, general and administrative expenses in the
accompanying statement of operations.
Accrued severance benefits and Pension Plan
Employees and directors with one year or more of service are
entitled to receive a lump-sum payment upon termination of their
employment with the Company based on the length of service and
rate of pay at the time of termination. Accrued severance
benefits are estimated assuming all eligible employees were to
terminate their employment at the balance sheet date in
compliance with relevant laws in Korean. The annual severance
benefits expense charged to operations is calculated based upon
the net change in the accrued severance benefits payable at the
balance sheet date.
Accrued severance benefits are funded through a group severance
insurance plan. The amounts funded under this insurance plan are
classified as a deduction to the accrued severance benefits.
The Company introduced defined contribution pension plan
("Plan") in 2005 and provides an individual account
for each participant. A plan's defined contributions to an
individual's account are to be made for periods in which
that individual renders services, the net pension cost for a
period shall be the contribution called for in that period.
Foreign currency translation
The Korean parent company and its subsidiaries use their local
currencies as their functional currencies. All assets and
liabilities of the foreign subsidiaries are translated into the
Korean Won at the exchange rate in effect at the end of the
period, and revenues and expenses are translated at average
exchange rates during the period. The effects of foreign
currency translation adjustments, net of tax, are reflected in
the cumulative translation adjustment account, reported as a
separate component of comprehensive income in shareholders'
equity.
Foreign currency transactions
Net gains and losses resulting from foreign exchanges
transactions are included in foreign currency gains (losses) in
the statement of operations.
Income taxes
The Company accounts for income taxes under the provisions of
SFAS No. 109,
Accounting for Income Taxes.
Under SFAS No. 109, income taxes are accounted for
under the asset and liability method. Deferred taxes are
determined based upon differences between the financial
reporting and tax bases of assets and liabilities at currently
enacted statutory tax rates for the years in which the
differences are expected to reverse.
F-13
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
A valuation allowance is provided on deferred tax assets to the
extent that it is more likely than not that such deferred tax
assets will not be realized. The total income tax provision
includes current tax expenses under applicable tax regulations
and the change in the balance of deferred tax assets and
liabilities.
Fair value of financial instruments
The Company's carrying amounts of cash, cash equivalents,
short-term financial instruments, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to
the short maturity of these instruments.
Derivatives
Derivative instruments, regardless of whether they are entered
into for trading or hedging purposes, are valued at fair value.
Derivative contracts not meeting the requirements for hedge
accounting treatment are classified as trading contracts with
the changes in fair value included in current operations.
Derivative financial instruments used for hedging purposes are
accounted for in a manner consistent with the accounting
treatment appropriate for the transactions being hedged or
associated with such contract. The instruments are valued at
fair value when underlying transactions are valued at fair
value, and resulting unrealized valuation gains or losses are
recorded in current results of operations.
The Company entered into sixteen foreign currency forward
contracts with various financial institutions in 2005 and there
are no outstanding derivative contracts as of December 31,
2005. The Company settled the contracts at the terminal dates
and recognized a transaction gains of W1,033 million and
transaction losses of W1,886 million for the year ended
December 31, 2005.
Accounting for Stock-Based Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of
SFAS No. 123,
Accounting for Stock Based
Compensation
, using the fair value method. Under this
method, compensation cost for stock option grants are measured
at the grant date based on the fair value of the award and
recognized over the service period, which is usually the vesting
period, using the method promulgated by Financial Accounting
Standards Board ("FASB") Interpretations No. 28,
Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans
("FIN 28"). The
Company uses a Black-Scholes model to determine the fair value
of equity-based awards at the date of grant.
Earnings per Share
Basic earnings per share is computed by dividing net income
attributable to common shareholders by the weighted average
number of common shares outstanding for all periods. Diluted
earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding, increased
by common stock equivalents. Common stock equivalents are
calculated using the treasury stock method and represent
incremental shares issuable upon exercise of the Company's
outstanding stock options. However, potential common shares are
not included in the denominator of the diluted earnings per
share calculation when inclusion of such shares would be
anti-dilutive, such as in a period in which a net loss is
recorded.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123(R) which
requires that the cost resulting from equity-based compensation
transactions be recognized in the financial statements using a
fair-value-based method. The Statement replaces SFAS 123,
supersedes APB 25, and amends SFAS No. 95. The
new statement is effective for public entities in periods
beginning after June 15, 2005. As the Company will be
required to estimate its forfeitures on option grants instead of
recognizing them when they occur, the Company will have a
F-14
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
transition adjustment on adoption. Upon adoption on
January 1, 2006, the cumulative transition adjustment will
be approximately W270 million.
On December 16, 2004, the FASB issued
SFAS No. 153,
Exchanges of Non-Monetary Assets
,
an amendment of APB Opinion No. 29. This Statement amends
Opinion 29 to eliminate the exception for non-monetary exchanges
of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have
commercial substance. The Statement is effective for
non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company does not expect
a significant impact on its results of operations and
disclosures.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
, a replacement
of APB Opinion No. 20 and FASB Statement No. 3. This
Statement requires retrospective application to prior
periods' financial statements of changes in accounting
principles, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
When it is impracticable to determine the period-specific
effects of an accounting change on one or more individual prior
periods presented, this Statement requires that the new
accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of
retained earnings (or other appropriate components of equity or
net assets in the statement of financial position) for that
period rather than being reported in an income statement. When
it is impracticable to determine the cumulative effect of
applying a change in accounting principles to all prior periods,
this Statement requires that the new accounting principle be
applied as if it were adopted prospectively from the earliest
date practicable. The Company does not believe adoption of
SFAS No. 154 will have a material effect on its
consolidated financial position, results of operations or cash
flows.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
,
which amends SFAS No. 133,
Accounting for
Derivatives Instruments and Hedging Activities
and
SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities.
SFAS No. 155 amends
SFAS No. 133 to narrow the scope exception for
interest-only and principal-only strips on debt instruments to
include only such strips representing rights to receive a
specified portion of the contractual interest or principle cash
flows. SFAS No. 155 also amends SFAS No. 140
to allow qualifying special-purpose entities to hold a passive
derivative financial instrument pertaining to beneficial
interests that itself is a derivative instrument. The Company is
currently evaluating the impact of this new Standard but
believes that it will not have a material impact on the
Company's financial position, results of operations or cash
flows.
In March 2006, the EITF issued EITF issue number 06-3,
How
Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That is, Gross, Versus Net Presentation).
EITF
06-3
tentatively concluded that a company must adopt a policy of
presenting externally imposed taxes on either gross or net
basis. Gross or net presentation may be selected for each
different type of tax, but similar taxes should be presented
consistently. Taxes within the scope of this issue would include
taxes that are imposed on a revenue transaction between a seller
and a customer, for example, sales taxes, value-added taxes, and
some types of excise taxes. Under a final consensus on EIFT
06-3,
the disclosure
would be required in annual financial period beginning after
December 15, 2006. The Company has not assessed the impact
of this new standard.
Reclassifications
Certain amounts in the 2003 and 2004 financial statements have
been reclassified to conform to 2005 presentation.
F-15
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
3.
Convenience Translation into United States Dollar Amounts
The Company reports its consolidated financial statements in the
Korean Won. The United States dollar ("US dollar")
amounts disclosed in the accompanying financial statements are
presented solely for the convenience of the reader, and have
been converted at the rate of 1,010.0 Korean Won to one US
dollar, which is the noon buying rate of the US Federal Reserve
Bank of New York in effect on December 31, 2005. Such
translations should not be construed as representations that the
Korean Won amounts represent, have been, or could be, converted
into, US dollars at that or any other rate. The US dollar
amounts are unaudited and are not presented in accordance with
generally accepted accounting principles either in Korea or the
United States of America.
4.
Allowance for Accounts receivable
Changes in the allowance for accounts receivable for the years
ended December 31, 2003, 2004 and 2005 are as follows:
2003
2004
2005
(In millions of Korean Won)
Balance at beginning of year
W
151
W
242
W
—
Provision for allowances
91
—
31
Write-offs
—
242
—
Balance at end of year
W
242
W
—
W
31
5.
Investment in equity method investee
In April 2004, its subsidiary, GRAVITY Entertainment Corp.
(formerly "RO Production Co., Ltd.") invested JPY
123 million for a 30% interest in "Animation
Production Committee", a joint venture. The investment was
accounted for under the equity method of accounting and it is
included in the other non — current assets of the
accompanying balance sheets.
6.
Acquisitions
(1) Acquisition of TriggerSoft Corp.
In April and May 2005, the Company acquired an aggregate of
88.15% of the voting common shares of TriggerSoft Corp. (the
"TriggerSoft") for a purchase price of
W1,627 million in cash. TriggerSoft is a game developer of
"R.O.S.E. Online", which is serviced by the Company.
The primary reasons for the acquisition were to involve actively
in the updates and improvements of the game.
The acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
TriggerSoft's results of operations are included in the
Company's consolidated financial statement of operations
from the date of acquisition. The excess amount of the purchase
price over the fair market value of the net assets acquired is
accounted for as residual goodwill.
F-16
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
The estimated fair value of assets acquired and liabilities
assumed on the acquisition dates were:
(In millions of
Korean Won)
Current assets
W
34
Non-current assets
200
Intangible assets
1,979
Goodwill
8
Current liabilities
W
214
Deferred tax liabilities
272
Non-current liabilities
108
Net assets acquired
W
1,627
The Company, with the assistance of independent valuation
experts, determined the fair values of assets acquired and
liabilities assumed and performed an allocation of the total
purchase price of W1,627 million to the net assets
acquired. Goodwill is not subject to amortization but periodic
impairment assessment. The intangible asset of "R.O.S .E
Online" game of W1,979 million is being amortized on a
straight — line basis over a useful life of three
years. The amortization expense for the intangible asset for the
year ended December 31, 2005 was W440 million.
At December 31, 2005, the Company determined to recognize
impairment losses for remaining balance of intangible assets and
goodwill due to deteriorated operational performance and adverse
future cash flow expectation based on income approach. Both
amortization expenses and impairment losses are included in
selling, general and administrative expense of the accompanying
statement of operations.
(2)
Acquisition of NEOCYON, Inc.
In November and December 2005, the Company acquired an aggregate
of 96.11% of the voting common share of NEOCYON, Inc. (the
"NEOCYON") for a purchase price of W7,716 million
in cash. NEOCYON is the Mobile Internet Service Provider (MISP),
who is engaged in the facilitation of content download business
for Club Cyon and WOW LG.
The acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
NEOCYON's results of operations are included in the
Company's consolidated financial statement of operations
from the date of acquisition. The primary reasons for the
acquisition were to leverage from NEOCYON's knowledge of
MISP business and as result, become a leading MISP provider
globally. The excess amount of the purchase price over the fair
market value of the net assets acquired is accounted for as
residual goodwill.
F-17
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
The estimated fair value of assets acquired and liabilities
assumed on the acquisition dates were:
(In millions of
Korean Won)
Current assets
W
970
Non-current assets
263
Property and equipment
1,343
Intangible assets
6,526
Goodwill
1,451
Current liabilities
861
Deferred tax liabilities
907
Non-current liabilities
W
1,069
Net assets acquired
W
7,716
The Company, with the assistance of independent valuation
experts, determined the fair values of assets acquired and
liabilities assumed and performed an allocation of the total
purchase price of W7,716 million to the net assets acquired.
Of the W6,526 million of acquired intangible assets,
W5,600 million and W926 million were assigned to the
value of content download business and the Ragnarok publishing
right in Russia, respectively. The Company recorded amortization
expense of W247 million for the acquired intangible assets,
using straight-line method and useful life of three years, in
selling, general and administrative expense.
7.
Property and Equipment, Net
Property and equipment as of December 31, 2004 and 2005
consist of the following:
2004
2005
(In millions of
Korean Won)
Land
W
5,954
W
260
Building
2,234
881
Computer and equipment
5,427
10,251
Furniture and fixtures
537
2,146
Vehicles
190
406
Leasehold improvements
1,043
425
Software externally-purchased
4,200
5,663
19,585
20,032
Less: accumulated depreciation
4,825
8,169
W
14,760
W
11,863
Depreciation expenses for the years ended December 31,
2003, 2004 and 2005, were W1,459 million,
W2,989 million and W4,388 million, respectively.
As of December 31, 2004, the Company's land and
building were collateralized for leasehold deposits which
amounted to W2,600 million. The related lease contract
expired in July, 2005.
As of December 31, 2005, a certain of the Company's
land and buildings are collateralized up to W820 million in
connections with long-term borrowings.
F-18
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
As of December 31, 2005, the Company reclassified a certain
land and building to be disposed as Assets held for sale which
were sold in May 2006.
8.
Accrued Severance Benefits
Changes in accrued severance benefits for the years ended
December 31, 2003, 2004 and 2005 are as follows:
2003
2004
2005
(In millions of Korean Won)
Balance at beginning of year
W
164
W
413
W
1,182
Increase due to acquisition of subsidiaries
—
—
230
Provisions for severance benefits
363
913
1,464
Severance payments
(114
)
(144
)
(2,288
)
413
1,182
588
Less: amounts placed on deposit with insurance company
(71
)
(222
)
—
Balance at end of year
W
342
W
960
W
588
In December 26, 2005, GRAVITY introduced a defined
contribution pension plan ("Plan") in accordance with
Employee Benefit Security Act of Korea and entered into a
nonparticipating defined contribution insurance contract with a
life insurance company. As of December 31, 2005, certain
GRAVITY's subsidiaries did not introduce this plan.
9.
Debt
In February and April, 2002, the Company entered into agreements
with YNK Korea, pursuant to which the Company granted it
the exclusive right to distribute Ragnarok for a contractual
period of three years from the date Ragnarok was first
commercialized. As a result of the receipt of exclusive
distribution rights, YNK Korea loaned the Company
W7,000 million at the inception of the agreement, which it
is accounted as debt in the accompanying balance sheets, in
accordance with EITF No. 88-18,
Sales of Future
Revenues.
As there is no interest rate stated in the agreement with YNK
Korea , the interest is imputed based on the difference between
the principal amount of the loan and the total payments expected
to be made pursuant to the agreements. Accordingly, the
repayment of principal amounts to YNK Korea is variable each
year in accordance with amount of annual revenue generated from
distribution of Ragnarok and deduction of annual interest
expense allocated using the interest rate method.
2004
(In millions of Korean Won)
Loans, representing obligations principally to YNK Korea Inc.
Due 2005
W
1,150
Less: Current portion
(1,150
)
W
—
In accordance with these agreements with YNK Korea, during the
years ended December 31, 2004 and 2005, the Company
recognized payments in the amounts of W7,037 million and
W3,406 million, respectively to YNK Korea. Of these loan
amounts, W2,391 million and W1,150 million were
allocated to principal, and W4,646 million and
W2,256 million were allocated to interest, in 2004 and
2005, respectively.
F-19
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
10.
Commitments and Contingencies
Commitments
In June 2005, the Company entered into a publishing agreement to
acquire exclusive distribution right of the on-line game,
"STYLIA" which is under development by Sonnori Co.,
Ltd. Of the total contract price of W3,000 million,
W2,000 million was paid and recorded as research and
development expenses.
In November 2005, the Company entered into a publishing
agreement to acquire exclusive distribution right of the on-line
game, "Time N Tales" which is under development by
Ndoors Corp. Of the contract price of W2,000 million,
W600 million was paid and recorded as research and
development expenses.
In December 2005, the Company purchased an online game,
"Emil Chronicle Online", developed by GungHo. The
costs related to the acquisition of "Emil Chronicle
Online" were recorded as intangible assets amounting to
W6,073 million. In addition, the Company entered into an
agreement to acquire exclusive distribution right of the game.
In December 2005, the Company entered into an agreement with
Movida Investment Inc., SOFTBANK CORP. and other eight companies
to invest in "Online Game Revolution
Fund No. 1" amounting to JPY1,000 million as
a limited partner with 10% interest of the total fund. The
Company paid initial payment of JPY100 million and recorded
an advance payment.
As of December 31, 2005, the Company has an agreement with
a financial institution for foreign currency forward contract up
to the limit of US $5,000 thousand. However, there is no
outstanding balance as of December 31, 2005 and short-term
financial instrument of W500 million is restricted from
withdrawal to secure foreign currency forward contract.
NEOCYON has general borrowing facilities with a limit of
W1,533 million. As at December 31, 2005, NEOCYON has
an outstanding balance of borrowing amounting to
W1,233 million.
The Company leases certain properties. The Company's
operating leases consist of various property leases expiring in
2007. Rental expenses incurred under these operating leases were
approximately W769 million, W956 million and
W1,275 million for the years ended December 31, 2003,
2004 and 2005, respectively.
Future minimum lease payments for the leases as of
December 31, 2005, are as follows:
2006
2007
(In millions of
Korean Won)
Operating lease
W
3,262
W
2,882
Litigation
In May 2005, the initial purchasers and shareholders of the ADSs
filed a number of class action complaints for violation of the
United States federal securities law in the United States
District Court for the Southern District of New York, which were
consolidated by an order of the Court entered on
December 12, 2005. The complaints identify the Company and
certain of its officers as defendants, and claim that the
Company's registration statement on
Form
F-1
and the
prospectus which constitutes a part of the registration
statement used in connection with its initial public offering
contained material misstatements. The Company believes that the
claims are without merit and intends to defend the case
vigorously. As of audit report date, the Company cannot
determine what the final conclusion of this litigation will be,
including any damages which may need to be paid or any amounts
which may be paid in settlement. A judgment against the Company
in this litigation may result in significant damages.
As of December 31, 2005, the Company is a defendant in two
lawsuits claiming for damages. The former chief executive
officer claims compensation for the unfair termination and a
shareholder claims compensation
F-20
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
for the loss from late authorization of his shareholder's
right. The outcome of these lawsuits cannot be determined and
the ultimate financial effects cannot be estimated as of audit
report date.
11.
Shareholders' Equity
As of December 31, 2005, GRAVITY is authorized to issue a
total of 40 million shares with a par value of
W500 per share, in registered form, consisting of common
shares and non-voting preferred shares. Of this authorized
amount, GRAVITY is authorized to issue up to 2 million
non-voting preferred shares. Under the articles of
incorporation, holders of non-voting preferred shares are
entitled to dividends of not less than 1% and up to 15% of the
par value of such shares the exact rate to be determined by
GRAVITY's board of directors at the time of issuance,
provided that the holders of preferred shares are entitled to
receive dividend at a rate not lower than that determined for
holders of common shares. Gravity does not have any non-voting
preferred shares outstanding.
On February 8, 2005, in an initial public offering, GRAVITY
registered 8,000,000 shares of American Depository Shares
("ADS") on the NASDAQ National Market in the United
States of America. Of the total shares registered, the Company
sold 5,600,000 shares ADSs, and the existing shareholders
sold 2,400,000 ADSs. Total cash received by GRAVITY after issue
cost was W71,837 million. Four ADS are equivalent to one
common share.
As of December 31, 2005, the Company had a total of
6,948,900 common shares issued and outstanding. All of the
issued and outstanding shares are fully paid and are registered.
12.
Stock purchase option plan
On December 24, 2004, the Company's shareholders
approved the stock purchase option plan (the "Plan").
The Plan provides incentive stock options to officers and
employees. On December 24, 2004, the Company granted
certain officers, some senior employees and employees options to
purchase 50,000 and 221,000 shares of the
Company's common stock at an exercise price of W80,000 and
W70,000 per share, respectively. The fair value of the
options at the date of the grant is estimated using the
Black-Scholes option pricing model. In accordance with the Plan,
all of the options granted in 2004 vest over four year period,
with 25% vesting after two years of continued employment, 25%
vesting after three years of continued employment, 25% vesting
after four years of continued employment, and the remaining 25%
vesting after five years from the grant date. The options that
have vested for each period must be exercised within one year
from the vesting date, and options that have not been exercised
during the each period shall be deemed to be terminated.
On February 8, 2005, in accordance with the terms of the
stock options granted, the exercise prices for the outstanding
options were adjusted to the IPO price (W55,431) for officers,
some senior employees and to the IPO price minus W10,000
for employees. This repricing created a new measurement date for
the Company's stock compensation expenses. The
weighted-average exercise price modified is W46,697, as
presented below.
F-21
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
A summary of activity under the Plan reflecting modification of
stock options is as follows:
Weighted-Average
Weighted-Average
Number of
Exercise Price
Fair Value at
Stock Options
per Share
Date of Grant
Stock options outstanding as of December 31, 2003
—
W
—
W
—
Options granted
271,000
71,845
20,211
Options exercised
—
—
—
Options forfeited
—
—
—
December 31, 2004
271,000
W
71,845
W
20,211
Options granted
—
—
—
Options exercised
—
—
—
Options forfeited
73,600
48,828
25,275
Stock options outstanding as of December 31, 2005
197,400
W
46,697
W
27,511
The total modified compensation expense relating to the grant of
stock options on December 24, 2004 of W7,343 million,
is recognized over the five year vesting period using the
FIN 28, graded attribution model. For the years ended
December 31, 2004 and 2005, the Company recognized
W49 million and W1,584 million in stock compensation
expense for the shares granted. Stock compensation expenses are
included in selling, general and administrative expenses and
cost of revenue in the statements of operations.
The following table summarizes information about stock options
outstanding and currently exercisable at December 31, 2005:
Weighted-Average
Remaining
Options
Contractual Life
Options
Exercise Prices
Outstanding
(Yrs)
Exercisable
W45,431
172,400
2.98
—
55,431
25,000
2.98
—
The fair value for each option was estimated, at the date of
grant and repricing date, using the Black Scholes' option
pricing model, with the following weighted average assumptions:
Grant Date
Repricing Date
Expected dividend yield
0
%
0
%
Risk-free interest rate
3.50
%
3.54
%
Expected volatility
53
%
53
%
Fair value of stock
W
55,431
W
55,431
The fair value of the stock at the date of grant was based on
the initial public offering price of the Company's American
Depositary Shares on the National Market on February 8,
2005, adjusted for the ratio of common stock to ADSs.
F-22
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
13.
Earnings per Share
The components of basic and diluted earnings per share are as
follows:
2003
2004
2005
(In millions of Korean Won, except share and per
share data)
Net income (loss) available for common shareholders(A)
W
19,140
W
28,057
W
(3,030
)
Weighted average outstanding shares of common shares(B)
5,130,895
5,548,900
6,803,147
Earnings (losses) per share
Basic and diluted (A/ B)
W
3,730
W
5,056
W
(445
)
The 271,000 and 197,400 stock options outstanding as of
December 31, 2004 and 2005 are excluded from the
Company's calculation of earnings (losses) per share as
their effect is antidilutive.
14.
Income Taxes
Income tax expenses (benefit) for the years ended
December 31, 2003, 2004 and 2005 consist of the following:
2003
2004
2005
(In millions of Korean Won)
Income (loss) before income taxes
Domestic
W
22,332
W
33,338
W
(3,872
)
Foreign
1,058
404
417
23,390
33,742
(3,455
)
Current income taxes
Domestic
4,868
6,253
5,100
Foreign
294
308
315
5,162
6,561
5,415
Deferred income taxes
Domestic
1,044
1,085
5,134
Foreign
(132
)
70
12
912
1,155
5,146
Tax effect resulting from business combination
—
—
(1,086
)
Total income tax expenses (benefit)
W
4,250
W
5,406
W
(817
)
The preceding table does not reflect the tax effects of
unrealized gains and losses on available-for-sale securities and
foreign currency translation. The tax effect of W1 million,
W2 million and W75 million for the years ending
December 31, 2003, 2004 and 2005 is recorded directly as
other comprehensive income within shareholders' equity.
F-23
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred income tax assets and
deferred income tax liabilities as of December 31, 2004 and
2005 are as follows:
2004
2005
(In millions of
Korean Won)
Current deferred income tax assets (liabilities)
Foreign tax credit carryforwards
W
1,502
W
896
Tax credit carryforwards for research and human
resource development
351
1,204
Accrued expense
9
417
Accrued income
(17
)
(104
)
Deferred expense
(152
)
—
Other
(1
)
79
1,692
2,492
Less: Deferred tax asset relating to other comprehensive income
    (loss)
1
76
W
1,691
W
2,416
Non-current deferred income tax assets (liabilities)
Foreign tax credit carryforwards
W
—
W
4,881
Tax credit carryforwards for research and human
resource development
—
433
Depreciation and amortization
142
344
Intangible assets in connection with business combination
—
(874
)
Impairment on other investment
192
214
Provisions for severance benefits
145
19
Unremitted earnings of subsidiary
(111
)
(186
)
Net operating loss carryforwards in subsidiaries
86
302
Other
8
2
462
5,135
Less: Valuation allowance
86
338
W
376
W
4,797
Deferred income tax assets are recognized only to the extent
that realization of the related tax benefit is more likely than
not. Realization of the future tax benefits related to the
deferred tax assets is dependent on many factors, including the
Company's ability to generate taxable income within the
period during which the temporary differences reverse, the
outlook for the economic environment in which the Company
operates, and the overall future industry outlook.
In assessing the realizability of deferred tax assets,
management considered whether it was more likely than not that
some portion or all of the deferred tax assets would not be
realized. The ultimate realization do deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences became
deductible. Management considered the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax
assets were deductible, management believed it was more likely
than not that the Company
F-24
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
would realize the benefits of these deductible differences, net
of the existing valuation allowances at December 31, 2005.
The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of
future taxable income during the carryforward period were
reduced.
As of December 31, 2005, GRAVITY Entertainment Corp., the
Company's 100% owned subsidiary in Japan, had available
loss carryforwards of W338 million which expire in 2011 and
2012. Based on this subsidiary's historical and projected
net and taxable income, the Company determined that it would not
be able to realize these loss carryforwards, and recognized a
valuation allowance of W86 on the full amount of the available
loss carryforwards at an effective rate expected to be incurred
in Japan.
As of December 31, 2005, TriggerSoft, the Company's
88.15% owned subsidiary in Korea, had temporary differences of
W259 million and available loss carryforwards of
W1,563 million which expire in 2010. Based on this
subsidiary's historical and projected net and taxable
income, the Company determined that it would not be able to
realize these loss carryforwards, and recognized a valuation
allowance of W251 million, on the full amount of the
temporary differences and available loss carryforwards, at an
effective rate expected to be incurred to TriggerSoft.
As of December 31, 2005, the Company also has foreign tax
credit carryforwards and tax credit carryforwards for research
and human resource development of W5,777 million and
W1,637 million, respectively, which expire in 2009 and 2010.
The statutory income tax rate, including tax surcharges,
applicable to the Company was approximately 29.7% in 2003 and
2004. The statutory income tax rate was amended to 27.5%,
effective for fiscal years beginning January 1, 2005 in
accordance with the Corporate Income Tax Law amended on
December 30, 2003.
As of December 31, 2005, the Company is entitled to a
reduced tax rate of 13.75% by virtue of the Special Tax
Treatment Control Law of Korea, which is 50% of the statutory
tax rate and applied to certain designated venture companies. As
the reduced tax rate is valid until 2006, in the year 2007, the
Company will reapply for its designation as a venture company.
However it is uncertain as to whether the Company will obtain
this designation. However, even if the Company ceases to enjoy
the 50% reduction in corporate income tax rate in 2007, the
Company will instead be entitled to a special tax exemption of
10% in corporate income tax rate for fiscal year 2007 by virtue
of being a small-and medium-sized company. Accordingly, deferred
income taxes as of December 31, 2005 were calculated based
on the rate of 13.75%, 24.75% and 27.50% for the amounts
expected to be realized during the fiscal year 2006, 2007, 2008
and thereafter, respectively.
F-25
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
A reconciliation of income tax expense at the Korean statutory
income tax rate to actual income tax expense is as follows:
2003
2004
2005
(In millions of Korean Won)
Tax expense at Korean statutory tax rate
W
6,947
W
10,021
W
(950
)
Income tax exemption
(3,473
)
(5,011
)
475
Tax credit carryforwards for research and human resource
    development
—
(351
)
(1,286
)
Foreign tax differential
274
127
116
Expense not deductible for tax purpose
184
139
342
Change in statutory tax rate
(72
)
139
26
Change in valuation allowances
(154
)
86
197
Expiration of unused foreign tax credit
—
214
337
Income tax penalties
633
61
—
Others
(89
)
(19
)
(74
)
Total income tax expense
W
4,250
W
5,406
W
(817
)
15.
Operations by Geographic Area
Geographic information for the years ended December 31,
2003, 2004 and 2005 is based on the location of the distribution
entity. Revenues by geographic region are as follows:
2003
2004
2005
(In millions of Korean Won)
Korea
W
16,475
W
13,524
W
10,093
Japan
12,180
18,372
17,246
Taiwan
11,969
14,643
10,582
Thailand
3,490
5,504
4,933
United States
2,373
3,528
2,701
China
2,089
2,842
1,178
Other
939
6,013
6,651
W
49,515
W
64,426
W
53,384
16.
Related Party Transactions
As of December 31, 2004, the Company provided loans to
employees for housing amounting to W12 million at an annual
interest rate of 9%. All the loans were repaid and therefore
there is no remaining balance as of December 31, 2005.
F-26
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
During the years ended December 31, 2003, 2004 and 2005,
there were related party transactions with a major shareholder
and an equity investee as follows:
2003
2004
2005
(In millions of Korean Won)
Sales to related parties
W
—
W
—
W
55
Purchases from related parties
721
938
861
Amounts due from related parties
3,800
3,899
4
Misappropriated funds receivable
7,441
7,482
—
Amounts due to related parties
—
146
132
A majority of the purchase transactions is rental expense in
accordance with agreements between the Company and the former
Chairman.
Most of due from balances have resulted from leasehold deposits
remitted to its former Chairman. The balances as of
December 31, 2003 and 2004 are included in the leasehold
and other deposits balance and due to the former Chairman's
equity transfer as stated in Note 1, the former Chairman
ceased to be related party on August 30, 2005.
The Company's former Chairman was found to have diverted
revenues otherwise due to the Company. The Company's
resulting investigation concluded that W7,482 million was
diverted by the former Chairman from 2002 to 2004. And such
amounts were accounted for in the line item of
"Misappropriated funds receivable" in the accompanying
balance sheets. In addition, in March 2003, the former Chairman
had misappropriated the Company's cash in the amount of
W1,623 million and repaid the same amount to the Company in
nine days.
Due to balance represents amount of accrued expenses payable to
equity investee. The balance is included in the other current
liabilities in the accompanying balance sheet.
On February 20, 2003, the Company obtained a loan of
W3,000 million at an annual interest rate of 18% from
IAMBiz Co., Ltd. On September 30, 2003, the Company fully
repaid the loan to IAMBiz Co., Ltd. On October 1, 2003,
IAMBiz Co., Ltd. acquired 4.99% of the Company's
outstanding common shares. On October 31, 2003, the Company
disposed its sticker photo division, together with mobile phones
and digital and other cameras to IAMBiz Co., Ltd. for proceeds
of W510 million. On December 10, 2003, the Company
also disposed its license to a horse racing game to IAMBiz Co.,
Ltd. for proceeds of W20 million. IAMBiz Co., Ltd. changed
its name to Rhoceo Co., Ltd. ("Rhoceo") on
November 11, 2004. In August 2005, the Company paid
W200 million to Rhoceo for licensing the game under
development by Rhoceo and recorded as research and development
expenses. Rhoceo Co., Ltd., which was under the control of the
former Chairman ceased to be related party on August 30,
2005 due to the former Chairman's his equity transfer.
In 2003, the Company invested W1,000 million in the mobile
business of Rople-net Co., Ltd. which was a subsidiary of Rhoceo
Co., Ltd. and recovered W223 million and gave up its right
for the remainder of investment, and purchased right to do
mobile business and software totaling W123 million from
Rople-net Co., Ltd. In August 2004, the Company also purchased
tangible assets totaling W53 million from Rople-net Co.,
Ltd. Rople-net Co., Ltd., which was a subsidiary of Rhoceo Co.,
Ltd. and, in turn, under the control of the former Chairman,
ceased to be related party on August 30, 2005 due to the
former Chairman's equity transfer.
F-27
Table of Contents
GRAVITY Co., Ltd.
Notes to Consolidated Financial
Statements — (Continued)
17.
Supplemental Cash Flow Information and Non-Cash Activities
2003
2004
2005
(In millions of Korean Won)
Supplemental cash flow information
Cash paid during the year for income taxes
W
4,343
W
6,935
W
6,648
Interest paid
6,773
5,163
2,476
W
11,116
W
12,098
9,124
Supplemental non-cash activities
Increase of capital lease asset
W
603
W
—
W
—
Acquisitions:
Fair value of assets acquired
W
—
W
—
W
12,774
Less: cash acquired
—
—
(150
)
12,624
Net cash paid
—
—
(9,193
)
Liabilities assumed
W
—
W
—
W
3,431
18.
Subsequent event
In April 2006, the former Chairman agreed to pay
W4,645 million to the Company, in part to reimburse the
Company for certain of the costs and expenses incurred by the
Company in connection with the investigation of the former
Chairman's diversion of revenues otherwise due to the
Company. As a part of the settlement, the Company and the former
Chairman have mutually agreed to cease both civil and criminal
action against the former Chairman. In accordance with the
agreement, the former Chairman is to pay W4,645 million to
the Company upon ceasing both civil and criminal lawsuits
against him by the Company. Accordingly, the Company withdrew
both cases and received W4,645 million on May 17, 2006.
In May, 2006, the Company entered into a contract to invest in
Perpetual Entertainment, Inc. ("Perpetual"), an
on-line game developer based in the United States of America.
The Company has secured right to appoint one Board member and
acquired preferred stock of $9,000 thousand of Perpetual.
In May, 2006, the Company entered into a contract with YAHOH
Communication Ltd. to dispose of its Assets held for sale which
consist of land and building for W9,500 million.
On April 28, 2006, the Company's Board of Directors
approved to establish a subsidiary in France to enter into
online game servicing and publishing business. On June 2,
2006, the Company established a bank account in France and
transferred EUR1,800 thousand to that account.
F-28