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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 1pt solid black; font-size: 1pt">&nbsp;</DIV>




<DIV align="center" style="font-size: 14pt; margin-top: 12pt"><B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION</B>
</DIV>

<DIV align="center" style="font-size: 12pt"><B>WASHINGTON, D.C. 20549</B>
</DIV>

<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><B>FORM 20-F</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>(Mark One)</B>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 0pt">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 12pt">
    <TD valign="top" align="center" width="7%"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%"><B>REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>OR</B></DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#254;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B><B>For the fiscal year ended December&nbsp;31, 2005</B>
</B>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>OR</B></DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 12%"><B><B>For the transition period from </B><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><B>to </B><U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U><B>.</B>
</B>
</DIV>

<DIV align="center">
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%" style="font-size: 12pt">
<TR style="font-size: 6pt">
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="88%">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD align="center"><FONT face="Wingdings">&#111;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><B>SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</B></TD>
</TR>
</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Commission file number: 000-50596</B></DIV>

<DIV align="center" style="font-size: 24pt; margin-top: 12pt"><B><FONT style="border-bottom: 1px solid #000000">LINKTONE LTD</FONT>.</B>
</DIV>

<DIV align="center" style="font-size: 10pt"><B>(Exact name of Registrant as specified in its charter)</B></DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>N/A</B></DIV>

<DIV align="center"><DIV style="font-size: 3pt; margin-top: 1pt; width: 50%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>

<DIV align="center" style="font-size: 10pt"><B>(Translation of Registrant&#146;s name into English)</B></DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Cayman Islands</B></DIV>

<DIV align="center"><DIV style="font-size: 3pt; margin-top: 1pt; width: 50%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>

<DIV align="center" style="font-size: 10pt"><B>(Jurisdiction of incorporation or organization)</B></DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>5/F, Eastern Tower, No.&nbsp;689, Beijing Dong Road<BR>
Shanghai 200001, People&#146;s Republic of China</B></DIV>

<DIV align="center"><DIV style="font-size: 3pt; margin-top: 1pt; width: 50%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>

<DIV align="center" style="font-size: 10pt"><B>(Address of principal executive offices)</B></DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Securities registered or to be registered pursuant to Section&nbsp;12(b) of the Act.</B></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>NONE</B></DIV>

<DIV align="center"><DIV style="font-size: 3pt; margin-top: 1pt; width: 50%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>

<DIV align="center" style="font-size: 10pt"><B>Securities registered or to be registered pursuant to Section 12(g) of the Act.</B></DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>Name of each exchange and Title of each class on which registered:</B></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>American Depositary Shares, each representing 10 ordinary shares, par value US$0.0001 per share,<BR>
Nasdaq National Market</B></DIV>

<DIV align="center"><DIV style="font-size: 3pt; margin-top: 1pt; width: 50%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>

<DIV align="center" style="font-size: 10pt"><B>(Title of Class)</B></DIV>


<DIV align="center"><DIV style="font-size: 3pt; margin-top: 1pt; width: 50%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>

<DIV align="center" style="font-size: 10pt"><B>Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.</B></DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>NONE</B></DIV>

<DIV align="center"><DIV style="font-size: 3pt; margin-top: 1pt; width: 50%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>

<DIV align="center" style="font-size: 10pt"><B>(Title of Class)</B></DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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 period covered by the annual report: 257,317,900 ordinary
shares, par value US$0.0001 per share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes <FONT face="Wingdings">&#111;</FONT> No <FONT face="Wingdings">&#254;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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. Yes <FONT face="Wingdings">&#111;</FONT> No <FONT face="Wingdings">&#254;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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. Yes <FONT face="Wingdings">&#254;</FONT> No <FONT face="Wingdings">&#111;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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;12b-2 of the Exchange Act. (Check one):
</DIV>
<DIV align="center" style="font-size: 10pt; margin-top: 3pt">Large Accelerated Filer <FONT face="Wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accelerated Filer <FONT face="Wingdings">&#254;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Non-Accelerated Filer <FONT face="Wingdings">&#111;</FONT></DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark which financial statement item the registrant has elected to follow:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Item&nbsp;17 <FONT face="Wingdings">&#111;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Item&nbsp;18 <FONT face="Wingdings">&#254;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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;12b-2 of the Exchange Act). Yes <FONT face="Wingdings">&#111;</FONT> No <FONT face="Wingdings">&#254;</FONT>
</DIV>

<DIV style="width: 100%; border-bottom: 1pt solid black; margin-top: 10pt; font-size: 1pt">&nbsp;</DIV>
<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>





<P align="center" style="font-size: 10pt">&nbsp;
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<DIV style="font-family: 'Times New Roman',Times,serif">









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</DIV>
<DIV align="left">
<A name="tocpage"></A>
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<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>TABLE OF CONTENTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>INTRODUCTION</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="90%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD colspan="3" valign="top" align="left"><A href="#101"><B>PART I</B></A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#102">Item&nbsp;1.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#102">Identity of Directors, Senior Management and Advisers</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#103">Item&nbsp;2.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#103">Offer Statistics and Expected Timetable</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#104">Item&nbsp;3.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#104">Key Information</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#105">Item&nbsp;4.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#105">Information on the Company</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#106">Item&nbsp;4A.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#106">Unresolved Staff Comments</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#107">Item&nbsp;5.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#107">Operating and Financial Review and Prospects</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#108">Item&nbsp;6.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#108">Directors, Senior Management and Employees</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#109">Item&nbsp;7.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#109">Major Shareholders and Related Party Transactions</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#110">Item&nbsp;8.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#110">Financial Information</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#111">Item&nbsp;9.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#111">The Offer and Listing</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#112">Item&nbsp;10.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#112">Additional Information</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#113">Item&nbsp;11.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#113">Quantitative and Qualitative Disclosures About Market Risk</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#114">Item&nbsp;12.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#114">Description of Securities Other than Equity Securities</A></TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="3" valign="top" align="left"><A href="#115"><B>PART II</B></A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#116">Item&nbsp;13.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#116">Defaults, Dividend Arrearages and Delinquencies</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#117">Item&nbsp;14.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#117">Material Modifications to the Rights of Security Holders and Use of Proceeds</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#118">Item&nbsp;15.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#118">Controls and Procedures</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Item&nbsp;16.
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Reserved</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#119">Item&nbsp;16A.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#119">Audit Committee Financial Expert</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#120">Item&nbsp;16B.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#120">Code of Ethics</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#121">Item&nbsp;16C.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#121">Principal Accountant Fees and Services</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#122">Item&nbsp;16D.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#122">Exemptions from the Listing Standards for Audit Committees</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#123">Item&nbsp;16E.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#123">Purchases of Equity Securities by the Issuer and Affiliated Purchasers</A></TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="3" valign="top" align="left"><A href="#124"><B>PART III</B></A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#125">Item&nbsp;17.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#125">Financial Statements</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#126">Item&nbsp;18.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#126">Financial Statements</A></TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#127">Item&nbsp;19.
</A></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#127">Exhibits</A></TD>
</TR>
<!-- End Table Body -->
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w5.txt">EX-4.5 EMPLOYMENT TERMINATION AGREEMENT - RAYMOND YANG LEI</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w7.txt">EX-4.7 EMPLOYMENT TERMINATION AGREEMENT - MICHAEL GUANGXIN LI</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w8.txt">EX-4.8 EMPLOYMENT AGREEMENT - MICHAEL GUANGXIN LI</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w10.txt">EX-4.10 EMPLOYMENT TERMINATION AGREEMENT - YE XIN</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w16.txt">EX-4.16 COPYRIGHT LICENSE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w49.txt">EX-4.49 LEASE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w59.txt">EX-4.59 SOFTWARE LICENSE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w60.txt">EX-4.60 SOFTWARE LICENSE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w62.txt">EX-4.62 SUPPLEMENTAL AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w64.txt">EX-4.64 SUPPLEMENTAL AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w65.txt">EX-4.65 SOFTWARE LICENSE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w66.txt">EX-4.66 SUPPLEMENTAL AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w67.txt">EX-4.67 SOFTWARE LICENSE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w68.txt">EX-4.68 SUPPLEMENTAL AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w69.txt">EX-4.69 SOFTWARE LICENSE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w70.txt">EX-4.70 SUPPLEMENTAL AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w71.txt">EX-4.71 EXCLUSIVE CONSULTING AND SERVICE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w72.txt">EX-4.72 EXCLUSIVE CONSULTING AND SERVICE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w73.txt">EX-4.73 BUSINESS COOPERATION AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w74.txt">EX-4.74 LOAN AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w75.txt">EX-4.75 LOAN AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w76.txt">EX-4.76 EQUITY INTERESTS PLEDGE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w77.txt">EX-4.77 EQUITY INTERESTS PLEDGE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w78.txt">EX-4.78 CONTRACT RELATING TO EXCLUSIVE PURCHASE RIGHT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w79.txt">EX-4.79 CONTRACT RELATING TO EXCLUSIVE PURCHASE RIGHT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w80.txt">EX-4.80 EXCLUSIVE CONSULTING AND SERVICE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w81.txt">EX-4.81 EQUITY TRANSFER AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv4w82.txt">EX-4.82 OPERATING AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv8w1.txt">EX-8.1 SIGNIFICANT SUBSIDIARIES</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv12w1.txt">EX-12.1 CERTIFICATION OF CEO REQUIRED BY RULE 13A-14(A)</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv12w2.txt">EX-12.2 CERTIFICATION OF CFO REQUIRED BY RULE 13A-14(A)</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv13w1.txt">EX-13.1 CERTIFICATION OF CEO REQUIRED BY RULE 13A-14(B)</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv13w2.txt">EX-13.2 CERTIFICATION OF CFO REQUIRED BY RULE 13A-14(B)</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv15w1.txt">EX-15.1 CONSENT OF PRICEWATERHOUSECOOPERS ZHONG TIAN CPAS LIMITED COMPANY</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv15w2.txt">EX-15.2 CONSENT OF MAPLES AND CALDER</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="h00610exv15w3.txt">EX-15.3 CONSENT OF FANGDA PARTNERS</A></FONT></TD></TR>
</TABLE>
</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>

<P align="center" style="font-size: 10pt">3
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>INTRODUCTION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This annual report on Form 20-F includes 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.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Forward-Looking Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This annual report on Form 20-F contains statements of a forward-looking nature. These
statements are made under the &#147;safe harbor&#148; provisions of the U.S. Private Securities Litigation
Reform Act of 1995. You can identify these forward-looking statements by terminology such as
&#147;will,&#148; &#147;expects,&#148; &#147;anticipates,&#148; &#147;future,&#148; &#147;intends,&#148; &#147;plans,&#148; &#147;believes,&#148; &#147;seeks,&#148; &#147;estimates&#148;
and similar statements. The accuracy of these statements may be impacted by a number of business
risks and uncertainties that could cause actual results to differ materially from those projected
or anticipated, including but not limited to those risks and uncertainties identified under the
section heading &#147;Risk Factors&#148; below.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All forward-looking statements in this Form 20-F are made as of the date of filing hereof,
based on information available to us as of that date, and we assume no obligation to update or
revise any of these forward-looking statements even if experience or future changes show that the
indicated results or events will not be realized.
</DIV>

<DIV align="left">
<A name="101"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART I</B>
</DIV>

<DIV align="left">
<A name="102"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;1. Identity of Directors, Senior Management and Advisers</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not Applicable.
</DIV>

<DIV align="left">
<A name="103"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;2. Offer Statistics and Expected Timetable</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not Applicable.
</DIV>

<DIV align="left">
<A name="104"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;3. Key Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Selected Financial Data</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table presents the selected consolidated financial information for our business.
You should read the following information in conjunction with Item&nbsp;5 &#147;Operating and Financial
Review and Prospects&#148; below. The following data as of December&nbsp;31, 2004 and 2005 and for the years
ended December&nbsp;31, 2003, 2004 and 2005 has been derived from our audited consolidated financial
statements for those years and should be read in conjunction with those statements, which are
included in this annual report beginning on page F-1. The following data as of December&nbsp;31, 2001,
2002 and 2003 and for the years ended December&nbsp;31, 2001 and 2002 has also been derived from our
audited consolidated financial statements for those years, which are not included in this annual
report. Our audited financial statements for the foregoing periods were prepared in accordance
with United States generally accepted accounting principles, or U.S. GAAP.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In November&nbsp;1999, we commenced operations as a business division of Intrinsic China Technology
Ltd. In April&nbsp;2001, our affiliated business division which focused on wireless data software was
spun off to a newly established holding company, Intrinsic Technology (Holdings) Ltd., or Intrinsic
Technology, and our company was renamed Linktone Ltd. Due to the significance of the spun-off
division relative to
</DIV>

<P align="center" style="font-size: 10pt">1
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">that of our company, the transaction was accounted for as a reverse spin-off, with our company
as the spinnee for accounting purposes. As a result, our combined financial data for the periods
prior to the spin-off was determined by treating Linktone as a separate independent entity.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All amounts below are in U.S. dollars, except for share number data.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2001</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(restated and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>audited) #</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Statements of Operations Data:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Gross revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,086,587</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,309,036</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,601,492</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">50,318,744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,608,603</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,011,910</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,068,767</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,485,670</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,083,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,487,256</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cost of services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(325,258</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,525,146</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,819,391</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,305,416</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(26,483,694</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">686,652</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,543,621</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,666,279</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,778,284</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,003,562</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(368,445</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(426,872</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(748,209</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,807,720</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,229,976</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Selling and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(745,312</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,171,988</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,144,540</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,794,568</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,719,763</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Stock-based compensation*</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,119,529</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,464,807</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,012,425</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Other general and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,400,142</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,526,724</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,070,141</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,809,947</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9,774,570</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total operating expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,513,899</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,125,584</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,082,419</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(21,877,042</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(32,736,734</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Income/(loss) from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,827,247</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(581,963</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,583,860</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,901,242</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,266,828</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,010</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,223</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">815,447</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,965,801</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">346,652</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">720,763</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Income tax expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(997,307</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,504,329</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,805,247</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(535,953</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,616,083</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,066,034</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency translation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(84</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">457</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">264</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">549,586</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unrealized gain/(loss) on
investments in marketable
securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,678</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">242,076</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Comprehensive income/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,796,231</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(536,037</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,616,540</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,001,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13,240,725</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Earning/(loss) per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.03</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.03</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(0.01</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Weighted average ordinary shares:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,390,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,390,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,390,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">224,569,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257,020,040</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,390,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,390,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,556,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">248,081,126</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">275,385,579</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Statements of Cash Flows Data:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash flows from:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(987,021</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(289,525</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,880,751</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,654,127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,561,944</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(287,906</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(85,081</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(304,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(17,266,029</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(34,440,154</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,345,650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,034,979</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65,412,374</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,832,327</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Stock-based compensation is a component of general and administrative expenses.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">#</TD>
    <TD>&nbsp;</TD>
    <TD>We restated our consolidated financial statements for the year ended December&nbsp;31, 2004. For
details, see Item&nbsp;5 under the heading &#147;Operating and Financial Review and Prospects &#151;
Operating Results &#151; Restatement of 2004 Consolidated Financial Statements.&#148;</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">2
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">





<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2001</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(restated and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance Sheet Data:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,375,776</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,036,065</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,612,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">63,413,629</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">36,252,678</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Short term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,860,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,580,530</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accounts receivable, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">443,860</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">563,787</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,092,619</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,445,535</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,945,662</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Property and equipment, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">236,868</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">236,714</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">450,238</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,527,813</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,565,446</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Tax refund and other receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119,275</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">125,213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">554,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,497,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,268,077</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,175,779</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,961,779</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,710,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">98,207,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">118,880,280</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">620,502</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">907,560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,919,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,538,867</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,790,369</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total shareholders&#146; equity/(deficit)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">223,982</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(385,514</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,206,619</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">87,669,088</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100,089,911</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total liabilities and shareholders&#146;
equity/(deficit)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,175,779</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,961,779</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,710,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">98,207,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">118,880,280</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Exchange Rate Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our business is currently conducted in and from China in Renminbi. In this annual report, all
references to &#147;Renminbi&#148; and &#147;RMB&#148; are to the legal currency of China and all references to U.S.
dollars, dollars, $ and US$ are to the legal currency of the United States. The conversion of
Renminbi into U.S. dollars in this annual report is based on the noon buying rate in The City of
New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve
Bank of New York. For reader convenience, this annual report contains translations of some Renminbi
or U.S. dollar amounts for 2005 at US$1.00: RMB8.0702, which was the prevailing rate on December
31, 2005. The prevailing rate at June&nbsp;21, 2006 was US$1.00: RMB7.9969. We make no representation
that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars
or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The
Chinese government imposes control over its foreign currency reserves in part through direct
regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign
trade.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth the average buying rate for Renminbi expressed as per one U.S.
dollar for the years 2001, 2002, 2003, 2004 and 2005.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Year</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Renminbi Average</B><SUP style="font-size: 85%; vertical-align: text-top"><B>(1) </B></SUP></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2001</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2772</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2002</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2772</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2771</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.2768</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.1826</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Determined by averaging the rates on the last business day of each month during the relevant period.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth the high and low exchange rates for Renminbi expressed as per
one U.S. dollar during the past six months.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="36%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Renminbi Average</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Month Ended</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0808</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0702</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">January&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0702</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0596</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">February&nbsp;28, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0616</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0415</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">March&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0505</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0167</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">April&nbsp;30, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0248</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0040</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">May&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0005</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">3
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Capitalization and Indebtedness</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not Applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Reasons for the Offer and Use of Proceeds</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not Applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Risk Factors</B>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>RISKS RELATED TO OUR COMPANY</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Risks Related to Our Contractual Relationships with the Mobile Operators in China</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We depend on the two principal mobile phone operators in China for delivery of almost all of our
services, and the termination or alteration of our various contracts with either of them or their
provincial or local affiliates could materially and adversely impact our business.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We offer most of our wireless value-added services to consumers through the two principal
mobile phone operators in China, China Mobile Communications Corporation, or China Mobile, and
China United Telecommunications Corporation, or China Unicom, which service substantially all of
China&#146;s approximately 393.4&nbsp;million mobile phone subscribers. As of April&nbsp;2006, China Mobile had
approximately 263.4&nbsp;million subscribers, or 67% of the mobile phone service market in China, while
China Unicom had approximately 130&nbsp;million subscribers, or 33% of the mobile phone service market
in China. Given their dominant market position, our negotiating leverage with these operators is
limited. If our various contracts with either operator are terminated or adversely altered, it may
be impossible to find appropriate replacement operators with the requisite licenses and permits,
infrastructure and customer base to offer our services, and our business would be significantly
impaired. For 2003, 2004 and 2005, we derived approximately 88.3%, 88.1% and 85.0%, respectively,
of our total revenues, including all of our revenues for advanced second generation, or 2.5G, and
audio-related services, from China Mobile and are, therefore, particularly dependent on that
operator.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our services are provided pursuant to contracts that we have with the national offices of the
mobile operators, as well as several of their provincial and local affiliates. Each of these
contracts is non-exclusive, and has a limited term (generally one or two years). We usually renew
these contracts or enter into new ones when the prior contracts expire, but on occasion the renewal
or new contract can be delayed by periods of one month or more. The terms of these contracts vary,
but the operators are generally entitled to terminate them in advance for a variety of reasons or,
in some cases, for no reason in their discretion. For example, several of our contracts with the
mobile operators can be terminated if:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we fail to achieve performance standards which are established by the
applicable operator from time to time,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we breach our obligations under the contracts, which include, in many cases,
the obligation not to deliver content that violates the operator&#146;s policies and
applicable law, and exclusivity provisions prohibiting us from offering services which
are the same as the services we provide to any other telecommunications service
providers,</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">4
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the operator receives high levels of customer complaints about our services, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the operator sends us written notice that it wishes to terminate the contract
at the end of the applicable notice period.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Changes in the policies of the mobile operators and in their enforcement of their policies have
resulted in our having to pay additional charges to the mobile operators, and further changes could
materially and adversely impact our revenue, profitability and financial condition in the future.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The mobile operators in China have a wide range of policies and procedures regarding customer
service, quality control and other aspects of the wireless value-added services industry. As the
industry has evolved over the last several years, the mobile operators have refined these policies
to improve overall service quality. In addition, the mobile operators have unilaterally changed the
way such policies have been enforced as applied to third party service providers such as ourselves,
and may do so again in the future. We often only become aware of such policy changes when the
mobile operators inform us orally or provide us with a monthly statement indicating an additional
charge, which in either case can happen months after the operating problem in question arose.
Because of this time delay, we cannot always confirm the existence of such problems or correct
errors in our systems in a timely manner.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Beginning in April&nbsp;2004, acting under the guidance of China&#146;s Ministry of Information
Industry, the mobile operators began enforcing their customer service policies more rigorously than
in the past and initiated steps to improve customer service. For example, the mobile operators
have been less willing to permit service providers to engage in broad distributions of short
messages (known as SMS) to promote their services, known as &#147;SMS pushes,&#148; which have been used to
cross-sell higher-margin services, because of the concern that users may find such messages a
nuisance. While we intend to seek approval from the mobile operators to engage in future SMS
pushes, we cannot be certain that we will be granted permission to the extent we request, or at
all. This rigorous enforcement, including the restrictions on SMS pushes, has resulted in a number
of penalties being imposed on participants in the market. These penalties have included precluding
such participants from offering certain services over the mobile operators&#146; networks or from
offering new services for a fixed period.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While we believe the mobile operators&#146; recent focus on compliance and service initiatives will
result in a stronger, more orderly market in the long-term, it has also resulted in service and
billing suspensions and in our having to pay certain charges due to the occasional contravention of
certain of these policies by us. Specifically, we received a notice of sanction from China Mobile
in December&nbsp;2004 for violating its rules relating to the acquisition of users for our wireless
application protocol, or WAP, services. As a result, we were not allowed to bill WAP users from
January&nbsp;1, 2005 until October&nbsp;10, 2005. In addition, China Mobile suspended approval of any new
product applications by us for its wireless platforms, including SMS, MMS, WAP, JAVA&#153;, IVR and
ringback, between January&nbsp;1, 2005 and June&nbsp;30, 2005. For 2005, the amount of fines was negligible,
compared to $0.7&nbsp;million for 2004. Because the mobile operators&#146; policies are in a state of flux
at this time and they are highly sensitive to customer complaints (even if the complaints may not
have a bona fide basis), we cannot be certain that our business activities will always be deemed in
compliance with those policies despite our efforts to so comply. Accordingly, we may be subject to
additional monetary penalties or service suspensions or both, even for conduct which we believed to
be permissible. Our relationships with the mobile operators could be adversely affected in the
long-term if we are perceived to be providing consistently poor quality services or weak customer
service. Any non-compliance with the mobile operators&#146; policies by us, whether inadvertent or not,
could result in a material and adverse effect on our revenue, profitability and financial
condition.
</DIV>


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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Our business could be adversely affected if any of the mobile operators in China begin providing
their own portfolio of wireless value-added services that compete with our services.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The principal mobile operators in China currently offer a limited number of specific wireless
value-added services, such as personal information management and instant messaging. However, they
have not yet developed their own comprehensive portfolio of services. Our business may be
adversely affected if any of the mobile operators in China decides to begin providing its own
wireless value-added services to mobile phone users which compete with our services. In that case,
we would not only face enhanced competition, but could be partially or fully denied access to their
networks.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Our revenue and profitability could be materially and adversely affected if we are required to pay
the mobile operators for their share of service fees not paid by customers due to service quality
or other problems.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If a customer refuses to pay for a wireless value-added service due to quality or other
problems attributable to the service provider, the mobile operators have generally not required the
service provider to pay them for their portion of the service fees that were lost as a result of
the customer&#146;s refusal to pay. However, China Unicom&#146;s affiliate in Fujian province requires us
and other service providers to reimburse it for these amounts in connection with our SMS services
provided in that province. If any of the mobile operators in China adopts such a policy in other
provinces and we cannot maintain high levels of service quality and customer service, we may have
to pay significant amounts of service fees for which we receive no corresponding revenue, which
could materially and adversely affect our revenue and profitability.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We depend on the mobile operators to maintain accurate records and to pay us for services we
provide.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We depend on the mobile operators to maintain accurate records of the fees paid by users and
to pay us for services we provide. Specifically, the mobile operators provide us with monthly
statements that do not provide itemized information regarding which of our services are being paid
for. As a result, monthly statements that we have received from the mobile operators cannot be
reconciled to our own internal records for the reasons discussed below under the heading &#147;&#151; Because
the mobile operators do not supply us with revenue and transmission information on a
service-by-service basis, we can only estimate our actual gross revenue and our cost of services by
service type, and as a result, which of our services are or may be profitable, all of which make it
difficult to analyze the factors affecting our financial performance.&#148; In addition, we have only
limited means to independently verify the information provided to us in this regard because we do
not have access to the mobile operators&#146; internal records. Our business and results of operations
could be adversely affected if these mobile phone operators miscalculate the revenue generated from
our services and our portion of that revenue.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Our revenues and cost of services are affected by billing and transmission failures which are often
beyond our control.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not collect fees for our services from the mobile operators in a number of
circumstances, including if:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the delivery of our service to a customer is prevented because his or her phone
is turned off for an extended period of time, the customer&#146;s prepaid phone card has run
out of value or the customer has ceased to be a customer of the applicable operator,</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">6
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the mobile operator experiences technical problems with its network which
prevent the delivery of our services to the customer,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we experience technical problems with our technology platform that prevents
delivery of our services, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the customer refuses to pay for our service due to quality or other problems.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These situations are known in the industry as billing and transmission failures, and we do not
recognize any revenue for services which are characterized as billing and transmission failures.
The failure rate can vary among the operators, and by province, and also has fluctuated
significantly in the past, ranging on a monthly basis from 10% to 53% of the total billable
messages which are reflected in our internal records during 2005. For 2005, the rate of billing and
transmission failures for our services averaged approximately 39% of the total billable messages.
Billing and transmission failures therefore will significantly lower the revenue we record. We are
also required to pay some of our content providers a percentage of the revenue received from or
confirmed by the mobile operators with respect to services incorporating the content providers&#146;
products. In calculating the fees payable to these providers, we make estimates to take into
account billing and transmission failures which may have been applicable to the services
incorporating the providers&#146; products, and reduce the fees payable by us accordingly. Nonetheless,
as estimates involve making assumptions which may prove inaccurate, we have in the past paid, and
may continue to pay, such providers fees which are disproportionate to what we have been paid for
the relevant service.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Because the mobile operators do not supply us with revenue and transmission information on a
service-by-service basis, we can only estimate our actual gross revenue and our cost of services by
service type, and as a result, which of our services are or may be profitable, all of which make it
difficult to analyze the factors affecting our financial performance.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China Mobile and China Unicom provide us with separate monthly statements for our SMS, 2.5G
and audio-related services. However, the monthly statements of the operators with respect to each
such service category do not contain revenue and billing and transmission failure information on a
specific service-by-service basis. Although we maintain our own records reporting the services
provided, we can only estimate our actual gross revenue and cost of services by service type
because we are unable to confirm which services were transmitted but resulted in billing and
transmission failures. As a result, we are not able to definitively calculate and monitor
service-by-service revenue, margins and other financial information, such as average revenue per
user by service and total revenue per user by service, and also cannot definitively determine which
of our services are or may be profitable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>The mobile operators may impose higher service or network fees on us if we are unable to satisfy
customer usage and other performance criteria.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Fees for our wireless value-added services are charged on a monthly subscription or per use
basis. Based on our contractual arrangements, we rely on the mobile operators for both billing of,
and collection from, mobile phone users of fees for our services.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China Mobile generally charges us service fees of 15% to 30% of the revenues generated by our
services. China Unicom has implemented a sliding scale system whereby the percentage of gross
revenue received by the service provider can range from 40% to 88% depending on customer usage,
revenue and other performance criteria. In 2005, we received on average 71% of the gross revenue
from China Unicom. Moreover, to the extent that the number of messages sent by us over China
Mobile&#146;s network, and over China Unicom&#146;s network in most provinces, exceeds the number of messages
our customers
</DIV>


<P align="center" style="font-size: 10pt">7
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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">send to us, we must pay per message network fees, which decrease in several provinces as the
volume of customer usage of our services increases. The number of messages sent by us will exceed
those sent by our users, for example, if a user sends us a single message to order a game but we in
turn must send that user several messages to confirm his or her order and deliver the game itself.
We cannot be certain that we will be able to satisfy these criteria in the future or that the
mobile operators will keep the criteria at their current levels. Any future increase in the mobile
operators&#146; network fees and service charges could reduce our gross margins.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>The mobile operators may not authorize our services to be offered on their networks if we fail to
achieve minimum customer usage, revenue and other criteria.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our business could be adversely affected if we fail to achieve minimum customer usage, revenue
and other criteria imposed or revised by the mobile operators at their discretion from time to
time. The mobile operators, through their provincial and local offices, have historically preferred
to work only with a small group of the best performing wireless value-added service providers,
based upon the uniqueness of the service offered by each provider, total number of users, usage and
revenue generated in the applicable province or municipality, the rate of customer complaints, and
marketing expenditures in the applicable province or municipality. In the future, we may fail to
meet the then current performance criteria that the mobile operators set from time to time. In any
such case, our services could be excluded from their networks at a provincial, municipal or
national level, or we could be precluded from introducing new services, which would adversely
affect our revenues and growth prospects.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>If China Mobile and China Unicom do not change their policies regarding how service selections
appear on their WAP portals, we may have difficulty increasing the popularity of our WAP services,
which could adversely affect our future revenue growth and profitability.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The WAP portals of both China Mobile and China Unicom are organized much like the pages of an
Internet Web site, with the services of third party service providers such as our company listed by
category on various segregated WAP pages within each operator&#146;s WAP portal. China Mobile and China
Unicom currently place the most popular WAP services at the top of the menu on the first page of
the list of services available in each service category on their WAP portals. As users tend to
pick from the first services they see on a WAP page, rather than scrolling through page after page,
prominent positioning tends to reinforce the position of the most popular services. Because other
service providers who entered the market for WAP services before we did have already established
strong positions on the WAP menus of the mobile operators, in particular, KongZhong Corporation
with respect to China Mobile&#146;s WAP portal, and Hurray! Holding Co., Ltd. with respect to China
Unicom&#146;s WAP portal, we may have difficulty building up the popularity of our various WAP services
and thereby enhancing their positioning on the WAP menus, unless the mobile operators change their
WAP placement policies. Our failure to increase the popularity of our WAP services could adversely
affect our future revenue growth and profitability.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>The services we offer and the prices we charge are subject to approval by the mobile operators, and
if requested approvals are not granted in a timely manner, our business could be adversely
affected.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We must obtain approval from the mobile operators with respect to each service that we propose
to offer to their customers and the pricing for such service. In addition, any changes in the
pricing of our existing services must be approved in advance by these operators. There can be no
assurance that such approvals will be granted in a timely manner or at all. Moreover, under all of
our contracts with China Mobile and most of our contracts with China Unicom, we cannot change
prices more than once every six months or charge prices outside of a fixed range. Failure to
obtain, or a delay in, obtaining such approvals could place us at a competitive disadvantage in the
market and adversely affect our business. In addition,
</DIV>


<P align="center" style="font-size: 10pt">8
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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">the mobile operators&#146; recent more rigorous enforcement of their customer service policies may
result in stricter scrutiny of our proposed services and pricing by the mobile operators, which may
in turn delay the approval process or result in disapproval of such proposed services or pricing.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Additional Risks Related to Our Company</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We operate in a rapidly evolving industry, which may make it difficult for investors to evaluate
our business.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We began commercially offering wireless value-added services in China in August&nbsp;2000, and
since that time, the technologies and services used in the wireless value-added services industry
in China have developed rapidly. As a result of this rapid and continual change in the industry,
you should consider our prospects in light of the risks and difficulties frequently encountered by
companies in an early stage of development. These risks include our ability to:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>attract and retain users for our wireless value-added services, especially for
our 2.5G and audio-related services,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our ability to expand the content and services that we offer and, in
particular, develop and aggregate innovative new content and service offerings, and
sources of revenues which are not dependent on the mobile operators,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>respond effectively to rapidly evolving competitive and market dynamics and
address the effects of mergers and acquisitions among our competitors,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>migrate existing users to subscription-based offerings, including our 2.5G and
audio-related services, in order to build a large and stable user base and generate
recurring revenue,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>maintain, expand and enhance our relationships with international media
companies and other strategic partners, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>increase awareness of our brand and user loyalty.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Due to these factors, there can be no certainty that we will maintain or increase our current
share of the highly competitive market in which we operate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Several of our senior managers have worked together for a relatively short period of time, and they
may not prove as effective as anticipated.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our chief executive officer and chief financial officer joined our company in 2003 and 2005,
respectively. Accordingly, they have worked together at our company for a relatively short period
of time. Due to the fact that our senior managers joined our company only recently and have
relatively limited experience working with each other, it is difficult to predict how successful
they will be, and our management team may not be as effective as anticipated. Our business strategy
may not be realized to its full extent and our business may suffer if these senior managers cannot
work together as a team.
</DIV>


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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>The success of some of our services is significantly dependent on our ability to obtain, customize
and localize desirable content and technology from third parties.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are increasingly obtaining much of our content, including wireless games, logos, music,
news and other information, from third parties. Furthermore, we expect that we will license
technology in connection with our development of next generation services such as MMS and
Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>. As the market for wireless value-added services develops, content and technology
providers may attempt to increase their profits from these distribution and localization
arrangements by demanding a greater share of revenue or other fees, which would adversely affect
our financial performance. Many of our arrangements with content and technology providers are
non-exclusive, short-term and subject to renewal. If our competitors are able to provide such
content in a similar or superior manner or to license the same technologies, it could adversely
affect the popularity of our services and our negotiating leverage with third party providers.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, we must often invest significant resources in customizing and localizing the
content and applications we license or purchase for the Chinese wireless market. This may include
work ranging from translating the content or application interface into Chinese to performing
significant development work to utilize the particular content or application.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If we fail to establish and maintain economically attractive relationships with content and
technology providers and to thereafter successfully customize and localize their products, we may
not be able to attract and retain users or maintain or improve our financial performance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We began to recognize revenue for our services on an accrual basis beginning in the quarter ended
December&nbsp;31, 2003, which involves the use of estimates of monthly revenue to the extent we are
unable to obtain actual figures from the mobile operators before we finalize our financial
statements. This could in turn require us to make adjustments to our financial statements.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our financial statements through September&nbsp;30, 2003 reflect our actual revenues as they appear
on the operators&#146; statements. However, for subsequent quarters, we recognized revenue earned on an
accrual basis and plan to do so in future quarters if necessary in order to report our earnings on
a timely basis. This involves the use of estimates of monthly revenue based on our internal records
for the month and prior monthly confirmation rates with the operators in prior months if we are
unable to obtain actual figures from the operators before we finalize our financial statements.
Actual revenue may differ from prior estimates when unexpected variations in billing and
transmission failures occur. Recognizing revenue on an accrual basis could potentially require us
to later make adjustments to our financial statements if the operators&#146; billing statements and cash
payments are different from our estimates, which could adversely affect our reputation and the
price of our ADSs.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the years ended December&nbsp;31, 2003, 2004 and 2005, approximately 6.2%, 3.0% and 2.0%,
respectively, of our gross revenues were based on such estimates. However, we are focusing on
increasing sales of our wireless value-added services through the Personal Handyphone System, or
PHS, and Personal Access System, or PAS, networks of China Telecom Group, or China Telecom, and
China Netcom Corporation Ltd., or China Netcom, and sales of our audio related services to fixed
line customers of China Telecom and China Netcom, which have recently begun to offer value-added
services and have not implemented comprehensive billing systems. We are also focused on increasing
sales in less economically developed provinces in the central and western parts of China where the
provincial offices of the mobile operators often have not implemented comprehensive billing systems
for wireless value-added services. As a result, we have on occasion received monthly statements
from China Telecom and China Netcom and certain provincial operators of China Mobile and China
Unicom in less economically developed provinces significantly later than China Mobile and China
Unicom provincial
</DIV>


<P align="center" style="font-size: 10pt">10
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">operators in more economically developed provinces. This in turn tends to increase the portion
of our revenue that we must estimate for a given quarter. At the same time, China Mobile has
completed the implementation of new billing systems in all provinces in China while China Unicom
has implemented similar systems in substantially all provinces. The information provided to third
party service providers such as our company under these new systems is less detailed in certain
respects than before, making revenue estimations somewhat more difficult.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our management and board of directors have evaluated the effect of these trends on our
methodology for making revenue estimates. Although we have no plans to do so currently, it is
possible that it may be necessary in the future for us to extend the time between the end of a
fiscal quarter and the announcement of our earnings for that quarter to obtain additional monthly
confirmation statements. Such an extension could result in our having to announce earnings after
our normally scheduled earnings release date, which could potentially adversely affect the trading
price of our ADSs. Moreover, we may have to make additional adjustments to our estimation
methodology in the future, which could result in unexpected discrepancies in estimates, or to stop
making estimations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>We face intense competition.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Chinese market for wireless value-added services is intensely competitive, and is changing
rapidly. We compete principally with three groups of wireless value-added service providers in
China:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>dedicated service providers such as Linktone, whose business focus is to offer
a variety of wireless content directly to mobile users,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the national Internet portal operators in China, which offer Internet access
and content aggregation services on a nationwide basis in addition to wireless
services, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>niche service providers, which focus primarily on a particular market segment
or application that often builds on a pre-existing sector competency.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have faced competition from service providers in the three groups described above since our
entry into this market. We may also face significant competition from other parties, including
companies which offer online services and are expanding to various degrees into wireless
value-added services, such as Shanda Interactive Entertainment Limited, which primarily focuses on
Internet-based games but has also begun to offer wireless games. Moreover, there are low barriers
to entry for new competitors in the wireless value-added services market, particularly for 2G
services. Several of our competitors have longer operating histories in China, greater name and
brand recognition, larger customer bases and databases, significantly greater financial,
technological and marketing resources and superior access to original content than we have. As a
result, our existing or potential competitors may in the future achieve greater market acceptance
and gain additional market share, which in turn could reduce our revenues.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A substantial portion of our revenues are derived from the relatively wealthier coastal and
southern provinces in China, and the termination or alteration of our contracts with the mobile
operators or a general economic downturn in those areas could have a particularly adverse effect on
our business.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Per capita income levels and mobile phone penetration rates (i.e., the number of mobile
subscribers divided by the population of China) in China are generally higher in the coastal and
southern provinces, such as Guangdong, Jiangsu, Liaoning, and Zhejiang provinces, as well as the
municipalities of Shanghai and Beijing, which are among our top revenue generating locales.
</DIV>


<P align="center" style="font-size: 10pt">11
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As noted above, there are numerous, often highly-subjective bases on which the mobile
operators have the right to terminate our contracts with them. Moreover, our contracts with China
Mobile for Guangdong, Jiangsu, Liaoning and Zhejiang provinces and the municipalities of Shanghai
and Beijing can be terminated in the discretion of either contracting party upon 15 to 30&nbsp;days
notice, depending on the contract. If these contracts are terminated or adversely altered or there
is a general economic downturn in those areas, our business could be adversely affected. We cannot
predict whether there will be a termination of our contracts with affiliates of the mobile
operators in significant provinces in the future.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We have incurred net losses for a significant portion of our history which could occur again.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We incurred significant net losses until the first quarter of 2003. We could incur significant
net losses in the future due to changes in the market, operating environment and competitive
dynamics and our ability to respond to those changes. If we do not sustain profitability, the
market price of our ADSs may decline.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We depend on key personnel for the success of our business. Our business may be severely disrupted
if we lose the services of our key executives and employees or fail to add new senior and middle
managers to our management.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our future success is heavily dependent upon the continued service of our key executives,
particularly Michael Guangxin Li, our chief executive officer, and Colin Sung, our chief financial
officer. Our future success is also dependent upon our ability to attract and retain qualified
senior and middle managers to our management team. If one or more of our current or future key
executives and employees are unable or unwilling to continue in their present positions, we may not
be able to easily replace them, and our business may be severely disrupted. In addition, if any of
these key executives or employees joins a competitor or forms a competing company, we could lose
customers and suppliers and incur additional expenses to recruit and train personnel. Each of our
executive officers has entered into an employment agreement and a confidentiality, non-competition
and non-solicitation agreement with us. We do not maintain key-man life insurance for any of our
executive officers.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also rely on a number of key technology staff for the operation of our company. Given the
competitive nature of our industry, the risk of key technology staff leaving our company is high
and could disrupt our operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Rapid growth and a rapidly changing operating environment strain our limited resources.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have limited operational, administrative and financial resources, which may be inadequate
to sustain the growth we want to achieve. As our user base increases, we will need to increase our
investment in our technology infrastructure, facilities and other areas of operations, in
particular our product development, customer service and sales and marketing which are important to
our future success. If we are unable to manage our growth and expansion effectively, the quality of
our services and our customer support could deteriorate and our business may suffer. For example,
any such performance issue could prompt the mobile operators to cease offering our services over
their networks. Our future success will depend on, among other things, our ability to:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>develop and quickly introduce new services, adapt our existing services and
maintain and improve the quality of all of our services, particularly as new mobile
technologies such as 2.5G and 3G are introduced,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>effectively maintain our relationships with the mobile operators,</TD>
</TR>

</TABLE>
</DIV>
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<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>expand the percentage of our revenues which are recurring and are derived from
monthly subscription based services,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>develop sources of revenue which are not dependent on the mobile operators,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>enter into and maintain relationships with desirable content providers,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>continue training, motivating and retaining our existing employees and attract
and integrate new employees, including our senior management, some of whom have been
with our company for less than one year,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>develop and improve our operational, financial, accounting and other internal
systems and controls, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>maintain adequate controls and procedures to ensure that our periodic public
disclosure under applicable laws, including U.S. securities laws, is complete and
accurate.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Any failures of the mobile telecommunications network, the Internet or our technology platform may
reduce use of our services.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Both the continual accessibility of the networks of the mobile operators in China and the
performance and reliability of China&#146;s Internet infrastructure are critical to our ability to
attract and retain users. Moreover, our business depends on our ability to maintain the
satisfactory performance, reliability and availability of our technology platform. The servers
which constitute the principal system hardware for our operations are located in three locations in
Shanghai, three locations in Beijing and one location in Jiangsu and one location each in Zhejiang,
Guizhou, Hebei and Hunan. We maintain backup system hardware in our offices in Shanghai and
Beijing, but cannot be certain such backup will be adequate if there are problems with our primary
system hardware. Any server interruptions, break-downs or system failures, including failures
caused by sustained power shutdowns, floods or fire causing loss or corruption of data or
malfunctions of software or hardware equipment, or other events outside our control that could
result in a sustained shutdown of all or a material portion of the mobile networks, the Internet or
our technology platform, could adversely impact our ability to provide our services to users and
decrease our revenues.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>If our exclusive providers of bandwidth and server custody service fail to provide these services
or increase their prices, our business could be adversely affected.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We rely on affiliates of China Telecom and China Netcom to provide us with bandwidth and
server custody service for our services pursuant to contracts which have one-year terms, in the
case of China Telecom, or are terminable at the discretion of either party, in the case of China
Netcom, and are usually in the standard forms of the respective service provider. If China Telecom,
China Netcom or their respective affiliates fail to provide such services, it may be difficult, if
not impossible, to find a substitute provider on a timely basis or at all. In addition, we have no
control over the costs of the services provided by China Telecom, China Netcom or their respective
affiliates. If China Telecom, China Netcom or their respective affiliates fail to provide these
services or raise their prices, our business could be adversely affected.
</DIV>


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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Our corporate structure could be deemed to be in violation of current or future Chinese laws and
regulations which could adversely affect our ability to operate our business effectively or at all.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with China&#146;s entry into the World Trade Organization, or WTO, foreign investment
in telecommunications and Internet services in China was liberalized to allow for up to 30.0%
foreign ownership in value-added telecommunication and Internet services in 2002, 49.0% in 2003 and
50.0% thereafter. In order to meet these ownership requirements, as of December&nbsp;31, 2005, we
maintained control over the following PRC affiliated companies: (i)&nbsp;Shanghai Weilan Computer Co.,
Ltd. (&#147;Shanghai Weilan&#148;), which is 50% owned by each of two of our shareholders, Ankai Hu and Dong
Li; (ii)&nbsp;Shanghai Unilink Company Ltd. (&#147;Shanghai Unilink&#148;), which is 50% owned by our Vice
President of Product Development, Jing Wang, and 50% owned by our former Vice President of Business
Development, Wei Long, each of whose equity interests in Shanghai Unilink are in the process of
being transferred to our Financial Controller, Jinhua Yuan, and our Human Resource Manager, Rong
Zhang, respectively; (iii)&nbsp;Shenzhen Yuan Hang Technology Co., Ltd. (&#147;Shenzhen Yuanhang&#148;), which is
50% owned by our Vice President of Business Development, Yan Ma, and 50% owned by our Financial
Controller, Jinhua Yuan; (iv)&nbsp;Beijing Cosmos Digital Technology Co., Ltd. (&#147;Beijing Comos&#148;), which
is 50% owned by our Human Resource Manager, Rong Zhang, and 50% owned by our Product Development
Manager, Teng Zhao; (v)&nbsp;Hainan Zhong Tong Computer Network Co., Ltd. (&#147;Hainan Zhong Tong&#148;), which
is 50% owned by our Financial Controller, Jinhua Yuan, and 50% owned our Product Development
Manager, Teng Zhao; (vi)&nbsp;Beijing Lian Fei Wireless Communications Technology Co., Ltd.
(&#147;Beijing Lian Fei&#148;), which is 50% owned by our Vice President of Business Development, Yan Ma, and
50% owned by our Human Resource Manager, Rong Zhang; and (vii)&nbsp;Shanghai Qimingxing E-commerce Co.,
Ltd. (&#147;Shanghai Qimingxing&#148;), which is 50% owned by our Financial Controller, Jinhua Yuan, and 50%
owned by our Technical Senior Manager, Xingyong Ding. We hold no ownership interest in those
companies. It is possible that the relevant Chinese authorities could, at any time, assert that any
portion of or all of the existing or future ownership structure and businesses of us, any of our
wholly owned subsidiaries, or any of our PRC affiliated companies, violate existing or future
Chinese laws, regulations or policies. It is also possible that the new laws or regulations
governing the telecommunication or Internet sectors in China that have been adopted or may be
adopted in the future will prohibit or restrict foreign investment in, or other aspects of, any of
our, our wholly owned subsidiaries&#146; or our PRC affiliated companies&#146; current or proposed businesses
and operations. In addition, these new laws and regulations may be retroactively applied. In any
such case, we could be required to restructure our operations which could adversely affect our
ability to operate our business effectively or at all.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We may be unable to collect long-term loans to shareholders of our affiliated Chinese entities.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2005, we had provided long-term interest free loans with an aggregate
outstanding balance of approximately RMB69.7&nbsp;million ($8.4&nbsp;million) to shareholders of our
affiliated Chinese entities for the purpose of investing in our affiliated Chinese entities as
registered capital and to make payments to the selling shareholders from whom we acquired certain
of our affiliated Chinese entities for settlement of purchase price consideration pursuant to
applicable acquisition agreements. The term of these loans in each case is 10&nbsp;years. The
shareholders of our affiliated Chinese entities can only repay the loans by transferring to us or
our designees all of their equity interest in the respective affiliated Chinese entity. Please
refer to the table under Item&nbsp;5 of this annual report under the heading &#147;Arrangements with
Consolidated Affiliates &#151; Loan Agreements.&#148; We expect that we will continue to be involved in and
provide additional financial support in the future to the extent allowed by the Sarbanes-Oxley Act
of 2002 and other applicable laws. Because of uncertainty associated with Chinese law, ultimate
enforcement of the loan agreements is uncertain.
</DIV>


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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We depend upon contractual arrangements with our affiliated Chinese entities for the success of our
business. These arrangements may not be as effective in providing operational control as direct
ownership of these businesses and may be difficult to enforce.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because we conduct our business only in China, and because we are restricted by the Chinese
government from owning telecommunications or Internet operations in China, we depend on our
affiliated Chinese entities, Shanghai Weilan, Shanghai Unilink, Shenzhen Yuanhang, Beijing Cosmos,
Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, in which we have no direct ownership
interest, to provide those services through contractual agreements with the mobile operators. These
arrangements may not be as effective in providing control over our telecommunications or Internet
operations as direct ownership of these businesses. For example, Shanghai Weilan or Shanghai
Unilink could fail to take actions required to operate our business, such as entering into content
development contracts with potential content suppliers or service contracts with the mobile
operators in China. Moreover, the fees for our services are paid by the mobile operators directly
to Shanghai Weilan and Shanghai Unilink, which are then obligated at our request to transfer
substantially all of such fees to our wholly owned subsidiaries, Shanghai Linktone Consulting Co.,
Ltd. (&#147;Linktone Consulting&#148;), Shanghai Huitong Information Co., Ltd. (&#147;Shanghai Huitong&#148;) and
Shanghai Linktone Internet Technology Co., Ltd. (&#147;Linktone Internet&#148;). If Shanghai Weilan or
Shanghai Unilink fail to perform their obligations under these agreements, we may have to rely on
legal remedies under Chinese law, which we cannot assure you would be effective or sufficient.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We generate our internal funds almost exclusively from our subsidiaries. If those entities are
restricted from paying dividends to us, we may lose almost all of our internal source of funds.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are a holding company with assets consisting primarily of cash generated from our initial
public offering in March&nbsp;2004 and our equity interests in Linktone Consulting, Shanghai Huitong,
Linktone Internet, Brilliant Concept Investments Ltd. (&#147;Brilliant&#148;), Wang You Digital Technology
Co., Ltd. (&#147;Wang You&#148;), and Linktone Software Co., Ltd. (&#147;Linktone Software&#148;). Our internal source
of funds has been derived almost exclusively from dividend payments from those entities after they
receive payments from our PRC affiliated companies. We are likely to lose all of our source of
funds if those entities are restricted from paying dividends to us, except for interest and
dividend we earned on our fixed deposits and short term investments which totaled $23,000 in 2003,
$752,000 in 2004 and $1,880,000 in 2005. Under current Chinese tax regulations, dividends paid to
us are not subject to Chinese withholding tax. However, Chinese legal restrictions permit payment
of dividends only out of net income as determined in accordance with Chinese accounting standards
and regulations, which in turn restricts our ability to receive these revenues.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The principal differences between net income under Chinese accounting standards and U.S. GAAP
relate to stock-based compensation and deferred taxes. Stock-based compensation and deferred taxes
are not recognized under Chinese accounting standards. Under Chinese law, Linktone Consulting,
Shanghai Huitong, Linktone Internet, Wang You and Linktone Software are also required to set aside
a portion of their net income each year to fund certain reserve funds. These reserves are
established to offset losses and for other general purposes under Chinese law and they are not
distributable as cash dividends. If further restrictions on payments of dividends by our
subsidiaries are implemented under Chinese law, our revenues could decrease significantly.
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>If any of our subsidiaries incurs any debt, it could impact our ability to pay dividends on our
ordinary shares or ADSs.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If any of our subsidiaries incurs debt on its own behalf in the future, the instruments
governing the debt may restrict their ability to pay dividends or make other distributions to us,
which in turn would limit our ability to pay dividends on our ordinary shares or ADSs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Computer viruses and hacking may cause delays or interruptions on our systems and may reduce use of
our services and harm our reputation.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Computer viruses and hacking may cause delays or other service interruptions on our systems.
&#147;Hacking&#148; involves efforts to gain unauthorized access to information or systems or to cause
intentional malfunctions or loss or corruption of data, software, hardware or other computer
equipment. In addition, the inadvertent transmission of computer viruses could expose us to a
material risk of loss or litigation and possible liability. We may be required to expend
significant capital and other resources to protect our systems against the threat of such computer
viruses and hacking and to rectify any damage to our systems. Moreover, if a computer virus or
hacking which affects our systems is highly publicized, our reputation could be materially damaged
and usage of our services may decrease.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Our revenues fluctuate significantly and may adversely impact the trading price of our ADSs or any
other securities which become publicly traded.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our revenues and results of operations have varied in the past and may continue to fluctuate
in the future. Many of the factors that cause such fluctuation are outside our control. Steady
revenues and results of operations will depend largely on our ability to:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>attract and retain users in the increasingly competitive wireless value-added
services market in China,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>expand the percentage of our revenues which are recurring and are derived from
monthly subscription based services,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>successfully implement our business strategies, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>update and develop our services, technologies and content, including
aggregating, customizing and localizing third party technologies and content for the
China market.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because the wireless value-added services industry in China is relatively new and rapidly
evolving and our business is also relatively new and has experienced significant volatility in
terms of financial results as a result of the factors stated above, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of our future
performance. It is possible that future fluctuations may cause our results of operations to be
below the expectations of market analysts and investors. This could cause the trading price of our
ADSs to decline.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We may be held liable for information displayed on or retrieved from our service offerings.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We may face liability for defamation, negligence, copyright, patent or trademark infringement
and other claims based on the nature and content of the materials that are provided via our
wireless value-added services. For example, we could be subject to defamation claims for messages
posted on our services that allow chatting, or SMS news updates sent to users by us could possibly
be deemed to contain state secrets in violation of applicable Chinese law. In addition, third
parties could assert claims against us
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">for losses incurred in reliance on information distributed by us. We may incur significant
costs in investigating and defending these claims, even if they do not result in liability.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We may not be able to adequately protect our intellectual property, and we may be exposed to
infringement claims by third parties.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We rely on a combination of copyright, trademark and trade secrecy laws and contractual
restrictions on disclosure to protect our intellectual property rights. We have registered 90
trademarks with China&#146;s Trademark Office and one trademark in each of Hong Kong, Singapore and
Taiwan. We are in the process of applying for 36 additional trademarks in China and two trademarks
in the United States. We have also obtained 21 copyright certificates in China for certain
cartoons and images and 26 copyright certificates for computer software. Our efforts to protect our
proprietary rights may not be effective to prevent unauthorized parties from copying or otherwise
obtaining and using our technology and content, particularly in China where the laws may not
protect our proprietary rights as fully as in the United States. Monitoring unauthorized use of our
services is difficult and costly, and we cannot be certain that the steps we take will effectively
prevent misappropriation of our technology and content. For example, competitors could copy one or
more of our downloadable icons, and we may not become aware of the infringement in a timely manner
or at all or be able to take effective action to enforce our rights.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From time to time, we may have to resort to litigation to enforce our intellectual property
rights, which could result in substantial costs and diversion of our resources. In addition, third
parties may initiate litigation against us for alleged infringement of their proprietary rights. In
the event of a successful claim of infringement and our failure or inability to develop
non-infringing technology or content or license the infringed or similar technology or content on a
timely basis, our business could suffer. Moreover, even if we are able to license the infringed or
similar technology or content, license fees that we pay to licensors could be substantial or
uneconomical.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>We have limited business insurance coverage.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The insurance industry in China is still at an early stage of development. Insurance companies
in China offer limited business insurance products, and do not, to our knowledge, offer business
liability insurance. As a result, we do not have any business liability insurance coverage for our
operations. Moreover, while business disruption insurance is available, we have determined that the
risks of disruption and cost of the insurance are such that we do not require it at this time. Any
business disruption, litigation or natural disaster might result in substantial costs and diversion
of resources.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Our recent acquisitions and any future acquisitions may have an adverse effect on our ability to
manage our business.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Selective acquisitions, such as our recent acquisitions of Beijing Cosmos, Brilliant, Hainan
Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, form part of our strategy to further expand
our business. If we are presented with appropriate opportunities, we may acquire additional
businesses, technologies, services or products which are complementary to our core wireless
value-added services business. The companies we recently acquired may not perform as well as we
expect, and have required significant attention from our management, in particular to ensure that
the acquisitions do not disrupt our relationships with the mobile operators in China, or affect our
users&#146; opinion of our services and customer support and are effectively integrated with our
existing operations and wireless value-added services. Future acquisitions will also likely
present similar challenges.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The diversion of our management&#146;s attention and any difficulties encountered in any
integration process could have an adverse effect on our ability to manage our business.
Acquisitions expose us to
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">potential risks, including risks associated with the integration of new operations, services
and personnel, ensuring effective internal controls with respect to acquired businesses, the extent
to which acquired businesses give rise to unforeseen or hidden liabilities, the diversion of
resources from our existing businesses and technologies, the inability to generate sufficient
revenue to offset the costs and expenses of acquisitions and potential loss of, or harm to,
relationships with employees and content providers as a result of integration of new businesses.
Given the sophisticated technologies used in the wireless value-added services industry, the
successful, cost-effective integration of other businesses&#146; technology platforms and services into
our own is also a critical, and highly complex, aspect of any acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>We may become a passive foreign investment company, which could result in adverse U.S. tax
consequences to U.S. investors.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We may be classified as a passive foreign investment company by the United States Internal
Revenue Service for U.S. federal income tax purposes. Such characterization could result in adverse
U.S. tax consequences to you if you are a U.S. investor. For example, if we are a passive foreign
investment company, our U.S. investors will become subject to increased tax liabilities under U.S.
tax laws and regulations and will become subject to burdensome reporting requirements. The
determination of whether or not we are a passive foreign investment company is made on an annual
basis and depends on the composition of our income and assets, including goodwill, from time to
time. Specifically, we will be classified as a passive foreign investment company for U.S. tax
purposes if 50.0% or more of our assets, based on an annual quarterly average, are passive assets,
or 75.0% or more of our annual gross income is derived from passive assets. We have determined that
virtually all of our income for 2003, 2004 and 2005 was active income under the gross income test.
However, as cash and cash equivalents (which constitute passive assets for passive foreign
investment company testing purposes) have comprised a significant percentage of our assets (based
on U.S. GAAP) in the past, the determination whether we were a passive foreign investment company
in prior years or will be a passive foreign investment company in the future will depend on the
valuation of our intangible assets (including goodwill and going concern value) which are not
reflected in our financial statements. We did not obtain an appraisal of our intangible assets for
passive foreign investment company testing purposes for prior periods, but we believe that the
value of these intangibles exceeds the amount of our cash and cash equivalents. Our judgment is not
binding on the Internal Revenue Service. Following the completion of our initial public offering in
March&nbsp;2004, the valuation of our intangible assets has been based, in part, on the market value of
our ADSs, which is subject to change. In addition, the composition of our income and assets will be
affected by the cash we raised in our initial public offering and how such cash has been spent. We
cannot assure you that we will not be a passive foreign investment company for the current or any
future taxable year. See Item&nbsp;5. &#147;Taxation &#151; United States Federal Income Taxation &#151; U.S. Holders &#151;
Passive Foreign Investment Company.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Anti-takeover provisions in our charter documents could make an acquisition of us, which may be
beneficial to our shareholders, more difficult and may prevent attempts by our shareholders to
replace or remove our current management.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our amended and restated articles of association, include provisions which could make an
acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove
our current management. These provisions include a classified board of directors. In addition, our
board of directors has the right to issue preferred shares without shareholder approval, which
could be used to institute a &#147;poison pill&#148; that would work to dilute a potential hostile acquirer&#146;s
ownership interest in our company, effectively preventing acquisitions that have not been approved
by our board of directors.
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Failure to achieve and maintain effective internal controls could have a material adverse effect on
the trading price of our ADSs.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are subject to the reporting obligations under the U.S. securities laws. The Securities and
Exchange Commission, or the SEC, as required by Section&nbsp;404 of the Sarbanes-Oxley Act of 2002, has
adopted rules requiring public companies to include a report of management on such companies&#146;
internal control over financial reporting in its annual report on Form 10-K or Form 20-F, as
applicable, that contains an assessment by management of the effectiveness of such company&#146;s
internal control over financial reporting. In addition, an independent registered public accounting
firm for a public company must attest to and report on management&#146;s assessment of the effectiveness
of our company&#146;s internal control over financial reporting. These requirements will first apply to
our annual report on Form 20-F for the fiscal year ending December&nbsp;31, 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Management may not conclude that our internal control over our financial reporting is
effective. For example, in February&nbsp;2006, after consulting with the Audit Committee, we decided to
restate our financial statements for the year ended December&nbsp;31, 2004 as a result of an error
related to the accounting for stock options. Also, in connection with the audit of our 2005
financial statements, we identified several areas of our internal controls over financial reporting
that are classified as material weaknesses, significant deficiencies or control deficiencies in
accordance with AU 325, Communication About Control Deficiencies in An Audit of Financial
Statements, of PCAOB Standards and Related Rules, see &#147;Item&nbsp;15 &#150; Controls and Procedures.&#148; Even if
these and any other issues that may arise in the future are addressed and our management concludes
that our internal control over financial reporting is effective, our independent registered public
accounting firm may still decline to attest to our management&#146;s assessment or may issue a report
that is qualified if such firm is not satisfied with our internal control over our financial
reporting or the level at which our controls are documented, designed, operated or reviewed, or if
such firm interprets the relevant requirements differently from us. If we fail to achieve and
maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude
on an ongoing basis that we have effective internal controls over financial reporting in accordance
with the Sarbanes-Oxley Act. As a result, any failure to achieve and maintain effective internal
control over financial reporting could result in the loss of investor confidence in the reliability
of our financial statements, which in turn could negatively impact the trading price of our ADSs.
Furthermore, we have incurred, and expect to continue to incur, significant costs and use
significant management and other resources in an effort to comply with Section&nbsp;404 of the
Sarbanes-Oxley Act and other requirements.
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>RISKS RELATED TO OUR INDUSTRY</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Our ability to generate revenues could suffer if the Chinese market for wireless value-added
services does not develop as anticipated.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The wireless value-added services market in China has evolved rapidly over the last four
years, with the introduction of new services, development of consumer preferences, market entry by
new competitors and adaptation of strategies by existing competitors. We expect each of these
trends to continue, and we must continue to adapt our strategy to successfully compete in our
market.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In particular, we are currently focused on establishing a wide range of wireless value-added
services for mobile phone handsets using 2.5G technologies. There can be no assurance, however,
that these 2.5G technologies and any services compatible with them will continue to be accepted by
consumers or promoted by the mobile operators. Moreover, there are numerous other technologies in
varying stages of development, such as 3G mobile technologies, which could radically alter or even
eliminate the market for SMS or 2.5G services.
</DIV>


<P align="center" style="font-size: 10pt">19
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accordingly, it is extremely difficult to accurately predict consumer acceptance and demand
for various existing and potential new offerings and services, and the future size, composition and
growth of this market. Furthermore, given the limited history and rapidly evolving nature of our
market, we cannot predict the price that wireless subscribers will be willing to pay for our
services or whether subscribers will have concerns about security, reliability, cost and quality of
service associated with wireless services. If acceptance of our wireless value-added services is
different than anticipated, our ability to maintain or increase our revenue and profits could be
materially and adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>The Chinese government or one or more of the mobile operators may prevent us from distributing, and
we may be subject to liability for, content that any of them believe is inappropriate.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China has enacted regulations governing telecommunication service providers, Internet access
and the distribution of news and other information. In the past, the Chinese government has stopped
the distribution of information over the Internet that it believes to violate Chinese law,
including content that is obscene, incites violence, endangers national security, is contrary to
the national interest or is defamatory. In addition, we may not publish certain news items, such as
news relating to national security, without permission from the Chinese government. Furthermore,
the Ministry of Public Security has the authority to cause any local Internet service provider to
block any Web site maintained outside China at its sole discretion.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The mobile operators in China also have their own policies regarding the distribution of
inappropriate content by wireless value-added service providers and have punished certain providers
for distributing content deemed by them to be obscene. Such punishments have included censoring of
content, delays in payments of fees by the mobile operators to the offending service provider,
restrictions on the ability of the service provider to bill for its services and suspension of the
service on the mobile operators&#146; networks. Accordingly, even if we comply with Chinese governmental
regulations relating to licensing and foreign investment prohibitions, if the Chinese government or
one or more of the mobile operators were to take any action to limit or prohibit the distribution
of information or to limit or regulate any current or future content or services available to
users, our revenues could be reduced and our reputation harmed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Telecommunication laws and regulations in China are evolving and subject to interpretation and may
change in the future. If we are found to be in violation of current or future Chinese laws or
regulations, we could be subject to severe penalties.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although wireless value-added services are subject to general regulations regarding
telecommunication services, we believe that currently, there are few Chinese laws at the national
level specifically explicitly governing wireless value-added services, such as our services related
to SMS, MMS and WAP. Many providers of wireless value-added services have obtained various
value-added telecommunication services licenses. Although Shanghai Weilan, Shanghai Unilink,
Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing have obtained
value-added telecommunication services licenses issued by the Shanghai Municipal Telecommunications
Administration Bureau, or Shanghai Communication Administration, and national inter-provincial
value-added telecommunication licenses in accordance with the Ministry of Information Industry&#146;s
general regulations regarding telecommunication services, we cannot be certain that other local or
national value-added telecommunication services license requirements will be required or will
conflict with each other or that any given license will be deemed sufficient by the relevant
governmental authorities for the provision of this category of service. It is also possible that
new national legislation might be adopted to regulate such services.
</DIV>


<P align="center" style="font-size: 10pt">20
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If we or our subsidiaries or affiliates are found to be in violation of any existing or future
Chinese laws or regulations regarding wireless value-added services or Internet access which is
discussed in the following risk factor, the relevant Chinese authorities have the power to, among
other things:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>levy fines and prohibit new product and service offerings;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>confiscate our income or the income of our subsidiaries and affiliates;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>revoke our business license or the business license of our subsidiaries and affiliates;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>shut down our servers or the servers of our subsidiaries and affiliates and/or
blocking any Web sites that we operate; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>require us to discontinue any portion or all of our wireless value-added
services business.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>The regulation of Internet Web site operators is also unclear in China, and our business could be
adversely affected if we are deemed to have violated applicable laws and regulations.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our affiliate, Shanghai Weilan, operates Internet Web sites in China, which are one of the
channels through which our services are offered. The interpretation and application of existing
Chinese laws and regulations, the stated positions of the main governing authority, the Ministry of
Information Industry, and the possibility of new laws, regulations or policy positions being
adopted have created significant uncertainty regarding the legality of existing and future foreign
investments in, and the businesses and activities of, Chinese companies with Internet operations
including those of our company. In particular, the Ministry of Information Industry has stated that
the activities of Internet content providers are subject to regulation by various Chinese
government authorities, depending on the specific activities conducted by the Internet content
provider. We cannot be certain that the commercial Internet content provider license issued by the
local Shanghai Municipal Telecommunications Administration Bureau and held by Shanghai Weilan or
any value-added telecommunication license held by Shanghai Weilan, Shanghai Unilink, Beijng Cosmos,
Hainan Zhong Tong, Beijing Lian Fei or Shanghai Qimingxing will satisfy these requirements. Our
failure to comply with applicable Chinese Internet regulations could subject us to severe penalties
as noted in the prior risk factor.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>The Chinese government is expected to grant regional or national licenses to offer full mobility
wireless services in China to China Telecom, China Netcom and possibly other parties with which we
have not yet developed close relationships. If those parties receive licenses and are successful in
the market but we are unable to develop cooperative relationships with them, our business could be
adversely affected.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;It is anticipated that the Chinese government will grant regional or national licenses to
offer full mobility wireless services in China to China Telecom, China Netcom and possibly other
parties, although the timing of such grants is unclear. We began providing SMS services over the
fixed line networks of China Telecom and China Netcom in September&nbsp;2004, and have launched audio
related services over the fixed line networks and the limited mobility PHS and PAS networks
operated by those operators. Limited mobility networks provide a limited range of mobile phone
services to a group of users within a designated geographic area such as a single city. Our
relationships with these mobile operators are not, however, as developed as our relationships with
China Mobile and China Unicom. As a result, if those parties receive regional or national wireless
licenses and are successful in the market but we are unable to develop cooperative relationships
with them, our business could be adversely affected if they take market share for wireless
value-added services from China Mobile and China Unicom. It is also possible that China Telecom,
China Netcom and any other parties receiving wireless licenses may decide to offer
</DIV>


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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">wireless value-added services created by them, rather than by third party service providers
such as our company. In that case, we would be in direct competition with those operators, and our
business could be adversely affected if we are not able to compete effectively against them.
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>RISKS RELATED TO DOING BUSINESS IN CHINA</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>A slow-down in the Chinese economy may slow down our growth and profitability.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The growth of the Chinese economy has been uneven across geographic regions and economic
sectors. There can be no assurance that growth of the Chinese economy will be steady or that any
slow down will not have a negative effect on our business. Several years ago, the Chinese economy
experienced deflation, which may reoccur in the foreseeable future. In addition, the Chinese
government recently began using macroeconomic tools to slow the rate of Chinese economic growth,
the results of which are difficult to predict. The Chinese economy overall affects our
profitability as expenditures for wireless value-added services may decrease due to slowing
domestic demand. More specifically, increased penetration of wireless value-added services in the
less economically developed central and western provinces of China will depend on potential
customers in those provinces achieving certain income levels so that mobile handsets and related
services become affordable to a significant portion of the population.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Government regulation of the telecommunications and Internet industries may become more burdensome.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Government regulation of the telecommunications and Internet industries is burdensome and may
become more burdensome. New regulations could increase our costs of doing business and prevent us
from efficiently delivering our services. These regulations may stop or slow down the expansion of
our user base and limit the access to our services. In addition to new laws and regulations,
existing laws not currently applicable to the wireless value-added services may be applied to those
services in the future.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>The uncertain legal environment in China could limit the legal protections available to our
investors.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Chinese legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential value. In the late
1970s, the Chinese government began to promulgate a comprehensive system of laws and regulations
governing economic matters. The overall effect of legislation enacted over the past 20&nbsp;years has
significantly enhanced the protections afforded to foreign invested enterprises in China. However,
these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and
their interpretation and enforcement involve uncertainties. These uncertainties could limit the
legal protections available to foreign investors such as the right of foreign invested enterprises
to hold licenses and permits such as a value-added telecommunication license and requisite business
licenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Any recurrence of severe acute respiratory syndrome, or SARS, an outbreak of the H5N1 strain of
bird flu (avian influenza) or another widespread public health problem, could adversely affect our
business and results of operations.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A renewed outbreak of SARS or another widespread public health problem in China, where all of
our revenue is derived, and in Shanghai, where our operations are headquartered, could have a
negative effect on our operations. In addition, there has been confirmed human cases of avian
influenza in PRC, Vietnam, Iraq, Thailand, Indonesia, Turkey, Cambodia and other countries which
have proven fatal in
</DIV>


<P align="center" style="font-size: 10pt">22
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">some instances. If such an outbreak or any other similar epidemic were to spread in the PRC,
where our operations are located, it may adversely affect our business and operating results.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operations may be impacted by a number of health-related factors, including the following:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>quarantines or closures of some of our offices which would severely disrupt our
operations,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the sickness or death of our key officers and employees, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a general slowdown in the Chinese economy.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Any of the foregoing events or other unforeseen consequences of public health problems could
adversely affect our business and results of operations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Changes in China&#146;s political and economic policies could harm our business.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The economy of China has historically been a planned economy subject to governmental plans and
quotas and has, in certain aspects, been transitioning in recent years to a more market-oriented
economy. Although we believe that the economic reform and the macroeconomic measures adopted by the
Chinese government have had a positive effect on the economic development of China, we cannot
predict the future direction of these economic reforms or the effects these measures may have on
our business, financial position or results of operations. In addition, the Chinese economy differs
from the economies of most countries belonging to the Organization for Economic Cooperation and
Development, or OECD. These differences include:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>economic structure;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>level of government involvement in the economy;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>level of development;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>level of capital reinvestment;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>control of foreign exchange;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>methods of allocating resources; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>balance of payments position.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a result of these differences, our business may not develop in the same way or at the same
rate as might be expected if the Chinese economy were similar to those of the OECD member
countries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because almost all of our future revenues may be in the form of Renminbi, any future
restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to
fund our business activities outside China or to make dividend or other payments in U.S. dollars.
Although the Chinese government introduced regulations in 1996 to allow greater convertibility of
the Renminbi for current account transactions and paying dividends, significant restrictions still
remain, including primarily the restriction that foreign invested enterprises may only buy, sell
and/or remit foreign currencies at those
</DIV>


<P align="center" style="font-size: 10pt">23
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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">banks authorized to conduct foreign exchange business after providing valid commercial
documents. In addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to governmental approval in China, and companies are required to
open and maintain separate foreign exchange accounts for capital account items. We cannot be
certain that the Chinese regulatory authorities will not impose more stringent restrictions on the
convertibility of the Renminbi, especially with respect to foreign exchange transactions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Recent Chinese regulations relating to acquisitions of Chinese companies by foreign entities may
limit our ability to acquire Chinese companies and adversely affect the implementation of our
acquisition strategy as well as our business and prospects.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On October&nbsp;21, 2005, the State Administration for Foreign Exchange, or SAFE, issued the <I>Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose Companies</I>, or Notice 75,
which became effective as of November&nbsp;1, 2005. Notice 75 replaced the previous SAFE regulations
relating to acquiring of Chinese companies by foreign entities. Notice 75 requires each PRC
resident, whether a natural or legal person, to complete the overseas investment foreign exchange
registration procedures with the relevant local SAFE branch, prior to establishing or assuming
control of an offshore company for the purpose of financing that offshore company with assets or
equity interests in an onshore enterprise in the PRC. In addition, an amendment to the
registration with the local SAFE branch is required to be filed by any PRC resident that directly
or indirectly holds interests in that offshore company upon either (1)&nbsp;the injection of equity
interests or assets of an onshore enterprise to the offshore company, or (2)&nbsp;the completion of any
overseas fund raising by such offshore company. An amendment to the registration is also required
to be filed by such PRC resident when there is any material change involving a change in the
capital of the offshore company.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or
acquired control of offshore companies that have made onshore investments in the PRC in the past
are required to complete the relevant overseas investment foreign exchange registration procedures
by March&nbsp;31, 2006. Under the relevant rules, failure to comply with the registration procedures
set forth in Notice 75 may result in restrictions on the relevant onshore company, including the
payment of dividends and other distributions to its offshore parent or affiliate and the capital
inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC
foreign exchange administration regulations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As it is presently uncertain how the SAFE regulations, and any future legislation
concerning offshore or cross-border transactions, will be interpreted or implemented by the
relevant government authorities in connection with our future offshore financings or acquisitions,
we cannot predict how they will affect our business operations or future acquisition strategy. For
example, our present and prospective Chinese subsidiaries&#146; ability to conduct foreign exchange
activities, such as remittance of dividends and foreign-currency-denominated borrowings, may be
conditioned upon compliance with the SAFE registration requirements by such Chinese residents, over
whom we have no control. In addition, we cannot assure you that such Chinese residents will be able
to complete the necessary approval and registration procedures required by the SAFE regulations
because we have no control over the outcome of the registration procedures. With respect to our
recent acquisitions of Brilliant and Beijing Cosmos or any future acquisitions of Chinese
companies, we cannot assure you that we or the owners of such Chinese companies, each as the case
may be, will be able to complete the necessary approvals, filings and registrations required by the
regulations or other legislation. Such uncertainties may restrict our ability to implement our
acquisition strategy and adversely affect our business and prospects.
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>The value of our ordinary shares and ADSs will be affected by the foreign exchange rate between
U.S. dollars and Renminbi.</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The value of our ordinary shares and ADSs will be affected by the foreign exchange rate
between U.S. dollars and Renminbi. From 1994 to July&nbsp;21, 2005, the conversion of Renminbi into
foreign currencies, including U.S. dollars, was based on exchange rates published by the People&#146;s
Bank of China, which was set daily based on the previous day&#146;s interbank foreign exchange market
rates in China and current exchange rates on the world financial markets. During that period, the
official exchange rate for the conversion of Renminbi to U.S dollars was generally stable.
However, on July&nbsp;21, 2005, as a result of the Renminbi being re-pegged to a basket of currencies,
the Renminbi was revalued and appreciated against the U.S dollar. There can be no assurance that
such exchange rate will continue to remain stable in the future. Our business and the price of our
ordinary shares and ADSs could be negatively affected by a revaluation of the Renminbi against the
U.S. dollar or by other fluctuations in prevailing Renminbi-U.S. dollar exchange rates. For
example, to the extent that we need to convert U.S. dollars into Renminbi for our operational needs
and should the Renminbi appreciate against the U.S. dollar at that time, our financial position and
the price of our ordinary shares and ADSs may be adversely affected. Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of declaring dividends on our ordinary
shares or for other business purposes and the U.S. dollar appreciates against the Renminbi, the
U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
</DIV>

<DIV align="left">
<A name="105"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;4. Information on the Company</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. History and Development of the Company</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We commenced operations as a business division of Intrinsic China Technology Ltd., which was
incorporated in the Cayman Islands in November&nbsp;1999. Intrinsic China Technology Ltd. focused
primarily on developing wireless data software and wireless value-added services. In April&nbsp;2001,
our affiliated business division which focused on wireless data software was spun-off to form a
newly established holding company in the Cayman Islands, Intrinsic Technology (Holdings) Ltd., and
our company was renamed Linktone Ltd. Due to the significance of the spun-off division relative to
that of our company, the transaction was accounted for as a reverse spin-off, with our company as
the spinnee for accounting purposes. We are incorporated in Cayman Islands. Our registered office
is located at M&#038;C Corporate Services Limited, P.O. Box 309GT, Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands. Our principal executive offices are located at 5/F,
Eastern Tower, No.&nbsp;689, Beijing Dong Road, Shanghai 200001, People&#146;s Republic of China. Our
telephone number is (86-21) 3318-4900. Our agent for service of process in the U.S. for the
purpose of our securities filings is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For more information on the history and development of our company, see Item&nbsp;5 of this annual
report under the headings &#147;Our Corporate Structure&#148; and &#147;Arrangements with Consolidated Affiliates&#148;
and Item&nbsp;4 of this annual report under the heading &#147;Recent Developments.&#148;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following diagram shows the current organizational structure of our subsidiaries and
affiliated companies as of May&nbsp;31, 2006:
</DIV>


<P align="center" style="font-size: 10pt">25
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><IMG src="h00610h0061001.gif" alt="(FLOW CHART)">
</DIV>



<P align="center" style="font-size: 10pt">26
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In March&nbsp;2004, we completed the initial public offering of our American Depositary
Shares, representing our ordinary shares, and listed those securities on the Nasdaq National
Market.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our capital expenditures for 2003, 2004 and 2005 were approximately $0.3&nbsp;million, $2.4&nbsp;million
and $2.0&nbsp;million, respectively, consisting of the purchase of computer and office equipment and
leasehold improvements. Substantially all of our capital expenditures for 2005 were incurred in
connection with the expansion of our business, as well as furniture and computer equipment
purchased in connection with the relocation of our Beijing office in December&nbsp;2005. We anticipate
that we will have capital expenditures in the next 12&nbsp;months of approximately $1&nbsp;million for
software and technology infrastructure products which we expect to finance with internal funds.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Recent Developments</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In January&nbsp;2005, we established a new subsidiary, Linktone Internet in China, which develops
software internally for our 2.5G and audio-related products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In May&nbsp;2005, we acquired all outstanding shares of Brilliant, a British Virgin Islands limited
liability corporation. Brilliant, through its subsidiary and exclusive contractual arrangements
with a domestic Chinese entity, is engaged in providing online gaming services. Brilliant, its
subsidiary and affiliated company are collectively referred to as the Brilliant Group. The initial
consideration was $3.1&nbsp;million in cash. An additional payment of $5.7&nbsp;million was made in March
2006 pursuant to an earn-out provision, based on eight times of the Brilliant Group&#146;s net profit for
2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;2005, we acquired all of the outstanding shares of Beijing Cosmos, a limited liability
company incorporated in China. Beijing Cosmos is a provider of WAP services to China Unicom. As
part of the consideration for this acquisition, we made an initial payment of $0.6&nbsp;million in cash
to Beijing Cosmos&#146;s shareholders, and paid $0.8&nbsp;million in cash to Beijing Cosmos to settle a loan
owed by the shareholders to Beijing Cosmos and $0.2&nbsp;million in cash to selling shareholders for the
net working capital of Beijing Cosmos as of May&nbsp;31, 2005. An additional payment of $2.5&nbsp;million
was made in May&nbsp;2006 pursuant to an earn-out provision, based on approximately 3.8 times of Beijing
Cosmos&#146;s net profit for the eleven month period from May&nbsp;1, 2005 to March&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;2005, we completed the acquisition of Hainan Zhong Tong, a provider of SMS services to
China Mobile. The aggregate purchase price was $1.7&nbsp;million, comprised of $0.7&nbsp;million in cash to
selling shareholders and $1&nbsp;million in cash paid to Hainan Zhong Tong for settling a loan owed by
the selling shareholders to Hainan Zhong Tong.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;2005, we completed the acquisition of Beijing Lian Fei, a provider of wireless value
added (&#147;WVAS&#148;) services to China Mobile. The aggregate purchase price was $2&nbsp;million, comprised of
$1.5&nbsp;million in cash to selling shareholders and $0.5&nbsp;million in cash paid to Beijing Lian Fei for
settling a loan owed by the selling shareholders to Beijing Lian Fei.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;2005, we established a new subsidiary, Linktone Software, in China, which utilizes to
develop software internally for our 3G products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August&nbsp;2005, we completed the acquisition of Shanghai Qimingxing, a provider WVAS services
to China Mobile. The aggregate purchase price was $1.9&nbsp;million, comprised of $0.8&nbsp;million in cash
to selling shareholders and $1.1&nbsp;million in cash payable to Shanghai Qimingxing for settling a loan
owed by the selling shareholders to Shanghai Qimingxing.
</DIV>

<P align="center" style="font-size: 10pt">27
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In October&nbsp;2005, we made a strategic investment in 9Sky International Limited and its related
parties (collectively known as &#147;9Sky entities&#148;) by entering into senior secured convertible loan
agreements in the total principal amount of $2,555,000. These loans are convertible into a certain
percentage of shares of the 9Sky entities upon the occurrence of certain conditions by April&nbsp;12,
2006 which date was subsequently extended to July&nbsp;12, 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In January&nbsp;2006, we acquired 51% of the outstanding shares of Ojava Overseas Ltd., a British
Virgin Islands limited liability corporation (&#147;Ojava Overseas&#148;), and 80% of the outstanding equity
interest in Beijing Ojava Wuxian Co., Ltd. (&#147;Ojava Wuxian&#148;), a domestic entity in the PRC. Ojava
Overseas and Ojava Wuxian are collectively referred to as the Ojava Group. The Ojava Group is a
leading mobile game developer and game publisher in the PRC. The initial payments for this
acquisition were (a) $1.8&nbsp;million in cash to shareholders of Ojava Overseas; (b) $1.6&nbsp;million in
cash to Ojava Overseas for subscription of additional shares issued by Ojava Overseas and (c) $1
million paid to Ojava Wuxian to settle a loan owed by shareholders to Ojava Wuxian. We also have an
option to purchase the remaining 49% interest in Ojava Overseas and 20% interest in Ojava Wuxian
based on the Ojava Group&#146;s achievement of certain performance objectives in 2007 and 2008. The
further payment is capped at $7.84&nbsp;million.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;24, 2006, our board of directors accepted Raymond Yang&#146;s resignation as our Chief
Executive Officer and Executive Director, and appointed Michael Guangxin Li, who resigned as our
Chief Operating Officer on January&nbsp;3, 2006, as a director. On March&nbsp;1, 2006, our Chief Technology
Officer, Xin Ye, resigned. On April&nbsp;3, 2006, our board of directors appointed Michael Guangxin Li
as our Chief Executive Officer.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Business Overview</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>OUR SERVICES</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We provide entertainment-oriented wireless value-added services to mobile phone users over the
2G and 2.5G mobile telecommunications networks in China. We specialize in the development,
aggregation, marketing and distribution of consumer wireless content and applications for access by
China&#146;s estimated 393.4&nbsp;million mobile phone users, primarily through the two principal mobile
network operators in China, China Mobile and China Unicom.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our 2G SMS-based services include ringtones, icons and screen savers, interactive SMS
messaging in certain television programs, adventure, action, trivia and fortune-telling games,
lunar and Western horoscopes, POP Messaging, jokes, fan clubs, event-driven or entertainment news
updates, and a virtual mobile amusement park called WonderWorld.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are also focused on offering 2.5G services, which include MMS services, such as animated
cartoons and screensavers, comic strips, magazine-style &#147;mobile articles&#148; on a variety of topics
and event-driven news updates. In addition, our 2.5G offerings include WAP services, such as
WAP-based ringtones, screensavers, games and dating services, and advanced Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> games.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, we offer audio-related services such as &#147;ringback,&#148; which replaces the common
&#147;ring-ring&#148; sound heard by callers with high quality music and sound effects, and IVR services,
which allow users to listen to songs, jokes, stories and coverage of major events, such as the 2004
Summer Olympics. Users can send such audio content, along with personal messages, to the mobile
phones of their friends or others.
</DIV>


<P align="center" style="font-size: 10pt">28
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our current 2G, 2.5G and audio-related services are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="22%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="21%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="21%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="21%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Technologies</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>Type of Consumer Service</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B>SMS (2G)</B>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Monophonic and
Polyphonic Ringtones
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Endless Battle<BR>
Space Game
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Horoscopes</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Icons and Screen
Savers
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Mobile Pet
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">WonderWorld Mobile<BR>
Amusement Park</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Crystal Ball<BR>
Fortune Telling Game
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">POP Messaging on
Various Topics of
Interest</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">SMS Interactive
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Jokes</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Television Messaging
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Fan Clubs</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Event-driven or<BR>
Entertainment News</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B>MMS/WAP/ Java</B><SUP style="font-size: 85%; vertical-align: text-top"><B>TM</B></SUP>
<B>(2.5G)</B>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Customizable
Monophonic and
Polyphonic Ringtones
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP>
-based Action,
Role-Playing and
Adventure Games
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">WAP-based Horoscopes, Jokes, Fan Clubs and
Event-Driven or
Entertainment News</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Color and Animated
Icons and Screen
Savers
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">WAP-based Card
Games and Games of
Chance
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Love Genie WAP<BR>
Dating Service</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Animated Cartoons
and Comic Strips
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">MMS Downloads of
Event-Driven News or
Entertainment
Updates</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px"><B>Audio-related Services</B>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Ringback
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Music</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Sound Effects</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">IVR Services
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Music</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Jokes</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Stories</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chat services</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Mobile novels</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><B>&#149;</B>
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Mobile blogs</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have launched several of our SMS and audio related services, which are described below,
over the PHS or PAS limited mobility networks and fixed line networks operated by China Telecom and
China Netcom. These networks provide a limited range of mobile phone services to a group of users
within a designated geographic area such as a single city, without the ability to roam from area to
area. The revenue generated from these services was not a significant part of our total gross
revenues for 2004, but represented 4.3% of our total gross revenues for 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our services can be purchased on a monthly subscription or per use basis, except for ringback
audio-related services from which we derive our revenue on a per content download basis while the
operator collects a monthly network service fee.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>SMS</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Ringtones, Icons and Screen Savers. </I>Our ringtone, icon and screen saver downloads enable
mobile phone users to customize the ringtone of their phones and the image which appears on the
phone screens.
</DIV>


<P align="center" style="font-size: 10pt">29
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We offer over 5,000 ringtones which have been tailor-made for the Chinese market with
monophonic, as well as polyphonic (which sounds more like real music than the traditional
electronic ringing sounds of mobile phones), capabilities. We also offer more than 10,000 icons and
screen savers which range in complexity from simple black-and-white images and monochrome color to
full color images.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Games. </I>We offer interactive SMS-based games that can be played on the screens of mobile
phones. These games are tailored by our product development department to play on the dial pad of a
mobile phone. Our current game offerings include <I>Endless Battle Space, Mobile Pet </I>and <I>Crystal Ball</I>.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>SMS Interactive Television Messaging. </I>Through our contractual relationship with STAR TV, and
Hunan Patel Life TV, we also enable television viewers to interact with certain programs via SMS
messages by, for example, sending an SMS message to vote for the winner of a contest on the
program.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>WonderWorld</I>. For a monthly admission price, this service offers users access to a mobile
amusement park where users take on a virtual identity, are able to interact with one another, and
have access to a variety of games, chat rooms, information and other entertaining services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Information-related Services. </I>We offer a number of information-related services including <I>POP
Messaging </I>which allows users to receive wireless messages containing information regarding one of
several categories of topical information, such as fashion, health and beauty. Users can also
receive automatic messages from us on selected topics such as jokes, news and horoscopes.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>MMS/WAP/Java</I><SUP style="font-size: 85%; vertical-align: text-top"><I>TM</I></SUP>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Ringtones, Icons and Screen Savers</I>. Our next generation MMS and WAP ringtones allow users to
create their own customized ringtones. We also offer more than 8,000 MMS and WAP color images and
color animations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Games. </I>We offer games based on the Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> and Brew programming languages which
offer an effective way to create sophisticated 2.5G games. We have already launched 120
Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> and Brew games as of December&nbsp;31, 2005, such as <I>Tom &#038; Jerry Cheese Chase</I>,
<I>Powerpuff Girls, Star Diver</I>, <I>Magic Shooting</I>, <I>Legend of Ninja, Counter Strike, Kitty Treasure
Hunting </I>and <I>The Promise</I>. We also offer WAP-based card games and games of chance such as blackjack,
poker and mahjong, as well as WAP-based versions of our SMS games described above.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Animated Cartoons and Comic Strips. </I>With this MMS and WAP service, users can choose from a
variety of animated cartoons and comic strips which they can view on their mobile phone screens. We
currently offer several serial comic strips, including comic strips based on <I>Garfield </I>and on the
Japanese character, <I>Shin Chan</I>, as well as 29 categories of non-serial cartoons and comic strips
which relate to different themes such as holidays, romance and user hobbies and interests.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>News and Entertainment Downloads. </I>Our users can download a variety of event-driven MMS news
and entertainment downloads.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Love Genie</I>. With this avatar-based WAP service, users can participate in an interactive
virtual community and post information about themselves, interact with each other, make new friends
and arrange dates with other users.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Finally, we offer WAP versions of our jokes, news, fan clubs and horoscope services.
</DIV>


<P align="center" style="font-size: 10pt">30
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Audio-Related Services</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Ringbacks. </I>Ringback allows a mobile phone user to customize the sound callers hear when the
user&#146;s phone is ringing. We supply a variety of pre-recorded messages from celebrities, sound
effects (such as sirens), and a wide range of popular music.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Voice Entertainment Services. </I>We provide IVR services, which allow users to send songs, jokes
and stories with personal messages to their mobile phones or to the mobile phones of their friends
or others. Our IVR services cover such topics as automobiles, jokes, sports, games and Chinese
comedies.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Revenues by Category of Activity</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China is the only principal market in which we compete. As described above, our revenues are
comprised of SMS, 2.5G services including MMS, WAP and Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> games, and audio related
services including ringback and IVR services. Gross revenues for the years ended December&nbsp;31, 2003,
2004 and 2005 are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">SMS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,539,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,180,566</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,702,269</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2.5G services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,449,366</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,300,826</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Audio related services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,659,007</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,963,773</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Casual games</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,374,995</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">62,291</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,805</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">266,740</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,601,492</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">50,318,744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,608,603</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>OPERATOR SERVICE AGREEMENTS WITH CHINA MOBILE AND CHINA UNICOM</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>General</I>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China Mobile and China Unicom are the predominant mobile operators in China. Given their
market presence, our negotiating leverage with these operators is limited, and our business is
dependent on maintaining our relationships with them. See Item&nbsp;3.D. &#147;Risk Factors &#151; Risks Related
to Our Company &#151; We depend on the two principal mobile phone operators in China for delivery of
almost all of our services, and the termination or alteration of our various contracts with either
of them or their provincial or local affiliates could materially and adversely impact our
business.&#148; Our affiliates, Shanghai Weilan, Shanghai Unilink, Beijing Cosmos, Hainan Zhong Tong,
Beijing Lian Fei and Shanghai Qimingxing, have entered into service agreements with the national
and some provincial and local offices of China Mobile and China Unicom to offer our various
services through their networks. For 2003, 2004 and 2005, we derived approximately 88.3%, 88.1% and
85.0%, respectively, of our gross revenues from China Mobile.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Service Fee Arrangements and Other Payment Consideration.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a summary of the material features of our contractual relationships with
China Mobile and China Unicom, and is not an exhaustive description.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Service Fee Arrangements. </I>China Mobile&#146;s provincial operators charge us a service fee equal
to 15.0% of the gross revenues from our content services (other than IVR services) with the
remainder paid to us, except in Shanxi province where we currently pay 9% to 14% of the gross
revenue depending on our monthly ranking among other service providers in the province. We
currently pay a service fee equal
</DIV>


<P align="center" style="font-size: 10pt">31
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">to 30.0% of the gross revenues from our IVR services offered through China Mobile&#146;s network.
China Unicom has implemented a sliding scale fee arrangement whereby we receive a range of 40% to
88% of the gross revenues depending on customer usage, revenue and other performance criteria. In
2005, we received on average 71% of the gross revenues, with China Unicom receiving the remaining
29%.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If a user does not pay the applicable fees for our services to China Mobile and China Unicom,
the mobile operators usually will not pay us for those services. Moreover, if any user on Fujian
Unicom&#146;s network refuses to pay because they are dissatisfied with the quality of our services,
then we have to pay Fujian Unicom the network fees in connection with the services we have provided
to such user, as well as Fujian Unicom&#146;s share of the revenue that would have been payable by such
user.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Network Fees. </I>To the extent that the number of messages sent by us over China Mobile&#146;s
network exceeds the number of messages our customers send to us, we must also pay a per message
network fee. For SMS, the applicable charge to us is currently RMB0.05 ($0.006) per message for
China Mobile in Gansu, Guangxi, Hainan, Inner Mongolia, Qinghai, Tibet and Shanxi provinces, but if
we were to fail to achieve certain usage thresholds in other provinces, China Mobile would apply a
higher network fee of up to RMB0.10 ($0.01) per message. Similarly, we pay China Unicom and its
provincial affiliates a per message network fee of approximately RMB0.05, to the extent the
messages we send exceed the number of messages sent to us by our customers. For MMS, China Mobile
applies a sliding scale charge arrangement at a range of RMB0.15 ($0.02) to RMB0.25 ($0.03) per
message network fee.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not collect fees for our services from the operators in a number of circumstances,
including if:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the delivery of our service to a customer is prevented because his or her
mobile phone is turned off for an extended period of time, the customer&#146;s prepaid phone
card has run out of value or the customer has ceased to be a customer of the applicable
operator,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>either of the two operators experiences technical problems with its network
which prevent delivery of our services to the customer,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>we experience technical problems with our technology platform that prevent
delivery of our services, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the customer refuses to pay for our service due to quality or other problems.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These are known as billing and transmission failures, which may not be a result of the
operations of the mobile operators, and their rate varies among the provincial operators and also
has changed significantly over time. The operators do not charge us network fees for transmissions
by us that end in billing and transmission failures. For 2003, 2004 and 2005, the rate of the
mobile operators confirmed revenues accounted for approximately 63.1%, 66.0% and 61.0%,
respectively, of the total billable messages that are reflected in our internal records. However,
as we became more experienced in our estimation methodology and also took into account input from
our sales teams, we made adjustments to total billable messages. The rate of the mobile operators
confirmed revenue as a percentage of the expected value of delivered messages (after adjustment)
was 103% for 2005. We do not recognize revenue for our services which are deemed to be billing and
transmission failures.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Term and Termination and Other Material Provisions</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The term of our contracts with China Mobile and China Unicom is generally one to two years. We
usually renew these contracts or enter into new ones when the prior contracts expire, but on
occasion, the
</DIV>

<P align="center" style="font-size: 10pt">32
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">renewal or new contract can be delayed by periods of one month or more. The agreements can also be
terminated in advance for a variety of reasons which vary among the individual contracts with the
operators, including, for example, where we breach our obligations under the contract, a high
number of customer complaints are made about our services or we cannot satisfy the operational or
financial performance criteria established by the applicable operator. Several of our contracts
with the operators can be terminated for no reason upon advance written notice.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Generally, our contracts with the mobile operators are silent on the arrangements relating to
payment from the operators in the event such contracts are not renewed. Payment and billing
disputes, if any, will therefore be resolved in accordance with the provision in the contracts
which generally provides that parties shall resolve disagreements through amicable negotiation
(where such provision survives the termination of the respective agreements) or through court
proceedings if amicable resolution cannot be reached.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>CONTENT RELATIONSHIPS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our content collaborators authorize the inclusion of their content in one or more of our
services in exchange for a percentage of our revenues or a royalty or a fixed fee payment which we
pay directly to the provider, and are usually non-exclusive. Our agreements with our content
collaborators have terms ranging from six months to four years. In addition, some agreements can
be renewed by the parties for additional successive terms indefinitely. Our significant content
collaborators currently include:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>2G and 2.5G and Other Services</I>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>STAR TV </I>&#151; We provide wireless interactive services for Channel &#091;V&#093;, a regional
music video channel, and XKWS, STAR TV&#146;s entertainment channel in China, through a
revenue sharing arrangement.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We pay STAR TV a pre-determined percentage of the total net revenue generated from
our services incorporating the content provided by STAR TV. The current term of our
agreement with STAR TV terminates in June&nbsp;2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>ChinaNet </I>&#151; ChinaNet, a leading news and information website, provides us with
news and other information for use on our wireless services in exchange for a fixed
fee. Under the agreement, we are obligated to pay ChinaNet a fixed monthly minimum
amount, as well as a pre-determined percentage of the total revenue generated from the
services incorporating the news content in excess of the minimum amount. Our agreement
with ChinaNet expires on December&nbsp;31, 2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Shin Chan </I>&#151; We have sublicensed the popular Japanese cartoon series, Shin Chan,
and have developed localized animated MMS messages and cartoon strips based on the
characters from that series. We pay this sublicensor a percentage of the revenues
received by the mobile operators with respect to services incorporating the Shin Chan
content. This agreement terminates in July&nbsp;2006 and will be automatically renewed for
an additional year unless either party objects.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Audio-related Services</I>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Sony BMG Music </I>&#151; We provide Sony BMG Music&#146;s catalog via true tones, ringback tones
and our IVR services. Sony BMG Music&#146;s content includes songs by many Chinese, Japanese
and Western artists. We pay Sony Music a nonrefundable one-time</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">33
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>fee as well as a percentage of the gross revenues received from the mobile operators
after we have recouped the one-time fee. The current term of this agreement will
terminate in January&nbsp;2007.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>EMI Music </I><B>&#151; </B>We are the non-exclusive provider of EMI&#146;s catalog of music, which
includes more than 5,000 songs by popular artists, for ringback services. We pay EMI
Music the higher of (i)&nbsp;a fixed rate multiplied by sales volume (i.e., the number of
music content provided to users) and (ii)&nbsp;a percentage of the revenues attributable to
the services incorporating EMI&#146;s music content. These variable fees are offset against
a one-time fee also paid to EMI Music. The current term of our agreement with EMI
Music will terminate in January&nbsp;2007.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Universal Music </I><B>&#151; </B>We have a non-exclusive license from Universal Music Mobile HK
Limited to provide Universal Music&#146;s catalog via ringback tones and true tones. Under
the agreement, we are obligated to pay a (i)&nbsp;non-refundable advance which can be
recouped by royalities generated on or before March&nbsp;2006, (ii)&nbsp;minimum guaranteed
amount as well as a percentage of the revenue we receive with respect to the related
services after we have recouped the minimum guaranteed amount. The current term of our
agreement with Universal Music terminates in November&nbsp;2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Warner Music </I><B>&#151; </B>We have a non-exclusive license from Warner Music Taiwan Limited to
provide Warner Music&#146;s Taiwan catalog via ringback tones, true tones and our IVR
services. Under the agreement, we are obligated to pay a minimum guaranteed amount as
well as a percentage of the revenue we receive with respect to the related services
after we have recouped the minimum guaranteed amount. Our agreement with Warner Music
terminates in August&nbsp;2006.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>SALES AND MARKETING</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We sell and market our services principally to and through China Mobile and China Unicom as
described below under the heading &#147;Operator Channels.&#148; We also sell and market through our Web
sites, promotional events, direct marketing, media advertising and other activities as described
below under the heading &#147;Non-Operator Channels.&#148;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In both the operator and non-operator channels we cross-sell to users of our SMS-based
services to migrate them to our subscription-based, premium 2.5G services, such as MMS and WAP
services. For further information on the risks associated with our cross-selling activities, please
see Item&nbsp;3.D. &#147;Risk Factors &#151; Risks Related to Our Company &#151; Changes in the policies of the mobile
operators and in their enforcement of their policies have resulted in our having to pay additional
charges to the mobile operators, and further changes could materially and adversely impact our
revenue, profitability and financial condition in the future.&#148;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operator Channels</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>General. </I>Substantially all of our services are provided through the networks of China Mobile
and China Unicom, and the mobile operators collect all fees for our services from the ultimate
users. As of December&nbsp;31, 2005, we also had approximately 108 sales professionals located in 31
provinces, of whom a majority are based in the eastern and southern regions of China to work
closely with the mobile operators at the provincial and local level.
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>WAP. </I>Our relationships with China Mobile and China Unicom allow us to promote our WAP services
to the mobile operators&#146; provincial affiliates. Both the provincial- and national-level WAP portals
of China Mobile and China Unicom are organized much like the pages of an Internet Web site, with
the services of third party service providers such as our company listed by category on various
segregated WAP pages within each operator&#146;s WAP portal. See Item&nbsp;3.D. &#147;Risk Factors &#151; Risks
Related to Our Company &#151; If China Mobile and China Unicom do not change their policies regarding
how service selections appear on their WAP portals, we may have difficulty increasing the
popularity of our WAP services, which could adversely affect our future revenue growth and
profitability.&#148;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>STK Cards. </I>A number of our services are embedded on STK cards offered by China Mobile and
China Unicom. STK cards are enhanced SIM cards that offer a variety of services embedded in the
cards which have been approved by the national office of China Mobile or China Unicom, as the case
may be, and selected by their local offices in the provinces where the cards are sold. In this way,
the selected services are pre-installed into phones which use these cards. The provincial offices
of China Mobile and China Unicom introduce new STK cards in most cases every six months which may
have new services from new service providers, or a mix of old and new services and providers,
embedded on them. STK cards can be obtained for free.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have services embedded in STK cards offered in 13 and 7 provinces and municipalities by
China Mobile and China Unicom, respectively. Due to previously announced penalties by China
Mobile, we were not permitted for the first half of 2005 to offer services for inclusion in new STK
cards with China Mobile. Delivery of our services through previously sold STK cards that were
still in use during this time period were not affected by the sanctions. For information on the
risks associated with these services, please see Item&nbsp;3.D. &#147;Risk Factors &#151; Risks Related to Our
Company &#151; The mobile operators may not authorize our services to be offered on their networks if we
fail to achieve minimum customer usage, revenue and other criteria.&#148;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Coordinated Marketing Campaigns. </I>We also cooperate in major marketing campaigns with China
Mobile and China Unicom. For example, we are currently working with China Mobile in its M-Zone
marketing initiative, which promotes its wireless value-added services to younger mobile phone
users.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Non-Operator Channels</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also focus on non-mobile operator sales and marketing activities, such as:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>promoting our Web sites to potential users as a fun, easy-to-access place to
request our wireless content and applications,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>hosting promotional events around China with one of the mobile operators at
which we create brand awareness by interacting with consumers to educate them about our
services and distributing Linktone-branded souvenirs,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>engaging in direct marketing to mobile phone users by, for example, including
advertising inserts in users&#146; bills from China Mobile or China Unicom,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>utilizing our database of users to create targeted marketing campaigns,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>advertising in youth and lifestyle magazines and other traditional print and
other media channels,</TD>
</TR>

</TABLE>
</DIV>
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</DIV>

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<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>cooperating with retail vendors of mobile handsets to offer our services to
purchasers, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>conducting integrated marketing campaigns with traditional media companies and
multi-national corporations.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have also entered into agreements with 23 Chinese mobile handset manufacturers and handset
design houses to embed certain of our wireless value-added services into their handsets for
end-users&#146; easy access. As of December&nbsp;31, 2005, approximately 12&nbsp;million handsets with an average
of 20 WAP services, 50 SMS services, 15 IVR services and five MMS services embedded in them had
been sold.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>INFRASTRUCTURE AND TECHNOLOGY</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have developed a flexible and scalable platform with open and adaptive technology. Our
Intelligent Application Gateway, or LT-IAG, is a unified platform supporting multiple protocols,
networks and billing solutions, with high scalability, load balancing, intelligent session
management and performance measurement. Through this platform, we are able to interconnect and
provide all major types of 2G, 2.5G and audio-related services through the networks of the mobile
operators. It also allows us to monitor our services and their delivery to China Mobile&#146;s and China
Unicom&#146;s networks on a real-time basis which allows us to optimize the efficiency of our system and
quickly address any problems. The platform is equipped with an open application interface for rapid
connectivity by third party content providers and access to multiple channels for SMS, MMS, WAP and
Web connectivity. LT-IAG is connected to the operators&#146; network on a pan-China basis.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our user database, which operates on our proprietary software and is an integral part of
LT-IAG, allows us to store, analyze, retrieve and compare various statistical information and to
identify relevant trends. LT-IAG also supports our customer service activities by providing our
service professionals with real-time user data and information regarding service delivery and
billing. In addition, LT-IAG can rapidly schedule, deploy and manage &#147;SMS pushes&#148; to promote our
products. LT-IAG is fully compatible with the 2.5G technology standard and related services.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our websites and services are made available primarily through network servers located in the
facilities of China Telecom&#146;s Shanghai affiliate, China Unicom&#146;s affiliates in Beijing, Guizhou,
Jiangsu, Shanghai and Zhejiang, and China Mobile&#146;s affiliates in Beijing, Hebei, Hunan, Jiangsu and
Shanghai. As of December&nbsp;31, 2005, there were 185 such network servers, running on a Linux-based
operating system. We lease dedicated lines with 5 megabits per second capacity from China Telecom
and shared lines with 100 megabits per second capacity from both China Mobile and China Unicom.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>COMPETITION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We compete principally with three groups of wireless value-added service providers in China.
The first group is comprised of companies which, like Linktone, focus primarily or entirely on this
market and offer a wide range of services. These include participants such as KongZhong
Corporation, Hurray! Holding Co., Ltd., MTone Wireless and Newpalm (a subsidiary of Chinadotcom),
as well as smaller companies such as Any8 and 263.net. These competitors are generally
characterized by strong market knowledge and, in some cases, well-developed relationships with the
mobile operators on a local and national basis. They also tend to focus on entertainment-related
services.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The second group is comprised of the major Internet portal operators in China, including
publicly-listed companies such as SINA CORP., Sohu.com Inc. and TOM Online Inc., which is an
</DIV>


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</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">affiliate of Internet portal operator TOM Group Limited. The Internet portals leverage their
existing strength in aggregating content, marketing and cross-selling among their established
Internet user base to promote wireless value-added services. Each of SINA CORP., Sohu.com Inc. and
TOM Online Inc. are significantly better capitalized than our company. However, with the exception
of SINA, these portals have traditionally lacked specific wireless product development expertise
and well-developed relationships with the mobile operators at a local level.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The third group is comprised of niche service providers, such as TENCENT Inc., Enorbus
Technologies and Solute Wireless, which focus primarily on a particular market segment or
application, such as wireless instant messaging, that often builds on a pre-existing competency in
the sector.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We may also face competition from companies in China which offer online services and are
expanding to various degrees into wireless value-added services, such as Shanda Interactive
Entertainment Limited, which primarily focuses on Internet-based games but which also offers
wireless games.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;International wireless companies, such as Nokia, come2us and Cybird, and international
Internet portal operators, such as Yahoo!, Lycos and AOL, who are or may be attempting to enter the
Chinese market could also present significant competition for us. These international competitors
have had only limited success, however, in penetrating the Chinese wireless value-added services
market to date.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Several of our competitors have longer operating histories in China, greater name and brand
recognition, larger customer bases and databases, significantly greater financial, technological
and marketing resources and superior access to original content than we have. As a result, our
existing competitors may in the future achieve greater market acceptance and gain additional market
share. In addition, it is possible that China Mobile or China Unicom or both could decide to
provide their own portfolio of content and services to their users themselves and deny network
access to third party service providers such as our company. Please refer to Item&nbsp;3.D. &#147;Risk
Factors &#151; Risks Related to Our Company &#151; We may face intense competition&#148; for a more detailed
discussion of the risks we face from our competitors.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>GOVERNMENT REGULATION</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a summary of the principal governmental laws and regulations that are or may
be applicable to wireless service providers like us in China. The scope and enforcement of many of
the laws and regulations described below are uncertain. We cannot predict the effect of further
developments in the Chinese legal system, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement of laws, particularly with regard to wireless
value-added services, which is an emerging industry in China. For a description of the regulatory
risks related to our business, please see Item&nbsp;3.D. &#147;Risk Factors &#151; Risks Related to Our Company &#151;
Changes in the policies of the mobile operators and in their enforcement of their policies have
resulted in our having to pay additional charges to the mobile operators, and further changes could
materially and adversely impact our revenue, profitability and financial condition in the future;&#148;
&#147;Risk Factors &#151; Risks Related to Our Industry &#151; The Chinese government or one or more of the mobile
operators may prevent us from distributing and we may be subject to liability for, content that any
of them believe is inappropriate;&#148; &#147;Risk Factors &#151; Risks Related to Our Industry &#151; The
Telecommunication laws and regulations in China are evolving and subject to interpretation and may
change in the future. If we are found to be in violation of current or future Chinese laws or
regulations, we could be subject to severe penalties;&#148; &#147;Risk Factors &#151; Risks Related to Our
Industry &#151; The regulation of Internet Web site operators is also unclear in China, and our business
could be adversely affected if we are deemed to have violated applicable laws and regulations;&#148;
&#147;Risk Factors &#151; Risks Related to Our Company &#151; Our corporate structure could be deemed to be in
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">violation of current or future Chinese laws and regulations which could adversely affect our
ability to operate our business effectively or at all;&#148; and &#147;Risk Factors &#151; Risks Related to Doing
Business in China &#151; Recent Chinese regulations relating to acquisitions of Chinese companies by
foreign entities may limit our ability to acquire Chinese companies and adversely affect the
implementation of our acquisition strategy as well as our business and prospects.&#148;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Regulation of Telecommunication Services</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The telecommunications industry, including certain wireless value-added services, is
highly-regulated in China. Regulations issued or implemented by the State Council, the Ministry of
Information Industry, and other relevant government authorities cover many aspects of
telecommunications network operation, including entry into the telecommunications industry, the
scope of permissible business activities, interconnection and transmission line arrangements,
tariff policy and foreign investment.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The principal regulations governing the telecommunications services business in China include:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Telecommunications Regulations </I>(2000), or the Telecom Regulations. The
Telecom Regulations categorize all telecommunications businesses in China as either
infrastructure telecommunications businesses or value-added telecommunications
businesses. The latter category includes SMS and other wireless value-added services.
Under the Telecom Regulations, certain services are classified as being of a
value-added nature and require the commercial operator of such services to obtain an
operating license, including telecommunication information services, online data
processing and translation processing, call centers and Internet access. The Telecom
Regulations also set forth extensive guidelines with respect to different aspects of
telecommunications operations in China.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Regulations for the Administration of Foreign-Invested Telecommunications
Enterprises </I>(2002), or the FI Telecom Regulations. The FI Telecom Regulations set
forth detailed requirements with respect to capitalization, investor qualifications
and application procedures in connection with the establishment of a foreign-invested
telecom enterprise. Under the FI Telecom Regulations, a foreign entity is prohibited
from owning more than 50% of the total equity in any value-added telecommunications
business in China, subject to certain geographic limitations.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Administrative Measures for Telecommunications Business Operating License</I>
(2001), or the Telecom License Measures. Under the Telecom License Measures, an
approved value-added telecommunications service provider must conduct its business in
accordance with the specifications recorded on its Telecom Business Operating License.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Regulation of SMS Services</I>. On April&nbsp;15, 2004, the Ministry of Information Industry
promulgated a <I>Circular on Certain Issues regarding Standardization of SMS Services</I>, or the
Circular. The Circular requires all service providers to obtain appropriate operating licenses
before they can provide wireless value-added services through the networks of the mobile operators
in China. Pursuant to the Circular, in the promotion of SMS services, mobile operators and service
providers in China are required to prominently feature descriptions of standards and methods by
which users will be charged for the services they order and how they may cancel their orders.
Monthly subscriptions to SMS services must be specifically confirmed by users. Any message sent by
a service provider to a user to confirm an order must include a schedule of charges applicable to
the service such user has ordered. If the user does not confirm an order, the order is deemed
cancelled. Providers of SMS services must provide such services strictly according to users&#146;
orders, and may not alter the number of such SMS messages, the
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">frequency at which the messages are sent, or the methods through which users pay for the
services. The Circular also required mobile operators and service providers to implement a series
of measures before May&nbsp;15, 2004 that would make it easier for users to cancel their SMS services.
If a user disputes any charges for SMS services or complains about the quality of the services, the
mobile operator is required to refund such user&#146;s payment for the services if it is unable to
assign responsibility for the problem to another party within 15&nbsp;days. In addition, service
providers are required to review the content in the process of collecting, developing, processing
and sending any message. The message must not contain any content prohibited by the state.
Provisions in this Circular apply to SMS services provided by fixed line operators as well.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On March&nbsp;30, 2005, the Ministry of Information Industry promulgated the <I>Telecommunications
Service Standards, </I>or the Standards<I>. </I>The Standards contain the minimum quality standards for
telecommunication services to be provided to customers, with detailed and specific standards for
each category of telecommunication services. Schedule&nbsp;6 of the Standards sets forth requirements
that shall be observed in providing information services, including voice messages and SMS
services. The requirements applicable to SMS services contained in Schedule&nbsp;6 have largely repeated
those contained in the Circular, with an additional requirement that an SMS service provider shall
ensure a 95% accuracy rate for the message transmission and that the SMS service provider shall set
up a publicly available hotline for customer service.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While we believe this recent focus on compliance and service initiatives will result in a
stronger, more orderly market in the long-term, it has also resulted in service and billing
suspensions and in our having to pay certain charges to the mobile operators for our inadvertent
contravention of the foregoing rules and the mobile operators&#146; own policies. We continuously
monitor our SMS services in order to minimize the possibility of a violation of the Circular and
the Standards.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition to regulations promulgated at the national level by the Chinese government, local
offices of the Ministry of Information Industry, or MII, have issued provisional regulations
requiring SMS service providers to obtain licenses from or register with it before providing SMS
service within the city. Our affiliates, Shanghai Unilink, Shanghai Weilan, Beijing Cosmos, Hainan
Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, hold inter-provincial value-added
telecommunication services licenses issued by the Ministry of Information Industry
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Regulation of Internet Culture Activities</I>. On May&nbsp;10, 2003, the Ministry of Culture of the
PRC, or MOC, promulgated the Internet Culture Administration Tentative Measures, or the Internet
Culture Measures, which became effective as of July&nbsp;1, 2003. The Internet Culture Measures require
Internet content providers which engage in Internet culture activities to obtain an Internet
culture operations license from the MOC in accordance with the Internet Culture Measures. The term
&#147;Internet culture activities&#148; includes, among other things, acts of online dissemination of
Internet cultural products, such as audio-visual products, game products, performances of plays or
programs, works of art and cartoons, and the production, reproduction, importation, sale (wholesale
or retail), leasing and broadcasting of Internet cultural products. We believe it is likely that
the MOC would interpret the phrase &#147;Internet culture activities&#148; to include dissemination of
culture products through SMS, MMS, WAP, Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> or other wireless technologies.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shanghai Unilink has applied for an Internet culture operation license with the MOC and the
Brilliant Group has already acquired such a license.
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Other Laws and their Application</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Regulation of Information Security. </I>Internet content in China is also regulated and
restricted. The National People&#146;s Congress, China&#146;s national legislative body, adopted the <I>Decision
of Maintaining Security on the Internet </I>on December&nbsp;28, 2000, which provides that any of the
following conduct may result in criminal punishment:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>gaining improper entry into a computer or system of strategic importance;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>disseminating politically disruptive information;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>leaking state secrets;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>spreading false commercial information;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>infringing intellectual property rights;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>spreading computer viruses;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>spreading false financial news or information;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>defaming others; or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>spreading obscene content.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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 powers in
this regard, and we may be subject to the jurisdiction of the local security bureaus.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Regulation of Internet Content Services. </I>As a wireless value-added services provider, we do
not engage in the Internet portal business which typically involves the provision of extensive
Internet content services, including Chinese language web navigational and search capabilities,
content channels, web-based communications and community services and a platform for e-commerce,
such as auction houses. Shanghai Weilan registered with the Shanghai Telecommunication
Administration Bureau in November&nbsp;2003 to provide commercial services, which are generally limited
to the marketing and sales of our wireless value-added services, at the Linktone websites.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a commercial ICP provider, we are prohibited from posting or displaying any content that:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>opposes the fundamental principles determined in China&#146;s Constitution;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>compromises state security, divulges state secrets, subverts state power or
damages national unity;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>harms the dignity or interests of the state;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>incites ethnic hatred or racial discrimination or damages inter-ethnic unity;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>sabotages China&#146;s religious policy or propagates heretical teachings or feudal
superstitions;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>disseminates rumors, disturbs social order or disrupts social stability;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>propagates obscenity, pornography, gambling, violence, murder or fear or
incites the commission of crimes;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>insults or slanders a third party or infringes upon the lawful rights and
interests of a third party; or</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">40
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<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>includes other content prohibited by laws or administrative regulations.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Failure to comply with these prohibitions may result in the closing of our Web sites.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Regulation of News Dissemination through SMS Services. </I>On November&nbsp;17, 2000, the <I>Internet
News Measures </I>were promulgated by the State Council News Office and the Ministry of Information
Industry. These measures stipulate that general web sites established by non-news organizations may
publish news released by certain official news agencies if such web sites satisfy the requirements
set forth in Article&nbsp;9 of the measures and have acquired the requisite approval, but may not
publish news items produced by themselves or news sources from elsewhere. All the news that we
publish and disseminate originates from official news agencies approved by the PRC government.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;25, 2005, the State Council News Office and the Ministry of Information Industry
jointly promulgated the <I>Regulations on Administration of Internet News Services, </I>or the &#147;Internet
News Regulations.&#148; According to the Internet News Regulations, all companies not established by
news organizations that intend to carry on dissemination of news on major political, economic,
military and diplomatic events must obtain approval from the State Council News Office and must
satisfy the minimum requirements of a registered capital of no less than RMB10,000,000 and other
requirements relating to internal control systems and competent personnel in respect of such
company.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The State Council News Office and Ministry of Information Industry have not specified whether
the Internet News Measures and Internet News Regulations apply to dissemination of news through
SMS, MMS, WAP, Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> or other wireless technologies. In addition, pursuant to a
circular issued by the Shanghai Communications Administration, distribution of news contents
through wireless applications such as SMS must be approved by relevant government agencies in
charge.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Regulation of Online Publication</I>. The State News and Publications Administration, or SNPA, is
the government agency responsible for regulating publishing activities in China. On June&nbsp;27, 2002,
the Ministry of Information Industry and SNPA jointly promulgated the <I>Tentative Internet Publishing
Administrative Measures</I>, or the Internet Publishing Measures, which took effect on August&nbsp;1, 2002.
The Internet Publishing Measures require Internet publishers to secure approval from SNPA. The term
&#147;Internet publishing&#148; is defined as an act of online dissemination whereby Internet information
service providers select, edit and process works created by themselves or others (including content
from books, newspapers, periodicals, audio and video products, electronic publications, and other
sources that have already been formally published or works that have been made public in other
media) and subsequently post the same on the Internet or transmit the same to users via the
Internet for browsing, use or downloading by the public.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SNPA and the Ministry of Information Industry have not specified whether the aforementioned
approval in the Internet Publishing Measures is applicable to dissemination of works through SMS,
MMS, WAP, Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> or other wireless technologies. If, in the future, SNPA and the
Ministry of Information Industry clarify that the Internet Publishing Measures are applicable to
wireless value-added telecommunications services operators or issue new regulations or rules
regulating wireless publishing, we may need to apply for a license or permit from governmental
agencies in charge of publishing. We cannot assure you that such application would be approved by
the relevant governmental agencies.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SNPA and the State Administration of Copyright issued the <I>Circular of Implementation of the
Decision of the State Council on Authority of Approval of Publication of Electronic and Internet
Game Products</I>, or the Game Publication Circular, on July&nbsp;27, 2004. Pursuant to the Game
Publication Circular, Internet game publication products include game software that can be used or
downloaded by mobile
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">phones through the Internet. Importation of Internet game publication products must be
approved by the provincial government agencies in charge of publication and then approved by SNPA.
We submitted the game publications that are associated with &#147;Mr.&nbsp;Hammer,&#148; a popular online action
game that we licensed from Neople Co., Ltd., a Korean company, to the SNPA for approval and
received such approval.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Regulations of Copyrights Relating to Online Transmissions. </I>On May&nbsp;18, 2006, the State
Council issued the <I>Regulations on Protection of Information Online Transmission Rights, </I>or the
&#147;Online Transmission Regulations,&#148; which come into effect on July&nbsp;1, 2006. The Online Transmission
Regulations provide that a copyright owner&#146;s right to transmit intellectual property including
works, performances, and video and audio products via electronic networks which include fixed line
and mobile networks, or the &#147;Transmission Rights,&#148; are protected, and third parties may not
transmit any of such intellectual property through electronic networks without first obtaining
consent from the relevant copyright owner, except in circumstances where the use of such
intellectual property would be considered as fair use.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Regulation of Advertisements. </I>The State Administration of Industry and Commerce, or the SAIC,
is the government agency responsible for regulating advertising activities in China. The SAIC has
not promulgated regulations specifically aimed at wireless advertising through a media other than
the Internet, such as through SMS services. However, one provisional regulation issued by the
Shanghai Communication Administration prohibits service providers from sending SMS advertisements
without the client&#146;s consent.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On January&nbsp;26, 2005, the SAIC and the Ministry of Information Industry jointly promulgated a
<I>Circular Regarding the Prohibition of Advertisements for Voice Messages, SMS and other Information
Services Which Contain Unhealthy Content, </I>or the SMS Advertising Circular<I>. </I>The SMS Advertising
Circular prohibits advertisement of information services with pornographic, obscene, superstitious
and other unhealthy content, or advertisements that are misleading in pricing and payment terms of
information services. The SMS Advertising Circular further provides that information service
providers and advertising companies involved in the dissemination of advertisements for information
services with pornographic, obscene, superstitious and other unhealthy content, or advertisements
that are misleading in pricing and payment terms of information services will be subject to
penalties by relevant authorities pursuant to PRC advertising regulations, and that information
service providers providing unhealthy contents will be subject to administrative and other measures
by telecommunications authorities, the public security authorities and national security
authorities in accordance with <I>Telecommunications Regulations </I>(2000)&nbsp;and other applicable laws and
regulations.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As part of our non-mobile operator marketing activities, we have developed integrated
marketing campaigns with traditional media companies and multinational corporations through certain
cross-selling efforts. If the SAIC were to treat our integrated marketing campaigns or other
activities as being advertising activities, we would need to apply to the local SAIC agencies where
such advertising activity was being conducted to expand our business scope to include the
advertising business. In addition, we also may need to set up subsidiaries or branches (with
advertising included in the business scope prescribed on such subsidiary or branch business
licenses) or hire local qualified agents in those cities where we expand our advertising
activities. We cannot assure you that such applications to expand our business scope or to set up
local subsidiaries or branches, if it becomes necessary for our integrated marketing campaigns,
would be approved by the SAIC. Conducting business beyond our approved business scope may be
subject to penalties including being banned from engaging in online advertising activities,
confiscation of illegal earnings and fines.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Regulation of Online Game Products</I>. The MOC regulates online game products. In July&nbsp;2003,
the MOC issued a public notice regarding the implementation of the Internet Culture Measures. The
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">public notice required that the importation of online game products shall be approved by the
MOC. Failure to obtain such approval would be subject to penalties, including being banned from
operating online game products and public censure.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On May&nbsp;14, 2004, the MOC promulgated a <I>Circular on Strengthening Censorship of Content of
Online Game Products, </I>or the Online Game Circular, which is applicable to online game products
disseminated through either Internet or wireless (mobile)&nbsp;networks. The Online Game Circular
requires all entities operating imported online game products to obtain an Internet culture
operation license issued by the MOC, which will strictly examine the content of any online game
products to be imported. Any imported online game product, as well as any material upgrades or
software patches, must be reviewed by the MOC (specifically by its Content Censorship Committee for
Imported Online Game Products) before such products may begin operation. Shanghai Unilink and the
Brilliant Group each has already acquired an Internet culture operation license from the MOC.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, for imported online games, the relevant license agreements for such games are
regarded as copyright import contracts and need to be registered with the MOC and the State
Copyright Bureau, otherwise we can not remit licensing fees out of China to the foreign game
licensor. We have registered the license agreement for &#147;Mr.&nbsp;Hammer&#148; with the local agency of the
MOC and the State Copyright Bureau.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Foreign Exchange Controls. </I>Our subsidiaries and Chinese affiliates are subject to various
foreign exchange controls which are discussed in Item&nbsp;10.D. under the heading &#147;Exchange Controls&#148;
and Item&nbsp;3.D. under the heading &#147;Risk Factors &#151; Risks Related to Doing Business in China &#151; Recent
Chinese regulations relating to acquisitions of Chinese companies by foreign entities may limit our
ability to acquire Chinese companies and adversely affect the implementation of our acquisition
strategy as well as our business and prospects&#148; of this annual report.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Organizational Structure</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For information on our organizational structure, see Item&nbsp;4.A. of this annual report under the
headings &#147;History and Development of the Company&#148; and &#147;Recent Developments&#148; and Item&nbsp;5 of this
annual report under the headings &#147;Our Corporate Structure&#148; and &#147;Arrangements with Consolidated
Affiliates.&#148;
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Property, Plant and Equipment</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our principal executive offices are located in Shanghai, where we lease approximately 5,365
square meters under a lease agreement that expires in March&nbsp;2007 at an effective annual rent of
approximately $509,037. Our primary branch office is located in Beijing, where we currently lease
approximately 3,504 square meters under a lease agreement that expires in February&nbsp;2009 at an
effective annual rent of approximately $383,478. We believe that we will be able to obtain adequate
facilities, principally through the leasing of appropriate properties, to accommodate our future
expansion plans. We also have other branch or representative offices in Guangzhou, Hangzhou,
Chongqing, Shenyang, Nanjing, Jinan, Wuhan and Xi&#146;an.
</DIV>

<DIV align="left">
<A name="106"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;4A. Unresolved Staff Comments</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not Applicable.
</DIV>


<P align="center" style="font-size: 10pt">43
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<DIV align="left">
<A name="107"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;5. Operating and Financial Review and Prospects</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>The following discussion of our financial condition and results of operations is based upon
and should be read in conjunction with our consolidated financial statements and their related
notes included in this annual report. This report contains forward-looking statements within the
meaning of Section&nbsp;27A of the Securities Act of 1933 and Section&nbsp;21E of the Securities Exchange Act
of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions
or future strategies that are signified by the words &#147;expect,&#148; &#147;anticipate,&#148; &#147;intend,&#148; &#147;believe,&#148;
or similar language. All forward-looking statements included in this annual report are based on
information available to us on the date hereof, and we assume no obligation to update any such
forward-looking statements. Actual results could differ materially from those projected in the
forward-looking statements. In evaluating our business, you should carefully consider the
information provided under the caption &#147;Risk Factors&#148; in this annual report on Form 20-F. We
caution you that our business and financial performance are subject to substantial risks and
uncertainties.</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>A. Operating Results</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Restatement of 2004 Consolidated Financial Statements</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have restated our consolidated financial statements for the year ended December&nbsp;31, 2004.
The determination to restate these consolidated financial statements was made by our management in
consultation with the Audit Committee of the Board of Directors in February&nbsp;2006. In October&nbsp;2004,
we amended certain of our executive officers&#146; prior stock option grants to provide that if we
terminated an officer without cause, as defined in our stock option plans, or if any such officer
resigns voluntarily, all or a portion of those options would immediately become fully vested and
exercisable at that time. Since upon voluntary termination a portion of those options vest and
become immediately exercisable, we determined that the full amount of the deferred compensation
relating to that portion of the options should have been expensed in the fourth quarter of 2004
when the amendments were effected. The restatement of our 2004 consolidated financial statements
increased stock compensation expense for the year ended December&nbsp;31, 2004 by $1.4&nbsp;million and
decreased net income before and after tax by $1.4&nbsp;million or $0.006 per diluted share and per basic
share. This non-cash adjustment does not impact the Company&#146;s cash flow from operating activities.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All amounts relating to 2004 stock compensation and net income results discussed in this
annual report have been presented on a restated basis.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Overview</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We provide entertainment-oriented internet and wireless value-added services to both consumers
and mobile phone users in China. Our revenues are primarily derived from the sale of various 2G,
2.5G and audio-related services to consumers through the mobile networks operated by China Mobile
and, to a lesser extent, China Unicom. In addition, in 2005, we continued to expand our service
offerings to fixed-line and wireless customers of China Telecom and China Netcom. We receive our
revenues principally in the form of payments from these telecommunication network operators after
the users have paid for our services and the operators have deducted their service and network
fees. Users pay for our services by monthly subscription and/or on a per use basis.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We achieved net income of $12.4&nbsp;million for 2005, compared to net income of $11.1&nbsp;million for
2004. For 2005, we generated $73.6&nbsp;million in gross revenues, compared to $50.3&nbsp;million for 2004,
representing an increase of 46.3%. Our increase in gross revenues during 2005 was due to increases
in the number of paying users, particularly for our audio-related services, as well as, to a lesser
extent,
</DIV>


<P align="center" style="font-size: 10pt">44
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">growth in sales of our SMS and 2.5G services in 2005. Our user base increased as a result of
our ongoing efforts to attract new users and the overall growth of the market for wireless (and, to
a lesser extent, fixed-line) value-added services in China, particularly growth in the popularity
of audio-related and 2.5G services. Our gross revenues in 2005 also increased as a result of a
significant increase in our estimated average revenue per user, which increased from $0.61 per
month in 2004 to $1.00 per month in 2005. In 2005, our SMS-based, audio-related and 2.5G services
accounted for $46.7&nbsp;million, $17.0&nbsp;million and $8.3&nbsp;million of our gross revenues, or 63.5%, 23.1%
and 11.3%, respectively. This compares to our SMS-based, audio-related and 2.5G service revenues
for 2004, which accounted for $40.2&nbsp;million, $3.7&nbsp;million, and $6.4&nbsp;million of our gross revenues,
or 79.9%, 7.4% and 12.7%, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The presentation of our financial results in this annual report is affected by the fact that
we, like other companies in the wireless value-added services industry in China, do not receive or
recognize revenue for services we provide that are characterized as billing and transmission
failures. These failures primarily result from the user&#146;s mobile phone being turned off, the user
experiencing problems with the mobile operators&#146; networks or our system or other issues, which, in
each case, prevent delivery of our services to our users. The operators&#146; monthly statements to
service providers regarding the services provided through their networks currently do not contain
billing and transmission failure information on either an aggregate or a service-by-service basis.
Although we maintain our own records reporting the services provided, and we receive separate
monthly statements from the mobile operators for each category of service platform (i.e., SMS, MMS,
WAP, Java&#153;, IVR and ringback services), we can only estimate our actual gross revenues and cost of
services by specific service because we are unable to confirm which specific service we transmitted
that resulted in billing and transmission failures. Consequently, we are not able to determine the
aggregate amount of billing and transmission failures or definitively calculate and monitor
service-by-service gross revenue, margins and other financial information and also cannot
definitively determine which of our services are or may be profitable.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The major factors affecting our results of operations and financial condition include:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Growth of the Wireless Value-Added Services Market in China. </I>Our financial
results have been, and we expect them to continue to be, affected by the growth in the
wireless value-added services market in China, particularly growth in the audio-related
and 2.5G market in China. Wireless telephony has become an increasingly important
medium of communication. According to the Ministry of Information Industry, the number
of mobile subscribers in China increased from 43.2&nbsp;million as of the end of 1999 to
393.4&nbsp;million as of December&nbsp;31, 2005. In 2005, SMS services continued to represent
the majority of the wireless value-added services market in China, with approximately
304.7&nbsp;billion SMS messages sent in 2005. However, we believe that growth in
audio-related, MMS and WAP services increased significantly in 2005. We expect the
market for audio-related and 2.5G services to continue to grow at a faster rate than
the market for 2G services for the foreseeable future, and our future revenue growth
will depend to a significant extent on our continued expansion into the audio-related
and 2.5G service markets.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Increase in Volume of Sales. </I>Our gross revenues have increased also as a
result of the popularity of our services with the mobile phone user group that we
market to. We focus on entertainment-oriented services such as music-related services
(for example, music downloads, ringbacks or ringtones) which we believe are
particularly attractive to young mobile phone users in China who are early adopters of
new wireless value-added services.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Operator Service Agreements with China Mobile, China Unicom, China Telecom and
China Netcom. </I>Our ability to generate revenue and the terms under which we deliver our
services depend to a large extent on our ability to maintain good relationships with
the national,</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">45
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>provincial and local offices of China Mobile and China Unicom and to differentiate our
services through, among other things, innovative product development and appealing
content from domestic and international content providers. This is particularly the
case in the wealthier, more densely populated coastal and southern provinces, such as
Liaoning, Jiangsu, Guangdong and Zhejiang provinces, as well as the municipalities of
Shanghai and Beijing, which are among our top revenue generating locales. The marketing
of our services is also significantly dependent on the sales channels of the mobile
operators. We have increased the number of our service contracts with the national,
provincial and local offices of China Mobile and China Unicom from 25 and 18 at the end
of 2004, respectively, to 41 and 35 at the end of 2005, respectively. We continue to
strive to maintain, expand and strengthen these relationships through our sales force
strategically located throughout China.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Each of China Mobile, China Unicom, China Telecom and China Netcom charge us service
fees from the gross revenues generated by our services. In addition, to the extent the
number of SMS or MMS messages sent by us over China Mobile&#146;s network exceeds the number
of SMS or MMS messages our customers send to us, we must also pay a per message network
fee. We also pay China Unicom, China Telecom and China Netcom network fees in most
provinces on the same basis. These service and network fees are reflected in our cost
of services, and as our business has grown, these costs have increased from $13.6
million in 2004 to $20.5&nbsp;million for 2005. Each of China Mobile, China Unicom, China
Telecom or China Netcom could alter any of the terms of our service agreements with them
or terminate the agreements for a variety of reasons in the future, including, for
example, to increase their service or network fees to enhance their profitability at the
expense of service providers<B>.</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>We anticipate that China Telecom, China Netcom and possibly other parties will be
granted regional or national licenses to offer full mobility wireless services in China,
although the timing of any such grants is unclear. While we continue to provide IVR,
RBT and SMS services over the fixed line networks and limited mobility PHS and PAS
networks of China Telecom and China Netcom, our relationships with these operators are
not as developed as our relationships with China Mobile and China Unicom. Revenues
generated from these services were $3.2&nbsp;million for 2005 and negligible in 2004. Our
revenues could be adversely affected in future periods if these parties receive regional
or national wireless licenses and are successful in the market but we are unable to
develop established cooperative relationships with them.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Changes in Mobile Operator Policies or the Manner in Which They are Enforced</I>.
China Mobile and China Unicom have adopted a wide range of policies and procedures
regarding customer service, quality control and other aspects of the wireless
value-added services industry. Changes in these policies have, among other things,
enabled customers to more easily cancel our services and required us to automatically
terminate subscription services for our inactive users. Due to previously announced
sanctions from China Mobile in December&nbsp;2004 for violating certain of its customer
service policies, we were not able to bill WAP users from January&nbsp;1, 2005 until October
10, 2005. In addition, China Mobile suspended approval of any new product applications
by us for its wireless platforms, including SMS, MMS, WAP, Java&#153;, IVR and ringback,
between January&nbsp;1, 2005 and June&nbsp;30, 2005. These sanctions did not affect our ability
to offer our existing wireless value-added services through China Mobile&#146;s networks.
We are also subject on occasion to monetary fines and forfeited income for inadvertent
contravention of customer service policies. The monetary fines are recognized as
selling and marketing expenses. For 2005, the amount of fines was negligible, compared
to $0.7&nbsp;million for 2004. We believe that the enhanced enforcement of customer</TD>
</TR>

</TABLE>
</DIV>
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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>service policies by China Mobile adversely affected the growth of our revenue from 2G,
2.5G and audio-related services in 2005.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Costs Associated with Content Provider Relationships. </I>Our wireless value-added
services include the delivery of third-party content, such as Hello Kitty cartoons and
music downloads for ringtones and ringbacks, to our end user customers. We provide
this content typically based on revenue sharing arrangements under which we pay the
third-party content provider an agreed percentage of the estimated revenues realized
from products incorporating the provider&#146;s content. Most of our content licenses have
a limited term, and grant us non-exclusive rights. Given the high demand for engaging,
trendy content in the China wireless value-added services market, we have limited
leverage to negotiate significantly favorable terms with third-party content providers.
During 2005, a greater percentage of our revenues were derived from third party
content-based services, resulting in increased revenue share payments to content
providers. Our cost of services in 2004 and 2005, which included such payments to
third party content providers, were $1.7&nbsp;million and $6.0&nbsp;million, respectively. Our
net income could be adversely affected in future periods if revenue share payments
continue to increase, both in absolute terms as well as a percentage of our gross
revenues.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Marketing Expenses. </I>In order to maintain visibility and demand for our SMS and
IVR products and our competitive position in the market, we need to make continued
investments in media advertising and integrated co-marketing. Our media advertising is
typically in the form of TV commercials and magazine placements, while our integrated
co-marketing typically takes the form of joint cooperation programs with content
providers such as TV programming. Fee rates for our various marketing channels are
becoming increasingly more expensive while generating only approximately the same level
of gross revenues. Our advertising costs increased during 2005 and in particular,
during the fourth quarter of 2005, from $3.4&nbsp;million in 2004 to $6.2&nbsp;million in 2005,
and our net income could be adversely affected in future periods if we are not able to
effectively manage advertising expenses and maximize the gross revenues we generate
from advertising.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Acquisition Costs</I>. We made a number of acquisitions and a strategic investment
in 2005, including Brilliant, Wang You and their affiliated Chinese company, Shenzhen
Yuanhang, Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei, Shanghai Qimingxing and
9Sky, which resulted in aggregate initial acquisition and investment costs of $11.6
million in that year.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Taxes. </I>Certain of our subsidiaries and affiliated Chinese entities enjoy tax
exemptions and reduced tax rates. See &#147;Taxation&#148; below. Such tax treatment increases
our net income. Our future results could be materially adversely affected if we are
not able to maintain similar tax treatment.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Stock-based Compensation Cost. </I>Stock-based compensation cost represents the
difference between the exercise price of options granted and the fair market value of
the underlying stock on the measurement date. Deferred stock compensation is amortized
on a straight-line basis and charged to expense over the vesting period of the
underlying options, which is generally four years. For 2004 and 2005, we incurred
stock-based compensation cost of $3.5&nbsp;million (which reflects the restatement described
under &#147;Restatement of 2004 Consolidated Financial Statements&#148; above) and $2.0&nbsp;million,
respectively, which was recorded as a component of general and administrative expenses.
Substantially all of these charges were related to the amortization of stock-based
compensation cost related to options granted in</TD>
</TR>

</TABLE>
</DIV>
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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>April&nbsp;2003 to attract and retain certain of our executive officers, as well as to the
amendment of their stock options in October&nbsp;2004.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>Repurchase of ADSs</I>. On September&nbsp;7, 2005, the Company&#146;s shareholders
authorized the repurchase of up to $15&nbsp;million worth of American Depository Shares or
ADSs. As of December&nbsp;31, 2005, the Company had repurchased 338,000 ADSs for an
aggregate consideration of $3.4&nbsp;million, including brokerage commissions.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our future revenues and results of operations may fluctuate significantly due to a combination
of factors, including:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the terms of our relationships with China Mobile and, to a lesser extent, China
Unicom, China Telecom and China Netcom,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the terms of our relationships with domestic and international content
providers, including the percentage of our revenues that we must pay to such providers
under revenue-sharing arrangements,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>regulation of our market by the operators and the Chinese government (in
particular, the Ministry of Information Industry),</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>growth and acceptance of various wireless value-added services that we offer in
China, in particular our 2.5G and audio-related services,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our ability to attract and retain users, principally in the more affluent,
densely-populated provinces such as Guangdong, Jiangsu and Zhejiang provinces, and the
municipalities of Shanghai and Beijing,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our ability to expand the content and services that we offer and, in
particular, develop and aggregate innovative new content and service offerings,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our ability to continue to acquire users through print, broadcast and other
marketing channels in a cost efficient manner,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the level of billing and transmission failures in the provinces where we derive
significant portions of our revenue,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our ability to execute internal cost reductions, effectively control operating
expenses or make expenditures that effectively differentiate our services and brand in
future periods,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our ability to effectively integrate the operations of companies that we
acquire or make strategic investments such they will be accretive to future financial
periods,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our ability to retain qualified personnel, particularly at the senior management level,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>competition in our markets, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>general economic conditions in China.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">48
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Our Corporate Structure</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the current shareholding structure, our Chinese affiliated entities, Shanghai Unilink,
Shanghai Weilan, Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, had
inter-provincial value-added telecommunication services licenses issued by the Ministry of
Information Industry. Each of Shanghai Weilan, Shanghai Unilink, Beijing Cosmos, Hainan Zhong
Tong, Beijing Lian Fei and Shanghai Qimingxing offer our services through one or more of the
telecommunications network operators in China. Shenzhen Yuanhang offers services related to our
casual gaming business. We hold no ownership interest in those companies.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We, our Chinese affiliated entities and their respective shareholders are parties to a series
of agreements governing the provision of our wireless valued-added services and our other services.
In addition, as of December&nbsp;31 2005, we had provided long-term interest free loans to the
shareholders of our Chinese affiliated entities with an aggregate outstanding balance of
approximately $8.4&nbsp;million. The proceeds from these loans have been used to fund investments in
our Chinese affiliated entities. See &#147;Arrangements with Consolidated Affiliates&#148; below.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our primary internal source of funds is dividend payments from Linktone Consulting, Shanghai
Huitong, Linktone Internet and Brilliant and Wang You. Under current Chinese tax regulations,
dividends paid to us from Chinese entities are not subject to Chinese income or withholding tax.
However, Chinese legal restrictions permit payment of dividends only out of net income as
determined in accordance with Chinese accounting standards and regulations. Under Chinese law,
Linktone Consulting, Shanghai Huitong, Linktone Internet and Wang You are also required to set
aside a portion of their net income each year to fund certain reserve funds. These reserves are
not distributable as cash dividends. Dividends paid to us by Brilliant, which was incorporated in
the British Virgin Islands, are not subject to tax.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Arrangements with Consolidated Affiliates</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Current Chinese laws and regulations impose significant restrictions on foreign ownership of
value-added telecommunication services businesses in China. Therefore, we conduct substantially
all of our operations in China through a series of agreements with our affiliated Chinese entities,
which were Shanghai Weilan, Shanghai Unilink, Shenzhen Yuanhang, Beijing Cosmos, Hainan Zhong Tong
and Beijing Lian Fei in 2005. The business operations of Shanghai Qimingxing were negligible in
2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shanghai Weilan, Shanghai Unilink, Shenzhen Yuanhang, Beijing Cosmos, Hainan Zhong Tong,
Beijing Lian Fei and Shanghai Qimingxing are variable interest entities (VIEs) under FASB
Interpretation No.&nbsp;46, or FIN 46, and accordingly, have been consolidated into our financial
statements. Transactions between these entities and our company and subsidiaries are eliminated in
consolidation.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that the terms of these agreements are no less favorable than we could obtain from
disinterested parties. The material terms of the agreements among us, our respective affiliated
Chinese entities and their shareholders are substantially identical except for the amount of the
loans extended to the shareholders of each entity and the amount of license fees paid by each
entity. We believe that the shareholders of our VIEs will not receive any personal benefits from
these agreements, except as shareholders of our company. The principal terms of these agreements
with our VIEs are described below.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Powers of Attorney. </I>Each of the shareholders of our VIEs have irrevocably appointed Colin
Sung, chief financial officer of Linktone Ltd., as attorney-in-fact, to vote on their behalf on all
matters on which they are entitled to vote with respect to VIEs as the case may be, including
matters relating to the
</DIV>


<P align="center" style="font-size: 10pt">49
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">transfer of any or all of their respective equity interests in our VIEs and the appointment of
the directors and general manager of our VIEs. The term of each of the powers of attorney is 10
years. These powers of attorney do not extend to votes by the shareholders of our company or
subsidiaries.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because the purpose of the irrevocable powers of attorney is to allow us to exercise
sufficient control over our affiliated Chinese entities, each such power by its terms is valid only
for so long as the designated attorney-in-fact remains an employee of one of our subsidiaries. If
the attorney-in-fact ceases to be an employee of any of our subsidiaries or if our subsidiaries
otherwise issue a written notice to dismiss or replace the attorney-in-fact, the power of attorney
will terminate automatically and be re-assigned to another employee.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Operating Agreements</I>. We guarantee the performance by our affiliated Chinese entities of
contracts, agreements or transactions with third parties. In return, our affiliated Chinese
entities have granted us a security interest over all of their assets, including all of their
accounts receivable. We also have the right of first refusal with respect to future loan
guarantees. In addition, our affiliated Chinese entities and their shareholders have each agreed
that they will not enter into any transaction, or fail to take any action, that would substantially
affect their assets, rights and obligations, or business without our prior written consent. They
will also appoint persons designated by us as the directors, officers and other senior management
personnel of our affiliated Chinese entities, as well as accept our guidance regarding their
day-to-day operations, financial management and the hiring and dismissal of their employees. While
we have the right to terminate all our agreements with our affiliated Chinese entities if any of
our agreements with them expires or is terminated, our affiliated Chinese entities may not
terminate the operating agreements during the term of the agreements, which is 10&nbsp;years.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Exclusive Consulting Services Agreements</I>. We provide some of our affiliated Chinese entities
with exclusive consulting services related to legal, finance and office administration. The term
of these services agreements is renewable every year. We charged Shanghai Weilan and Shanghai
Unilink an aggregate fee of $3.1&nbsp;million for these services for the year ended December&nbsp;31, 2005.
The service fees payable to us are subject to our adjustment from time to time based on the actual
operating results of our affiliated Chinese entities.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Trademark, Domain Name and Software License Agreements</I>. We have granted Shanghai Weilan and
Shanghai Unilink a license to use our domain name (<I>www.linktone.com</I>) and our registered trademarks.
Linktone Consulting has also granted Shanghai Weilan and Shanghai Unilink licenses to use certain
of its domain names. The licensee of each of the licenses described above pays us an annual
license fee of RMB10,000 ($1,208). Because of the insignificant amounts involved, we waived these
fees in 2005. In addition, Shanghai Huitong and Linktone Internet have granted Shanghai Weilan and
Shanghai Unilink multiple licenses to use various mobile phone software such as software programs
relating to our SMS platform, databases and games. We charged Shanghai Weilan and Shanghai Unilink
an aggregate fee of $26.2&nbsp;million (based on invoiced revenue) for the use of this software for the
year ended December&nbsp;31, 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The license agreements for trademark and domain names will terminate upon the earlier of 10
years or the expiration of our right to use the relevant domain names and trademarks. The term of
the software license agreements is one to two years. Our affiliated Chinese entities cannot assign
or transfer their rights under the licenses to any third party, and cannot use the licensed
trademarks in television, newspapers, magazines, the Internet or other public media without our
prior written consent.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Domain Name Transfer Arrangements. </I>To ensure we have control over the assets integral to our
operations, Shanghai Weilan has transferred to us its ownership rights in its domain name
</DIV>


<P align="center" style="font-size: 10pt">50
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">(<I>www.linktone.com.cn</I>) which we have licensed back for Shanghai Weilan&#146;s use in its operations
on a non- exclusive basis.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Contracts Relating to the Exclusive Purchase Right of Equity Interest. </I>Under the Contracts
Relating to the Exclusive Purchase Right of Equity Interest among us, each of our VIEs and their
respective shareholders, we or our designee has an exclusive option to purchase from each such
shareholder all or part of his or her equity interest in our VIEs at book value, to the extent
permitted by Chinese law. The term of these agreements is 10&nbsp;years, renewable by us for an
additional 10-year term at our sole discretion.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Service Agreements. </I>Under existing service agreements, Messrs.&nbsp;Hu and Li are designated as
directors of Shanghai Weilan for a three-year term. All of the equity interests in Shanghai Weilan
held by each of these individuals will be transferred to us or our designee upon the individual&#146;s
termination of service as a director.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Loan Agreements. </I>We have extended interest-free loans to the shareholders of our affiliated
Chinese entities for the purpose of investing in our affiliated Chinese entities as registered
capital and to make payments to the selling shareholders from whom we acquired certain of our
affiliated Chinese entities for settlement of purchase price consideration pursuant to applicable
acquisition agreements. The term of these loans in each case is 10&nbsp;years. The shareholders of our
affiliated Chinese entities can only repay the loans by transferring to us or our designees all of
their equity interest in the respective affiliated Chinese entity. The following table sets forth
the date the loan agreement was entered into, the borrower, the affiliated Chinese entity, the
interest, the maturity date and the amount of each loan, as of December&nbsp;31, 2005.
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Date of loan</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Affiliated</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Agreement</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Borrower</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Entity</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Interest</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Maturity date</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Outstanding balance</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(in thousands</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(in thousands</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>of RMB)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>of $)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">November&nbsp;27, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>Ankai Hu</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>Shanghai Weilan</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>November 26, 2013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,798.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">338.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">November&nbsp;27, 2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Dong Li</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Shanghai Weilan</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">November 26, 2013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,365.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">285.8</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">August&nbsp;25, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>Jinhua Yuan</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>Shanghai Unilink</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">August 25, 2014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,000.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">604.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">August&nbsp;25, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>Rong Zhang</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Shanghai Unilink</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">August 25, 2014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,000.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">604.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">May&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Jinhua Yuan</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>Shenzhen Yuan Hang</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">May 30, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,403.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">290.4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">May&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Yan Ma</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Shenzhen Yuan Hang</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">May 30, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,403.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">290.4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">June&nbsp;30, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Teng Zhao</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Beijing Cosmos</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">June 29, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,953.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">840.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">June&nbsp;30, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Rong Zhang</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Beijing Cosmos</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">June 29, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,953.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">840.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">June&nbsp;30, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Yan Ma</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Beijing Lian Fei</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">June 29, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,500.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">785.4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">June&nbsp;30, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Rong Zhang</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Beijing Lian Fei</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">June 29, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,690.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">929.2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">June&nbsp;30, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Teng Zhao</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Hainan Zhong Tong</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">June 29, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,023.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">848.5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">June&nbsp;30, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Jinhua Yuan</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Hainan Zhong Tong</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">June 29, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,023.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">848.5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">August&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Jinhua Yuan</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">Shanghai Qimingxing</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">August 30, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,778.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">August&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>Xinyong Ding</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>Shanghai Qimingxing</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">None</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">August 30, 2015</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,778.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">466.0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px"><B>Total</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>69,673.3</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>8,436.7</B></TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To the extent these loan agreements relate to loans made to the shareholders of our
affiliated Chinese entities in order to make payments to the former, selling shareholders of
certain of our affiliated Chinese entities, the loan amounts due under such loan agreements may be
updated in the future to account for further purchase price considerations that may be payable
pursuant applicable acquisition agreements.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Equity Interests Pledge Agreements. </I>The shareholders of Shanghai Weilan and Shanghai
Unilink have pledged their respective equity interests in Shanghai Weilan and Shanghai Unilink to
guarantee the performance and the payment of the service fees by Shanghai Weilan and Shanghai
Unilink under the Exclusive Consulting Services Agreements described above. If either Shanghai
Weilan or Shanghai Unilink breach any of their obligations under the Equity Interests Pledge
Agreements, we are entitled to sell the equity interests held by the relevant shareholders, and
retain the proceeds of such sale or require any of them to transfer to us his or her equity
interest in the applicable affiliated entity.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Critical Accounting Policies and Estimates</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with generally
accepted accounting principles in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.
We evaluate our estimates on an on-going basis based on historical experience and on various 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. Actual results may differ from these estimates under different
assumptions or conditions.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our financial statements.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Revenue and Cost of Services Recognition</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Substantially all of our revenues are derived from wireless value-added services to mobile
phone users through the platforms of various subsidiaries of the operators. We recognize all
revenues in the period in which the service is rendered, provided that persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is reasonably assured. Fees for these services are charged on a per message basis
or on a monthly subscription basis, and vary according to the type of products and services
delivered.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We contract with the operators for the transmission of services as well as for billing and
collection services. We measure our revenues based on the total amount paid by our customers,
which the operators bill and collect on our behalf. For the transmission, billing and collection
services, the operators retain a fixed percentage fee. To the extent that the number of SMS and
MMS messages sent by us over the operators&#146; network exceeds the number of messages our customers
send to us, we must also pay a per message network fee.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The operators provide us statements after month-end indicating the amount of fees that were
charged to users for wireless value-added services that we provided during that month and the
portion of fees that are due to us in accordance with our contractual arrangements with the
operators. The operators deliver these statements to us typically within 20 to 60&nbsp;days following
month-end, and we typically receive payment within 30 to 90&nbsp;days following receipt of the
statement. In addition, we have developed our own internal system that records the number of
messages sent to and messages received from mobile
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">users. Generally, there are differences between the expected value of delivered messages and
the fees charged by the operators for the delivered messages. These differences may result from
the user&#146;s mobile phone being turned off, problems with the operators&#146; networks or our system or
other issues, which prevent delivery of our services to our users. These are known in the industry
as billing and transmission failures. We do not recognize revenues for services which result in
billing and transmission failures. Billing and transmission failures can vary significantly from
month to month, province to province and between operators. The billing and transmission failure
rates varied on a monthly basis from 10% to 60% during 2004 and from 10% to 53% during 2005. The
ratio of operators&#146; confirmed revenues generated from our services as a percentage of the expected
value of delivered messages based on our own internal records was 66% for 2004 to 103% for 2005, as
we became more experienced in our estimation methodology and also took into account input from our
sales team. Also, if a user does not pay the applicable fees for our services to the operators,
the operators usually will not pay us for those services, and our expenses incurred in connection
with such services are included in our cost of services.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are also required to pay most of our content providers a percentage of the revenue received
from or confirmed by the operators with respect to services incorporating the content providers&#146;
products. In calculating the fees payable to these providers, we make estimates to take into
account billing and transmission failures which may have been applicable to the services
incorporating the providers&#146; products and reduce the fees payable by us accordingly. Nonetheless,
as estimates involve making assumptions which may prove inaccurate, we have in the past paid, and
may continue to pay, such providers fees which are disproportionate to what we have been paid for
the relevant service. After we make payments to these providers for a particular period, we may
ask for refunds or make an additional payment, or make further adjustments or reconciliations with
respect to fees payable for future periods as a result of billing and transmission failures arising
in prior periods.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For content providers which are paid on a fixed fee basis, we do not incur additional charges
as their content is used. Accordingly, billing and transmission failures do not affect our cost of
services for services incorporating content from these providers. For 2005, most of our key
content providers were paid an initial fee and the revenue share to be paid was first offset
against the initial fee until the initial fee was fully utilized and then payment was made based on
the revenue share amount agreed with content providers.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We record our revenues in the period in which the services are performed. A substantial
portion of our revenue is recorded based on monthly statements received from operators. When a
statement is not received before closing our books, we are required to make an estimate of the
revenues and cost of services earned during the period covered by the statement. We base our
estimates on our internal records and input from our sales team and then factor in an adjustment
which takes account of historical experience, in the preceding recent months, of discrepancies
between final operator statements and our internal records. These discrepancies are the result of
billing and transmission failures which vary in amount from month to month. Given these failures,
our estimation will not be the same as actual results.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, we have been focusing on increasing sales of our wireless value-added services
through China Telecom&#146;s and China Netcom&#146;s mobile PHS and PAS networks and sales of our audio
related services through China Telecom&#146;s and China Netcom&#146;s fixed line networks, which began
offering value-added services in late 2004 and have implemented comprehensive billing systems. At
the same time, China Mobile has completed the implementation of new billing systems in all
provinces in China. China Unicom has also implemented similar systems in substantially all
provinces. The information provided to third party service providers such as our company under
these new systems is less detailed in certain respects than before, making revenue estimations
somewhat more difficult.
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If actual results vary significantly from our estimate, it could result in an overstatement or
understatement of revenues and costs of services. The amount of net margin which was based on
estimates in 2004 and 2005 was $655,543 and $774,938, respectively. If this estimate was
inaccurate by plus or minus 5.0%, our net margin for the year would be overstated or understated,
as the case may be, by $32,777 and $38,747, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Approximately 97% and 98% of our revenues for the years ended December&nbsp;31, 2004 and 2005,
respectively, were confirmed by monthly statements received by us from provincial mobile operators
prior to the finalization of the financial statements for such years. Since we systematically
track monthly discrepancies/failure rates by province using either monthly statements from the
operators or our own internal systems, we believe that we are able to make a reasonable estimate of
revenues and cost of services based on historical experience when a small portion of provincial
operator statements has not been received.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our gross revenues include the gross amounts billed to customers, rather than the amounts
billed net of the operators&#146; service and other fees. According to Emerging Issue Task Force Issue
No.&nbsp;99-19, recognizing revenue on a gross basis in this manner is appropriate if we act as a
principal, rather than as an agent, in connection with the provision of our services. Factors
which support a conclusion that we are acting as a principal include:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>ability to adjust the cost of services by adjusting the design or marketing of the service,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>ability to determine prices within ranges prescribed by the operators,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>assumption of risk of non-payment by customers, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>ability to control content of services and suppliers of that content.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In our case, we have some ability to adjust the ratio of our revenues to cost of services
(which include the operators&#146; service and other fees) by, for example, changing the design and
marketing of our services to decrease the number of messages that we send which go unmatched by a
user&#146;s reply and thus incur a network fee. In addition, although the prices of our services must
be approved by the operators in advance, we have been able to adjust our prices from time to time
to reflect or react to changes in the market. The operators will also not usually pay us if users
of our services do not pay them and will not pay us if users do not receive the services due to
billing and transmission failures. As a result, we in fact bear the credit and delivery risk for
our portion of the revenues generated with respect to our services. Finally, we have discretion to
select the content for our services and the providers of that content, provided it does not violate
applicable Chinese law or the policies of the operators. Based on these factors, we have concluded
that recognizing revenues on a gross basis is appropriate.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Deferred Tax Valuation Allowance</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our provisions for income taxes, deferred tax assets and liabilities, and the extent to which
deferred tax assets can be recognized, are determined by our management. We make a valuation
allowance to reduce our deferred tax assets to the amount that is more likely than not to be
realized based on our estimate of future taxable income and prudent and feasible tax planning
strategies. A significant portion of our deferred tax assets relate to Linktone Consulting. Due
to changes in our tax planning in 2005, we believe it is likely that Linktone Consulting will
generate sufficient taxable income to utilize a portion of its tax loss carryforwards before
expiration and other accruals. As a result, we reduced our valuation allowance from $0.5&nbsp;million
to $0.3&nbsp;million for the year ended December&nbsp;31, 2005.
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Stock-based Compensation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We accounted for our stock-based compensation to employees in accordance with Accounting
Principles Board (&#147;APB&#148;) No.&nbsp;25, &#147;Accounting for Stock Issued to Employee.&#148; In general,
stock-based compensation cost under APB No.&nbsp;25 represents the difference between the exercise price
of options granted and the fair market value of the underlying stock at the date of measurement.
For awards with fixed option terms, the date of measurement is normally the date of grant. For
awards with certain contingencies such as performance-based criteria, compensation cost will be
re-measured at each interim reporting period end until such contingencies are removed or no longer
applicable. Following our initial public offering, we have determined the fair market value of our
ordinary shares by reference to the current trading price of our ADSs on The NASDAQ National
Market.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Deferred stock-based compensation is amortized on a straight-line basis and charged to expense
over the vesting period of the underlying options, which is generally one to four years. The
amortization of deferred compensation was $1.1&nbsp;million, $3.5&nbsp;million and $2.0&nbsp;million for 2003,
2004 and 2005, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As described in &#147;Restatement of 2004 Consolidated Financial Statements&#148; above, we have
restated our historical consolidated financial statements for 2004 to record the accounting impact
of certain amendments made in October&nbsp;2004 to certain stock options granted to some of our
executive officers. The restatement increased the stock compensation expense for 2004 by $1.4
million to $3.5&nbsp;million. In connection with these amendments, we also recorded in 2005 an
incremental compensation expense of $0.8&nbsp;million related to the acceleration of vesting that
occurred following the resignation of certain of our executive officers in January and February
2006. See Note 5(l) &#151; &#147;Stock-based compensation&#148; to our consolidated financial statements in this
annual report for more information on the effect of the $0.8&nbsp;million incremental compensation
expense on 2005 amounts.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December&nbsp;2004, the FASB issued SFAS No.123(R), &#147;<I>Shares Based Payment</I>.&#148; SFAS No.123(R)
establishes standards for the accounting for transactions in which an entity exchanges its equity
instruments for goods and services. It focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment transactions (e.g., employee stock
options). SFAS No.123(R) requires the measurement of the costs of employee services received in
exchange for an award of an equity instrument such as employee stock options at the fair value on
the grant date. Those costs will be recognized over the period during which an employee is
required to provide services in exchange for the award. Beginning on January&nbsp;1, 2006, we adopted
the provisions of SFAS No.123(R) under the modified prospective method which does not require us to
restate our prior year financial statements to reflect expensing of stock-based compensation under
SFAS No.&nbsp;123(R). Under SFAS No.&nbsp;123(R), we will use the Black-Scholes option pricing model to
estimate the fair value of the stock-based compensation as of the grant date. The Black-Scholes
model requires us to make assumptions and judgments about the variables (including the option&#146;s
expected life, the price volatility of the underlying stock), risk free interest rate for the
periods within the expected term of the option and dividend yield to be used in the calculation.
The option&#146;s expected life and our stock price volatility are based on our management&#146;s best
estimates at the time of grant, both of which impact the fair value of the option calculated under
Black-Scholes model and, ultimately, the expense that will be recognized over the vesting term of
the option. SFAS 123(R) requires that we recognize compensation expense for only the portion of
options that are expected to vest. Therefore, we apply estimated forfeiture rates that are based
on historical employee termination behavior. We periodically adjust the estimated forfeiture rates
so that only the compensation expense related to stock-based compensation that vest are included in
the statement of operations. If the actual number of forfeitures differs from those estimated by
our management, additional adjustments to compensation expense may be required in future periods.
Upon adoption of FAS 123(R), we estimate that the stock option compensation expense related to
issued but
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">unvested options at December&nbsp;31, 2005 will be approximately $2&nbsp;million to $2.5&nbsp;million, which
would be recognized in 2006 and thereafter.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Revenues</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As described in &#147;Critical Accounting Policies and Estimates &#151; Revenue and Cost of Services
Recognition,&#148; we generate revenues primarily from service fees paid by mobile phone users who use
our services through the operators. Our wireless value-added services fees are charged on a
monthly subscription or per use basis. Fees for our 2G SMS-based services currently range from
RMB0.1 ($0.01) to RMB2.0 ($0.25) per message and from RMB2.0 ($0.25) to RMB15.0 ($1.86) per month
for subscription services. Fees for 2.5G MMS, WAP and Java&#153; services currently range from RMB1.0
($0.12) to RMB10.0 ($1.24) per message and from RMB5.0 ($0.62) to RMB30.0 ($3.71) per month for
subscription services. Fees for audio-related services range from RMB0.5 ($0.06) to RMB3.0 ($0.37)
per audio content download. For 2005, our 2G, audio-related and 2.5G services represented 63.5%,
23.1% and 11.3%, respectively, of our gross revenues.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also generate revenues by offering services through the fixed line networks, PHS and PAS
networks of China Telecom and China Netcom. This revenue was not a significant part of our total
gross revenues for 2004 but represented 4.3% of our total gross revenues for 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Cost of Services</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our cost of services includes the following:
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Service and network fees payable by us to the operators, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Payments to certain content and marketing providers for the use of their content.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Service and network fees are deemed paid when the operators remit to us our portion of the
fees paid by users net of the service and network fees described above.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We pay our content and marketing providers directly, which payments are generally in the form
of a fixed periodic fee, or a percentage of our aggregate net revenue received from or confirmed by
the operators with respect to services provided that incorporate the providers&#146; products, or a
combination of fixed and variable amounts.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth the amount of each category of cost of services for the periods
indicated:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Cost of services:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Operators&#146; fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,303,603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13,639,288</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">20,511,512</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Payments to content and marketing providers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">515,788</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,666,128</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,972,182</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,819,391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">15,305,416</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">26,483,694</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Operating Expenses</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operating expenses include product development, selling and marketing, stock-based
compensation and other general and administrative expenses.
</DIV>


<P align="center" style="font-size: 10pt">56
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Product Development Expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our product development expenses consist primarily of the salary and welfare expenses of our
technical support team, which is responsible for our LT-IAG technology platform and other technical
support, and our product development team, which focuses on aggregating, customizing and localizing
our services. This category of expenses also includes depreciation and amortization of computers
and software related to the activities of those teams.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our SMS-based content and applications have been principally developed in-house. In the first
quarter of 2003, we began allocating product development resources to next generation MMS, WAP and
Java&#153; services, as well as audio-related services. We develop slightly more than half of our MMS,
WAP, Java&#153; and audio-related services content in-house with the remainder aggregated from third
parties. For the year ended December&nbsp;31, 2005, approximately 35%, 29%, 7%, 13% and 16% of our
product development expenditures were related to our 2G services, 2.5G services, audio-related
services, general office information technology support and new businesses (such as casual gaming),
respectively. We expect that the portion of our product development expenditures devoted to 2.5G
and audio-related services will increase moderately in the future.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although the monthly statements we receive from the operators do not include breakdowns of
gross revenues by service and not all of the affiliates of the operators provide daily reports on
services sent and received, we utilize a number of resources to plan and refine our product
development activities. For example, our internal records of the services we transmit to the
operators for delivery to the ultimate user provide us with extensive information about the
popularity of our services, such as gross usage and the number of repeat users. However, we can
only estimate the revenue those services generate due to the operators&#146; unitemized monthly
statements. Nevertheless, our focus on maintaining, expanding and strengthening close
relationships with the operators helps keep us informed as to upcoming marketing and product
initiatives by the operators and rollouts of new mobile technology standards, which enables us to
tailor our product development efforts to address these trends.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We depreciate our computer hardware and office equipment on a straight-line basis over their
estimated useful lives.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As part of our continual assessment of our estimation techniques, we determined that our
previous estimates on residual value and the useful life of our computer equipment, software and
other assets required modification. Effective from January&nbsp;1, 2005, we have modified our
estimation on the residual value of product development assets from 10% to zero, and the updated
useful life of such assets as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="3"><B>Old Estimation</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="3"><B>New Estimation</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Computer hardware/equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>60 months</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>36-60 months</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Office equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">60 months</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">12-36 months</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These changes increased depreciation expense by $0.4&nbsp;million and reduced income tax expense by
$0.1&nbsp;million for the year ended December&nbsp;31, 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Selling and Marketing Expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our selling and marketing expenses consist primarily of the direct costs attributable to our
sales and marketing activities, such as travel, entertainment, advertising expenses and cost of
promotions. It also includes the salary and welfare expenses of the staff in our sales department
and marketing
</DIV>


<P align="center" style="font-size: 10pt">57
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">department, as well as charges imposed on us by the mobile operators for our inadvertent
contravention of their customer service policies, which generally appear as separate charges on the
statements we receive from the operators.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Stock-based Compensation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operating expenses include stock-based compensation charges, which are described under
&#147;Critical Accounting Policies and Estimates &#151; Stock-based Compensation&#148; above.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Other General and Administrative Expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our other general and administrative expenses consist primarily of the salary and welfare
expenses of our customer research department, customer service department, business development
department and other administrative functions, such as legal, human resources, finance and senior
management. Other general and administrative expenses also include fees for professional services
(e.g., audit, tax, legal and recruitment), office rentals, relocation expenses (in 2005 which
included expenses incurred in connection with the move of our office in Beijing), bandwidth leasing
and server custody fees charged by the operators and the amortization of leasehold improvements.
Leasehold improvements are amortized on a straight-line basis over the lesser of the relevant lease
term or the assets&#146; estimated useful lives.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Taxation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the current laws of the Cayman Islands and British Virgin Islands, we are not subject to
a tax on income or capital gain. However, our revenues are primarily derived from our affiliated
Chinese entities. Chinese companies are generally subject to Enterprise Income Tax (EIT)
comprising a national income tax and local tax. Linktone Consulting and Shanghai Weilan are
subject to a 30% national income tax and a 3% local tax. Shanghai Huitong and Linktone Internet
qualify as &#147;foreign investment production enterprises established in a coastal economic development
zone in an old urban district&#148; under applicable tax rules, and accordingly are subject to a 24.0%
national income tax and a 3.0% local tax in China. Additionally, Shanghai Huitong and Linktone
Internet are entitled to an exemption from the national income and local tax for the first two
years after cumulative profitability and a 50.0% reduction for the subsequent three years. Our
affiliated Chinese entities Shanghai Unilink and Shanghai Qimingxing are currently considered
&#147;small businesses&#148; under applicable tax rules, and are subject to a 2.4% tax on revenue and 4.8%
tax on the difference between revenue and cost of services, rather than on income. Shanghai Weilan
initially was also subject to tax on revenue rather than on income, however, its revenue in 2004
exceeded the revenue ceiling for entities qualified to be taxed under the revenue method.
Therefore, Shanghai Weilan has been subject to a 30.0% national income tax and 3.0% local tax since
2004. Because Hainan Zhong Tong, Wang You and Linktone Software are located in economic
development zones in coastal cities, they are subject to a preferential national income tax rate of
15%, and are permanently exempt from local tax. Shenzhen Yuanhang, Beijing Cosmos and Beijing Lian
Fei qualify as &#147;high technology&#148; enterprises, and are therefore entitled to: (i)&nbsp;with respect to
Beijing Cosmos and Beijing Lian Fei, a three (3)&nbsp;year national and local tax exemption followed by
three (3)&nbsp;years with a 50% reduction in the national income tax rate and continued exemption from
the local income tax rate, commencing from the first year of operations and (ii)&nbsp;with respect to
Shenzhen Yuanhang, a two (2)&nbsp;year national and local tax exemption followed by three (3)&nbsp;years with
a 50% reduction in the national income tax rate and continued exemption from the local income tax
rate, commencing from the first year of profitability.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If our income is generated from a permanent establishment in China, the income of such
permanent establishment would be subject to a 30.0% national income tax and 3.0% local income tax.
</DIV>


<P align="center" style="font-size: 10pt">58
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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Income of our company that is not connected to a permanent establishment in China would be
subject to a 10.0% withholding tax on gross receipts from profit, interest, rentals, royalties and
other income earned in China. Since Linktone Consulting, Shanghai Huitong, Linktone Internet,
Linktone Software and Wang You are our wholly-owned subsidiaries and are considered permanent
establishments in China for tax purposes, the income generated by these entities is subject to EIT,
and the dividends distributed from these entities to our company is exempt from Chinese withholding
tax.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Payments for software license fees and related technical consulting services provided by
Shanghai Huitong and Linktone Internet to Shanghai Weilan and Shanghai Unilink are subject to a
17.0% value-added tax, or VAT. Under applicable tax regulations, Shanghai Huitong and Linktone
Internet are entitled to a tax refund equivalent to the portion of VAT expense that is in excess of
3.0%. This VAT expense is shown in our &#147;Consolidated Statements of Operations&#148; as a reduction in
our revenue. For the year ended December&nbsp;31, 2005, Shanghai Huitong and Linktone Internet paid a
total $6.3&nbsp;million in VAT and received a $5.0&nbsp;million tax refund. As of December&nbsp;31, 2005,
Shanghai Huitong and Linktone Internet accrued VAT refund receivable and payable of $2.1&nbsp;million
and $2.6&nbsp;million, respectively, for approximately $11.4&nbsp;million in software license fee revenue
invoiced in 2005 and $6.4&nbsp;million in software license fee revenue expected to be invoiced in 2006.
The entire $2.1&nbsp;million has been refunded.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are subject to a business tax on our revenues derived from services in China, which is
generally 3% &#151; 5% of the revenue. Business tax applies to the gross revenues recognized by our
Chinese affiliated entities and to the service fees charged to those entities by Linktone
Consulting. The business tax shown in our consolidated statements of operations causes a reduction
in our revenue.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subject to the approval of the relevant tax authorities, Linktone Consulting, one of our
wholly owned subsidiaries in China, had total tax loss carryforwards of approximately $2.8&nbsp;million
as of December&nbsp;31, 2005 for EIT purposes. Approximately $0.02&nbsp;million, $0.04&nbsp;million, $2.3
million, $0.4&nbsp;million and $0.03&nbsp;million of such losses will expire in 2006, 2007, 2008, 2009 and
2010, respectively. These tax loss carryforwards give rise to potential deferred tax assets
totaling $0.8&nbsp;million. For more information regarding our tax loss carryforwards and deferred tax
assets, see &#147;Critical Accounting Policies and Estimates &#151; Deferred Tax Valuation Allowance&#148; above.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Capital Expenditures</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our capital expenditures for 2003, 2004 and 2005 were approximately $0.3&nbsp;million, $2.4&nbsp;million
and $2.0&nbsp;million, respectively, consisting of the purchase of computer and office equipment and
leasehold improvements. Substantially all of our capital expenditures for 2005 were incurred in
connection with the expansion of our business, as well as furniture and computer equipment
purchased in connection with the relocation of our Beijing office in December&nbsp;2005. We anticipate
that we will have capital expenditures in the next 12&nbsp;months of approximately $1&nbsp;million for
software and technology infrastructure products which we expect to finance with internal funds.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Results of Operations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth a summary of our audited consolidated statement of operations
for the periods indicated and as a percentage of gross revenues. Our historical operating results
are not necessarily indicative of the results for any future period.
</DIV>


<P align="center" style="font-size: 10pt">59
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD style="border-bottom: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(restated and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>%</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,601,492</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">50,318,744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,608,603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,485,670</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">93.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,083,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">95.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,487,256</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">95.8</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,819,391</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(35.1</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,305,416</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(30.4</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(26,483,694</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(36.0</TD>
    <TD nowrap>)%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,666,279</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">58.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,778,284</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">65.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,003,562</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">59.8</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(748,209</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4.5</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,807,720</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5.6</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,229,976</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8.5</TD>
    <TD nowrap>)%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Selling and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,144,540</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12.9</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,794,568</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(17.5</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,719,763</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(20.0</TD>
    <TD nowrap>)%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Share-based compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,119,529</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6.7</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,464,807</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6.9</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,012,425</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2.7</TD>
    <TD nowrap>)%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other general and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,070,141</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12.5</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,809,947</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(13.5</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9,774,570</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(13.3</TD>
    <TD nowrap>)%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total operating expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,082,419</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(36.6</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(21,877,042</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(43.5</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(32,736,734</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(44.5</TD>
    <TD nowrap>)%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,583,860</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">21.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,901,242</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">21.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,266,828</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">15.3</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,223</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">815,447</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">1.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,965,801</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">2.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">346,652</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">720,763</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.9</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(997,307</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2.0</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,504,329</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2.0</TD>
    <TD nowrap>)%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income after tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,616,083</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">21.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,066,034</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">22.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">16.9</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Year Ended December&nbsp;31, 2005 Compared to Year Ended December&nbsp;31, 2004</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Gross Revenues</I>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross revenues increased by 46.3% to $73.6&nbsp;million for the year ended December&nbsp;31, 2005 from
$50.3&nbsp;million in 2004, primarily as a result of increases in the number of paying users,
particularly for our audio-related services, as well as growth in sales of our SMS and 2.5G
services in 2005. We estimate that our user base expanded to an average of 7.7&nbsp;million users per
month during 2005, reaching a peak of an average of 10.0&nbsp;million users in August&nbsp;2005, compared
with our estimate of an average of 6.8&nbsp;million users per month during 2004. This increase was
primarily due to our ongoing efforts to attract new users from a broader geographic base as well as
gaining customers from our competitors through increased marketing channels, especially print and
broadcast media channels, and an expanded sales network. Our user base also increased as a result
of the overall growth of the wireless (and, to a lesser extent, fixed line) value-added services
market in China, particularly for audio-related and 2.5G services.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, we estimate that our average revenue per user increased to $1.00 per month during
2005, compared to $0.61 per month during 2004. This increase was primarily due to our enhanced
product portfolio for all categories of our services. Growth in sales of our audio-related, 2G and
2.5G services contributed to 57.1%, 28.0% and 7.9%, respectively, of our total increase in gross
revenues for 2005 compared to 2004. In 2005, ringback and IVR services accounted for 11.0% and
12.0%, respectively, of our gross revenues. In 2005, MMS and WAP services accounted for 8.8% and
2.0%, respectively, of our gross revenues.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our gross revenues for 2005 were negatively affected, however, by various sanctions imposed by
China Mobile in 2005, as described under &#147;Overview &#151; Changes in Mobile Operator Policies or the
Manner in Which They are Enforced.&#148; We cannot quantify the impact of the sanctions on our gross
revenue because we cannot estimate with precision the revenues we would have earned during the time
period affected by the sanctions. Also, we cannot predict whether we will be subject to additional
sanctions or penalties in future periods.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Cost of Services</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our cost of services increased by 73.2% to $26.5&nbsp;million in 2005 from $15.3&nbsp;million in 2004,
primarily due to the overall growth of our business resulting in increased service and network fees
being paid by us to the operators. Cost of services also increased in part due to increased
revenue share payments to our content providers and co-marketing partners, reflecting a greater
percentage of revenues derived from third party content. In 2005, our total service and network
fees paid to the operators were
</DIV>


<P align="center" style="font-size: 10pt">60
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">$20.5&nbsp;million, representing 77.4% of our total cost of services, and fees paid to content and
marketing partners were $6.0&nbsp;million, representing 22.6% of our total cost of services, compared to
$13.6&nbsp;million, representing 88.9% of our total cost of services, and $1.7&nbsp;million, representing
11.1% of our total cost of services, respectively, for the same period in 2004.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If we are successful in establishing collaborative relationships or partnerships involving
payments to additional domestic and international content providers, or to other parties such as
additional handset manufacturers that embed our services in their handsets, we expect that our cost
of services may increase.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating Expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operating expenses increased to $32.7&nbsp;million in 2005 from $21.9&nbsp;million in 2004.
Operating expenses as a percentage of gross revenues increased to 44.5% in 2005 from 43.5% in 2004.
The increase was mainly due to the fact that the rate of growth in our operating expenses, in
particular, our selling and marketing and product development expenses, outpaced the rate of growth
of our revenue. Depreciation and amortization expenses for computers and equipment in relation to
our total operating expenses were not material for 2005 and 2004.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Product development expenses increased by 121.4% to $6.2&nbsp;million in 2005 from $2.8&nbsp;million in
2004, primarily due to an increase in staff costs as a result of additional hiring to expand our
product development and technology support teams, which increased from 123 and 122 employees,
respectively, as of December&nbsp;31, 2004 to 312 and 148 employees, respectively, as of December&nbsp;31,
2005. Staff costs for product development increased to $4.4&nbsp;million, or 13.5% of our total
operating expenses, in 2005 from $2.4&nbsp;million, or 11.0% of our total operating expenses, in 2004.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Selling and marketing expenses increased by 67.0% to $14.7&nbsp;million in 2005 from $8.8&nbsp;million
in 2004, primarily due to increased investment in advertising and sales activities in online and
offline media, as well as an increase in the number of sales and marketing employees from 227 as of
December&nbsp;31, 2004 to 280 as of December&nbsp;31, 2005. Advertising and sales activities increased to
$8.6&nbsp;million, or 26.3% of our total operating expenses, in 2005 from $4.3&nbsp;million, or 19.6% of our
total operating expenses, in 2004. Staff costs increased to $2.9&nbsp;million, or 8.9% of our total
operating expenses, in 2005 from $1.9&nbsp;million, or 8.7% of our total operating expenses, in 2004.
In 2004 and 2005, approximately 55%, 44% and 1% and 50%, 17% and 33%, respectively, of such
expenses were incurred to promote our 2G, 2.5G and audio-related services, respectively. We expect
that the major portion of our sales and marketing expenses will be related to our 2.5G and
audio-related services in future periods.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We recorded stock-based compensation cost in the amount of $2.0&nbsp;million in 2005, compared to
$3.5&nbsp;million in 2004. The reduction was primarily due to stock-based compensation cost related to
options granted to our management and certain staff employees in April&nbsp;2003 had been fully
amortized by July&nbsp;2005. The decrease also resulted from the fact that stock-based compensation
cost incurred in connection with the amendment of certain executive officers&#146; stock options in
October&nbsp;2004 was significantly greater in 2004 than 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other general and administrative expenses increased by 44.1% to $9.8&nbsp;million in 2005 from $6.8
million in 2004, primarily due to an increase in staff costs as a result of additional hiring of
staff from 46 to 85 employees, as well as an increase in professional service fees such as for
legal, audit and recruitment. The majority of new hires were in our legal, finance and human
resources departments. These staff costs increased to $2.9&nbsp;million, or 8.9% of our total operating
expenses, in 2005 from $2.1&nbsp;million, or 9.6% of our total operating expenses, in 2004.
</DIV>


<P align="center" style="font-size: 10pt">61
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We expect that our operating expenses will increase at a slower pace in the near-term in
comparison to prior periods as we have implemented cost reductions beginning in the first quarter
of 2006 to create a leaner and more efficient company.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Year Ended December&nbsp;31, 2004 Compared to Year Ended December&nbsp;31, 2003</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Gross Revenues</I>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross revenues increased by 203.0% to $50.3&nbsp;million for the year ended December&nbsp;31, 2004 from
$16.6&nbsp;million in 2003, primarily as a result of increases in the number of paying users and average
revenue per user, particularly for our SMS services, as well as growth in sales of our 2.5G and
audio-related services in 2004. We estimated that our user base expanded to an average of 6.8
million users per month during 2004, reaching a peak of an average of 7.2&nbsp;million users in November
2004, compared with our estimate of an average of 3.3&nbsp;million users per month during 2003. This
increase was primarily due to our efforts to attract new users from a broader geographic base as
well as gaining customers from our competitors through increased marketing channels, especially
print and broadcast media channels, and an expanded sales network. Our user base also increased as
a result of the overall growth of the wireless value-added services market in China, particularly
for 2.5G and audio-related services.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, we estimated that our average revenue per user increased to $0.61 per month
during 2004, reaching a peak of $0.74 in December&nbsp;2004, compared to $0.54 in December&nbsp;2003. This
increase was due primarily to our enhanced product portfolio for all categories of our services and
the launch of IVR services in April&nbsp;2004. Growth in sales of our 2G, 2.5G and audio-related
services contributed to 70.3%, 19.0% and 10.7%, respectively, of our total increase in gross
revenues for 2004 compared to 2003. In 2004, MMS and WAP services accounted for 10.5% and 2.0%,
respectively, of our gross revenues. In 2004, ringback and IVR services accounted for 3.5% and
3.7%, respectively, of our gross revenues.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although our gross revenues for SMS services increased in 2004 compared to 2003, we
experienced a decline in SMS-related revenues between the second and third quarters and between the
third and fourth quarters of 2004. These declines resulted principally from the ongoing effects of
China Mobile&#146;s implementation of its new platform for customer service and billing management.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Cost of Services</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our cost of services increased by 163.8% to $15.3&nbsp;million in 2004 from $5.8&nbsp;million in 2003,
primarily due to the overall growth of our business resulting in increased service and network fees
being paid by us to the mobile operators. Cost of services also increased in part due to payments
to our content providers and marketing partners under our cooperation agreements with them. In
2004, our total service and network fees paid to the mobile operators were $13.6&nbsp;million,
representing 88.9% of our total cost of services, and fees paid to content and marketing partners
were $1.7&nbsp;million, representing 11.1% of our total cost of services, compared to $5.3&nbsp;million,
representing 91.4% of our total cost of services, and $0.5&nbsp;million, representing 8.6% of our total
cost of services, respectively, for the same period in 2003.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating Expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our operating expenses increased significantly to $21.9&nbsp;million in 2004 from $6.1&nbsp;million in
2003. Operating expenses as a percentage of gross revenues increased from 36.6% in 2003 to 43.5%
in 2004. The increase was mainly due to the fact that the rate of growth in our operating
expenses, in particular, our selling and marketing and product development expenses, outpaced the
rate of growth of
</DIV>


<P align="center" style="font-size: 10pt">62
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">our revenue. Depreciation and amortization expenses for computers and equipment in relation
to our total operating expenses were not material for 2003 and 2004.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Product development expenses increased by 300.0% to $2.8&nbsp;million in 2004 from $0.7&nbsp;million in
2003, primarily due to an increase in staff costs as a result of additional hiring to expand our
product development and technology support teams, which increased from 64 and 30 employees as of
December&nbsp;31, 2003 to 123 and 122 employees as of December&nbsp;31, 2004. Staff costs for product
development increased to $2.4&nbsp;million, or 11.0% of our total operating expenses, in 2004 from $0.7
million, or 11.5% of our total operating expenses, in 2003.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Selling and marketing expenses increased by 319.0% to $8.8&nbsp;million in 2004 from $2.1&nbsp;million
in 2003, primarily due to increased investment in advertising and sales activities in online and
offline media, as well as an increase in the number of sales and marketing employees from 97 as of
December&nbsp;31, 2003 to 168 as of December&nbsp;31, 2004. Such advertising and sales activities increased
to $4.3&nbsp;million, or 19.6% of our total operating expenses, in 2004 from $0.9&nbsp;million, or 14.8% of
our total operating expenses, in 2003. Staff costs increased to $1.9&nbsp;million, or 8.7% of our total
operating expenses, in 2004 from $0.7&nbsp;million, or 11.5% of our total operating expenses, in 2003.
In 2003, substantially all of our sales and marketing expenses were incurred promoting our 2G
services. However, in 2004, approximately 55%, 44% and 1% of such expenses were incurred to
promote our 2G, 2.5G and audio-related services, respectively. Our sales and marketing expenses
also increased during this period because we incurred charges imposed by the mobile operators for
the inadvertent contravention of certain of their policies, which totaled $0.7&nbsp;million in 2004,
compared to nil in 2003.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We recorded stock-based compensation cost in the amount of $3.5&nbsp;million in 2004, compared to
$1.1&nbsp;million in 2003, primarily due to amortization of stock-based compensation cost related to
options granted to our management and certain staff employees in April&nbsp;2003. The increase also
resulted from stock-based compensation cost incurred in connection with the amendment of certain
executive officers&#146; stock options in October&nbsp;2004.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other general and administrative expenses increased by 223.8% to $6.8&nbsp;million in 2004 from
$2.1&nbsp;million in 2003, primarily due to an increase in staff costs as a result of additional hiring
of staff from 43 to 105 employees. The majority of new hires were in our finance and human
resources departments as well as senior management. These staff costs increased to $2.1&nbsp;million,
or 9.6% of our total operating expenses, in 2004 from $1.1&nbsp;million, or 18.0% of our total operating
expenses, in 2003. An increase in our lease expenses, incurred in connection with our move to new
corporate offices in July&nbsp;2004, in the amount of $0.7&nbsp;million for the year ended December&nbsp;31, 2004,
also contributed to the increase in other general and administrative expenses.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Liquidity and Capital Resources</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our primary sources of liquidity have historically been proceeds from our private placements
of preferred shares to investors and from our initial public offering in March&nbsp;2004 and cash flow
from operations. In the future, we anticipate that our primary sources of liquidity will come from
cash flow from operations. The following table sets forth the summary of our cash flows for the
periods indicated:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>For the year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(restated and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,880,751</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,654,127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,561,944</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash used in investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(304,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(17,266,029</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(34,440,154</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash (used in)/provided by financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65,412,374</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,832,327</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<P align="center" style="font-size: 10pt">63
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>For the year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(restated and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(audited)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>audited)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign currency translation adjustment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">457</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">264</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">549,586</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net increase in cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,576,828</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57,800,736</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(27,160,951</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents, beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,036,065</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,612,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">63,413,629</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents, end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,612,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">63,413,629</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">36,252,678</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The ability of our subsidiaries to obtain cash or other assets from our affiliated
Chinese entities, Shanghai Weilan, Shanghai Unilink, Shenzhen Yuanhang, Beijing Cosmos, Hainan
Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing depends on the effectiveness and
enforceability of our agreements with those entities and their owners. A description of these
agreements is set forth under &#147;Arrangements with Consolidated Affiliates&#148; above. In turn, the
ability of our subsidiaries to convert Renminbi into U.S. dollars and transfer them to our company
is subject to the Chinese foreign exchange regulations, including primarily the restriction that
foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks
authorized to conduct foreign exchange business after providing valid commercial documents.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to various software license and service agreements, our subsidiaries charged Shanghai
Weilan and Shanghai Unilink an aggregate fee of $39.1&nbsp;million for the year ended December&nbsp;31, 2005.
After these charges, as of December&nbsp;31, 2005, approximately $7.1&nbsp;million and $0.02&nbsp;million of
profits (determined based on invoiced revenue) remained in Shanghai Weilan and Shanghai Unilink,
respectively. As of December&nbsp;31, 2005, approximately $1&nbsp;million of profit (determined based on
invoiced revenue) remained in Shenzhen Yuanhang. Beijing Cosmos, Hainan Zhong Tong, Beijing Lian
Fei and Shanghai Qimingxing, each had accumulated losses as of December&nbsp;31, 2005. Of the profits
remaining in Shanghai Weilan, Shanghai Unilink and Shenzhen Yuanhang, $5.8&nbsp;million related to 2003,
$1.2&nbsp;million related to 2004 and $1.12&nbsp;million related to 2005. For tax planning reasons and
because we usually charge our affiliated Chinese entities fees for the current year only, we do not
anticipate transferring such cumulative retained profits relating to earlier years to our
subsidiaries via service charges in the future. In addition, because Shanghai Weilan, Shanghai
Unilink and Shenzhen Yuanhang are only affiliated entities of us rather than subsidiaries, such
profits cannot be transferred to us in the form of cash dividends. However, our subsidiaries
normally have access to the cash or other assets retained in Shanghai Weilan, Shanghai Unilink,
Shenzhen Yuanhang, Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing via
inter-company advances.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating Activities</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash provided by operating activities was $2.9&nbsp;million, $9.7&nbsp;million and $9.6&nbsp;million for
2003, 2004 and 2005, respectively. For 2003, 2004 and 2005, cash provided by operating activities
consisted primarily of our operating profit.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Investing Activities</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash used in investing activities in 2003, 2004 and 2005 was approximately $0.3&nbsp;million, $17.3
million and $34.4&nbsp;million, respectively. In 2003 and 2004, cash expenditures consisted primarily
of the purchase of short term investments and fixed assets, including computers and office
equipment and leasehold improvements, in connection with the expansion of our business. In 2005,
cash expenditures included the acquisitions of Shenzhen Yuanhang through Brilliant, Beijing Cosmos,
Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, our strategic investment in 9Sky, and
the purchase of short term investments and fixed assets such as computers and office equipment and
leasehold improvements.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We had no material commitments for capital expenditures as of December&nbsp;31, 2003, 2004 and
2005. During 2003, 2004 and 2005, we spent approximately $0.3&nbsp;million, $2.4&nbsp;million and $2.0
million,
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">respectively, for renovations of our new corporate offices and for the purchase of computer
and office equipment.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Financing Activities</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash used in financing activities was $2.8&nbsp;million for 2005, which consisted primarily of
funds used to finance our ADS repurchase program. Cash provided by financing activities was $65.4
million for 2004, which consisted of the net proceeds from our initial public offering and from the
exercise of stock options. We had no cash provided by or used in financing activities for 2003.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have no written treasury or borrowing policy. We keep almost all of our cash in U.S.
dollar or RMB denominated bank accounts, short-term time deposits or short-term, investment grade
fixed income securities for two principal purposes: to finance our operations, and to manage the
interest rate and currency risks arising from our operations. We adjust the amount of cash held in
U.S. dollars and RMB from time to time to maximize our interest rate returns and to ensure that we
have sufficient RMB for our operational needs, including for lease and other commitments. We have
not historically financed our operations through borrowings and have not used derivative
instruments to hedge market risks.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that current cash and cash equivalents will be sufficient to meet anticipated
working capital (net cash used in operating activities), commitments and capital expenditures for
the foreseeable future. We also believe that our recent acquisitions of Shenzhen Yuanhang through
Brilliant, Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing and our
strategic investment in 9Sky will have no material impact on our future liquidity or capital
resources in the near-term. We may, however, require additional cash resources due to changed
business conditions or other future developments, including any investments or acquisitions we may
decide to pursue. If these sources are insufficient to satisfy cash requirements, we may seek to
sell additional equity or debt securities or to obtain a credit facility. The sale of additional
equity or convertible debt securities could result in additional dilution to shareholders. The
incurrence of indebtedness would result in increased debt service obligations and could result in
operating and financial covenants that would restrict operations. Financing may not be available
in amounts or on terms acceptable to us, if at all.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Research and Development, Patents and Licenses</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>RESEARCH AND DEVELOPMENT</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that a key part of our future success will depend on our ability to develop and
enhance our services by leveraging our expertise in entertainment-oriented wireless value-added
services. Our product development activities are led by our 312-member product development
department based in Shanghai, Beijing and Shenzhen, of which approximately 103 work on new services
such as MMS, WAP and Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> and the remainder focusing on SMS-based services,
audio-related services and casual gaming. Our total expenditures for research and development were
$0.7&nbsp;million, $2.8&nbsp;million and $6.2&nbsp;million for the years ended 2003, 2004 and 2005, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We develop the content for our services in-house, aggregate it from domestic and international
providers or through acquisitions. We plan to enter into additional relationships with domestic
and international providers, in particular with respect to the development of games, music and
content for all of our 2.5G services, in order to fully utilize the technological benefits of 2.5G
and the sophisticated premium content which users will demand. For aggregated third party content,
most of our efforts involve customization, localization and related development activities of the
content for the Chinese market to create appealing, user-friendly products. We also intend to make
additional strategic
</DIV>


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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">investments or acquisitions such as our acquisitions of Shenzhen Yuanhang through Brilliant
and Beijing Cosmos in order to build more robust interactive entertainment services.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our services development team in Shanghai and Beijing focuses on MMS and WAP products, as well
as Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> and Brew games. We currently develop or aggregate from third parties,
particularly from game developers in Japan and Korea, a variety of action and adventure
Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> games. For this purpose, we have a game development team which is highly
experienced working in the Java<SUP style="font-size: 85%; vertical-align: text-top">TM</SUP> and Brew programming languages to customize and
localize games for the Chinese market.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Finally, certain provincial and local offices of the mobile operators use different software
and technology, and our product development department must conform our services so that they are
interoperable with China Mobile&#146;s and China Unicom&#146;s networks at all levels.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We rely primarily on a combination of copyright laws and contractual restrictions to establish
and protect our intellectual property rights. We require our employees to enter into agreements to
keep confidential all information relating to our customers, methods, business and trade secrets
during and after their employment with us. Our employees are required to acknowledge and recognize
that all inventions, trade secrets, works of authorship, developments and other processes, whether
or not patentable or copyrightable, made by them during their employment are our property. They
also sign agreements to substantiate our sole and exclusive right to those works and to transfer
any ownership that they may claim in those works to us.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While we actively take steps to protect our proprietary rights, such steps may not be adequate
to prevent the infringement or misappropriation of our intellectual property. This is particularly
the case in China where the laws may not protect our proprietary rights as fully as in the United
States. Infringement or misappropriation of our intellectual property could materially harm our
business. We have registered 80 Internet and WAP domain names in English and Chinese, of which our
primary domain names are listed below.
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.linktone.com</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.linktone.com.cn</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.lt2000.com.cn</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.lt2000.net</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.ul9000.com</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.ul9000.com.cn</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.ul9000.cn</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.soring.cn</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.i-liao.com</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>wap.linktone.com,</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>wap.linktone.com.cn</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.i-liao.com</I>,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>wap.linktone.com,</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>wap.linktone.com.cn</I>,</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">66
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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><I>www.my1828.com,</I></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>www.smschina.com,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>www.8228.com,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>www.yhgame.com, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="5%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>www.vrhappy.com.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have registered 90 trademarks with China&#146;s Trademark Office and one trademark in each of
Hong Kong, Singapore and Taiwan, relating to our company name and logo and some of our services.
We are in the process of applying for 36 additional trademarks in China and two trademarks in the
United States.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China&#146;s trademark law adopts a &#147;first-to-file&#148; system for obtaining trademark rights. As a
result, the first applicant to file an application for registration of a mark will preempt all
other applicants. Prior use of unregistered marks, except for statutorily defined &#147;well known&#148;
marks, is generally not a basis for legal action in China. We may not be able to successfully
defend or claim any legal rights in those trademarks for which applications have been made but for
which the Trademark Office has not issued a registration certificate.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have also obtained 21 copyright certificates in China for cartoons and images and 26
copyright certificates for computer software.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Many parties are actively developing and seeking patent protection for wireless
services-related technologies. We expect these parties to continue to take steps to protect these
technologies, including seeking patent protection. There may be patents issued or pending that are
held by others and that cover significant parts of our technology, business methods or services.
Disputes over rights to these technologies are likely to arise in the future. We cannot be certain
that our products do not or will not infringe valid patents, copyrights or other intellectual
property rights held by third parties. We may be subject to legal proceedings and claims from time
to time relating to the intellectual property of others.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Trend Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other than as disclosed elsewhere in this annual report, we are not aware of any recent trends
that are likely to have a material effect on our business.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>E. Off-Balance Sheet Arrangements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not have any outstanding derivative financial instruments, off-balance sheet guarantees,
interest rate swap transactions or foreign currency forward contracts. We do not engage in trading
activities involving non-exchange traded contracts.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>F. Tabular Disclosure of Contractual Obligations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have entered into leasing arrangements relating to our office premises. We also have
commitments in respect of advertising agreements with third parties, and contingent purchase price
commitments in respect of certain acquisition and loan agreements to which we are a party. The
following table sets forth our commitments under operating leases, advertising commitments and
acquisition agreements as of December&nbsp;31, 2005:
</DIV>


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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Office</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Advertising</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Contingent Purchase</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Premises</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Commitments</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Price Commitments</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less than one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,498,556</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,384,236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,467,697</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">8,350,489</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">1 - 3&nbsp;years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,174,058</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,174,058</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">3 - 5&nbsp;years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">50,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">50,324</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,722,938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,384,236</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,467,697</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,574,871</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The contingent purchase price commitments referenced above include the following:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with our acquisition of Beijing Cosmos, we may be obligated to pay approximately
$2.5&nbsp;million out of a maximum of $3.1&nbsp;million in contingent consideration to the selling
shareholders of Beijing Cosmos if certain financial performance objectives are achieved by March
31, 2006. $0.6&nbsp;million of the maximum $3.1&nbsp;million in contingent consideration was already paid to
the selling shareholders of Beijing Cosmos as an advance payment prior to December&nbsp;31, 2005.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with our strategic investment in 9Sky, we are obligated to advance further loans
in the aggregate amount of approximately $2&nbsp;million to 9Sky, if certain conditions pursuant to a
convertible loan agreement are achieved.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Inflation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inflation in China has not had a material impact on our results of operations in recent years.
According to the National Bureau of Statistics of China, the change in the Consumer Price Index in
China was 1.2%, 3.9% and 1.8% in 2003, 2004 and 2005, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Quantitative and Qualitative Disclosures About Market Risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Interest Rate Risk</I>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our exposure to risk for changes in interest rates relates primarily to our investments in
short-term financial instruments. 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. Partly as a result of this, our future interest income may fall
short of expectations due to changes in interest rates, or we may suffer losses in principal if we
are forced to sell securities that have fallen in estimated fair value due to changes in interest
rates. However, 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 an interest rate change.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Foreign Currency Risk</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Substantially all our revenues and expenses are denominated in Renminbi, but a substantial
portion of our cash is kept in U.S. dollars. Although we believe that, in general, our exposure to
foreign exchange risks should be limited, our cash flows and revenues will be affected by the
foreign exchange rate between U.S. dollars and Renminbi. It is possible that the Chinese
government may elect to loosen further its current controls over the extent to which the Renminbi
is allowed to fluctuate in value in relation to foreign currencies. Our business and the price of
our ordinary shares and ADSs could be negatively affected by a revaluation of the Renminbi against
the U.S. dollar or by other fluctuations in prevailing Renminbi-U.S. dollar exchange rates. For
example, to the extent that we need to convert U.S. dollars into Renminbi for our operational needs
and should the Renminbi appreciate against the U.S. dollar at that time, our cash flows would be
reduced which could materially adversely affect our business. Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of declaring dividends
</DIV>


<P align="center" style="font-size: 10pt">68
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">on our ordinary shares or for other business purposes and the U.S. dollar appreciates against
the Renminbi, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be
reduced.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We do not engage in any hedging activities, and we may in the future experience economic loss
as a result of any foreign currency exchange rate fluctuations. During the twelve months ended
December&nbsp;31, 2005, the foreign currency translation adjustments to our comprehensive income was
$0.8&nbsp;million and the currency loss was $0.36&nbsp;million, primarily as a result of the Chinese Renminbi
appreciating approximately 2.5% against the U.S. dollar in connection with the Chinese government&#146;s
decision in July&nbsp;2005 to tie the Renminbi to a basket of currencies rather than to the U.S. dollar.
The following is a sensitivity analysis showing the impact of hypothetical changes in the value of
the Renminbi against the U.S. dollar as of December&nbsp;31, 2005 on our results for 2005:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Change in the Value of Chinese</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Renminbi against the U.S. Dollar</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Additional Translation Adjustments</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">from Actual Value as of December</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">to Comprehensive Income</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Additional Transaction Gain/(Loss)</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">31, 2005</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">(in thousands)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">(in thousands)</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">2.5% Appreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">823</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(36</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:30px; text-indent:-15px">5% Appreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1646</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(72</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="center"><DIV style="margin-left:15px; text-indent:-15px">2.5% Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(823</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">36</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center"><DIV style="margin-left:30px; text-indent:-15px">5% Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">$</TD>
    <TD align="right">(1646</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">72</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Recent Accounting Pronouncements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In November&nbsp;2005, the FASB issued FSP 115-1, &#147;The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments&#148; nullifies the guidance in EITF 03-1, &#147;The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,&#148; on determining whether
an impairment of a security is other than temporary (including guidance on the investor&#146;s ability
and intent to hold investments, the severity of the impairment, the duration of the impairment, and
the forecasted recovery of fair value). FSP 115-1 shall be applied to reporting periods beginning
after December&nbsp;15, 2005, although earlier application of FSP 115-1 is permitted. We do not expect
a material impact on our financial position or on our results of operation upon the adoption of FSP
115-1 in 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December&nbsp;2004, the FASB issued SFAS No.&nbsp;123 (revised 2004), &#147;Share-Based Payment&#148; (SFAS
123(R)), which replaces SFAS No.&nbsp;123, &#147;Accounting for Stock-Based Compensation&#148; (SFAS 123) and
supersedes APB Opinion No.&nbsp;25, &#147;Accounting for Stock Issued to Employees.&#148; SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values, beginning with the first interim or annual
period after June&nbsp;15, 2005. The pro forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement recognition. Under SFAS 123(R), we must
determine the appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used at date of adoption.
The transition methods include prospective and retroactive adoption options. Under the
retroactive method, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires that compensation expense
be recorded for all unvested stock options and restricted stock at the beginning of the first
quarter of adoption of SFAS 123(R), while the retroactive method would record compensation expense
for all unvested stock options and restricted stock beginning with the first period restated. We
have adopted the provisions of SFAS No.&nbsp;123(R) under the prospective method using the Black-Scholes
option pricing model beginning January&nbsp;1, 2006.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SFAS No.&nbsp;154, &#147;Accounting Changes and Error Corrections,&#148; a replacement of Accounting
Principles Board Opinion No.&nbsp;20 and SFAS No.&nbsp;3, &#147;Reporting Accounting Changes in Interim Financial
</DIV>



<P align="center" style="font-size: 10pt">69
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Statements,&#148; was issued in June&nbsp;2005. SFAS No.&nbsp;154 requires retrospective application to
financial statements of prior periods for changes in accounting principles that are not adopted
prospectively. This statement is effective January&nbsp;1, 2006. The application of this standard had
no impact on our 2005 consolidated financial statements.
</DIV>

<DIV align="left">
<A name="108"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;6. Directors, Senior Management and Employees</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Directors and Senior Management</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The names of our current directors and executive officers, their ages and the principal
positions with Linktone held by them, as of May&nbsp;31, 2006, are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="34%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="34%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Age</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Position</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Class</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Term of Office</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Mark Begert
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">34</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">I
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3&nbsp;years</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">David C. Wang (2)(3)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">62</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">I
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3&nbsp;years</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Thomas Hubbs (1)(2)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">61</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">II
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3&nbsp;years</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Elaine La Roche (1)(2)(3)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">56</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chairperson of the Board
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">II
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3&nbsp;years</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Michael Guangxin Li (4)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">39</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">II
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3&nbsp;years</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Jun Wu (3)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">34</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">III
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3&nbsp;years</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Derek Sulger (1)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">34</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">III
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3&nbsp;years</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Colin Sung (4)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">40</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Acting Chief Executive
Officer and Chief
Financial Officer</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Member of audit committee.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Member of compensation committee.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>Member of nominating committee.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(4)</TD>
    <TD>&nbsp;</TD>
    <TD>Mr.&nbsp;Sung served as our acting Chief Executive Officer from February&nbsp;2006 until
April&nbsp;2006, at which time Mr.&nbsp;Li was appointed as our Chief Executive Officer.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our Amended and Restated Memorandum and Articles of Association provide for the division of
the board of directors into three classes: Class&nbsp;I directors (currently Mark Begert and David C.
Wang), Class&nbsp;II directors (currently Elaine La Roche, Thomas Hubbs and Michael Guangxin Li) and
Class&nbsp;III directors (currently Jun Wu and Derek Sulger). The current terms of the Class&nbsp;I, II and
III directors expire upon the election and qualification of directors at the annual general
meetings to be held on 2008, 2006 and 2007, respectively. At each annual general meeting,
directors who are elected will serve a three-year term until such director&#146;s successor is elected
and is duly qualified, or until such director&#146;s earlier death, bankruptcy, insanity, resignation or
removal. There are no family relationships among any of the directors or executive officers of our
company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Biographical Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Mark Begert </I>served as our Chief Financial Officer from April&nbsp;2001 when our affiliated business
division, which focused on wireless data software, was spun-off to a newly established holding
company, Intrinsic Technology, until May&nbsp;2005. He has served on our board since September&nbsp;2005.
Previously, he managed the corporate finance, investor relations and corporate communications
departments of Intrinsic Technology from May&nbsp;2000 to April&nbsp;2001. From June&nbsp;1994 until May&nbsp;2000, Mr.
Begert was a Vice President and manager in the fixed income capital markets group of Merrill Lynch.
Mr.&nbsp;Begert graduated cum laude from Harvard University with a Bachelor of Arts degree.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>David C. Wang </I>has served on our board since February&nbsp;2004. Since November&nbsp;2002, he has worked
as the President of Boeing China where he leads Boeing&#146;s growth and localization in the region. Prior to
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">joining Boeing, he worked at General Electric for more than 20&nbsp;years, most recently as
Chairman and Chief Executive Officer of General Electric China and as a member of the corporate
business development group. Mr.&nbsp;Wang graduated magna cum laude from St. Louis University with a
Bachelor of Science degree in Electrical Engineering and holds a Master of Science degree in
Electrical Engineering from the University of Missouri.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Thomas Hubbs </I>has served on our board since February&nbsp;2004. He is an Executive Vice President
and the Chief Financial Officer of Bytemobile, Inc., a Silicon Valley-based mobile technology
company, where he has worked since October&nbsp;2001. From October&nbsp;1998 to August&nbsp;2001, he worked at
InterWave Communications International, Ltd., a provider of wireless microcellular network
equipment, as an Executive Vice President and Chief Financial Officer of the company. He currently
serves on the Board of Directors of DCL Corporation and Provista Software International, Inc. Mr.
Hubbs graduated from Lehigh University with a Bachelor of Science in Business Administration and
received a Masters of Business Administration from the University of Santa Clara.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Elaine La Roche </I>has served on our board since February&nbsp;2004. Ms.&nbsp;La Roche currently serves as
an independent director of China Construction Bank and sits on its Audit, Nomination and Strategy
committees. From 2005 to 2006, she was a financial executive at Cantor Fitzgerald, a global
interdealer broker. From June&nbsp;2000 until April&nbsp;2005, Ms.&nbsp;La Roche was the Chief Executive Officer
of Salisbury Pharmacy Group, which is in the business of acquiring, restructuring and operating
independent community pharmacies in the Northeastern United States. From February&nbsp;1998 to June
2000, Ms.&nbsp;La Roche was seconded from Morgan Stanley to serve as the Chief Executive Officer of
China International Capital Corporation, a joint venture investment bank in the People&#146;s Republic
of China in which Morgan Stanley is a primary shareholder. Prior to that, she worked at Morgan
Stanley from May&nbsp;1978 to February&nbsp;1998, including as a Managing Director since 1987 where she
served in various capacities including as Chief of Staff to the Chairman and President of Morgan
Stanley. Ms.&nbsp;La Roche graduated from Georgetown University School of Foreign Service with a degree
in International Affairs and from the American University with a Masters of Business Administration
in finance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Michael Guangxin Li </I>has served on our board since February&nbsp;2006 and as our Chief Executive
Officer since April&nbsp;2006. Previously, he served as our Chief Operating Officer from March&nbsp;2003
until January&nbsp;2006. From August&nbsp;2000 until February&nbsp;2003, he was Senior Vice President of
Operations and Strategy at Newpalm (China) Information Technology Co., Ltd., a wireless value-added
service provider in China. Prior to that, he worked as an associate at Mercer Management
Consulting, a corporate strategy and operations consulting firm, from August&nbsp;1999 to August&nbsp;2000
and as a sales manager and director at IBM in China from August&nbsp;1991 to June&nbsp;1997. Mr.&nbsp;Li graduated
from Beijing University with a degree in Mechanical Engineering and from the Wharton School,
University of Pennsylvania, with a Masters of Business Administration.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Jun Wu </I>has served as a director since April&nbsp;2001. Mr.&nbsp;Wu is one of our founders and served as
Chairman of our Board before our initial public offering in March&nbsp;2004. From November&nbsp;1999 until
November&nbsp;2002, Mr.&nbsp;Wu was also the Chief Executive Officer and Chairman of the Board of Intrinsic
Technology, a wireless data software developer in China. Prior to 1999, he was the Chief Systems
Architect for Sendit AB, a Swedish-based mobile messaging company until May&nbsp;1999. Mr.&nbsp;Wu received
a first degree in Computer Science from the Imperial College of Science and Technology at the
University of London.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Derek Sulger </I>served as a director from November&nbsp;1999 until November&nbsp;2002, and has served again
as a director since July&nbsp;2003. Mr.&nbsp;Sulger serves as Executive Director and Chief Financial Officer
of SmartPay Jieyin Ltd., a Shanghai-based mobile payment technology company which he co-founded.
He also serves as the co-chairman of Lunar Group, an investment holding company which was the
original
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">investor in our company. Mr.&nbsp;Sulger is one of our founders and served as Executive
Director and Chief Financial Officer of our company from December&nbsp;1999 through April&nbsp;2001. From
April&nbsp;2001 through September&nbsp;2002, he served as Executive Director and Chief Operating Officer of
Intrinsic Technology, a wireless data software concern which was spun off from our company. From
July&nbsp;1993 until April&nbsp;2000, he worked at Goldman Sachs in London and New York, most recently as an
Executive Director in the Fixed Income, Currency and Commodities Division. Mr.&nbsp;Sulger graduated
cum laude from Harvard University with a Bachelor of Arts degree.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Colin Sung </I>has served as our Chief Financial Officer since June&nbsp;2005. He also served as our
acting Chief Executive Officer from February&nbsp;2006 until April&nbsp;2006. From June&nbsp;2004 until April
2005, Mr.&nbsp;Sung served as corporate controller of UTI, United States, Inc., a subsidiary of
International Freight Forwarder, which is listed on The Nasdaq National Market. From August&nbsp;2001
until May&nbsp;2004, he was the Vice President of Finance and Corporate Controller of USF Worldwide,
Inc., a subsidiary of USFreightways, which is listed on The Nasdaq National Market and was acquired
by GPS Logistics in October&nbsp;2002. Mr.&nbsp;Sung has a Bachelor of Science degree from William Paterson
University and a Masters of Business Administration degree from American Intercontinental
University.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None of the directors or executive officers of our company were selected pursuant to
arrangements or understandings with our major shareholders, customers, suppliers or others.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Compensation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Compensation to our Directors</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2005, we paid an aggregate of $190,152 to our non-executive directors. In addition, we
granted stock options in 2005 under our 2003 Stock Incentive Plan, or the 2003 Plan, to our
directors as stated below:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000">Number of ordinary shares</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000">Name of Directors</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">underlying stock options</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Raymond Lei Yang</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Elaine La Roche</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">86,667</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">David C. Wang</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">86,667</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Thomas Hubbs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">86,667</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Mark Begert</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Derek Sulger</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Jun Wu</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Directors who are also employed by our company do not receive separate fees as our directors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All of our current directors have entered into indemnification agreements in which we agree to
indemnify, to the fullest extent allowed by Cayman law, our charter documents or other applicable
law, those directors from any liability or expenses, unless the liability or expense arises from
the director&#146;s own willful negligence or willful default. The indemnification agreements also
specify the procedures to be followed with respect to indemnification. We currently maintain
directors&#146; and officers&#146; liability insurance on behalf of our directors and officers.
</DIV>

<P align="center" style="font-size: 10pt">72
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Executive Officer Compensation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth certain information concerning compensation paid during 2005 to
our executive officers:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Long-Term</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Annual Compensation</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Compensation</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Ordinary Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>All Other</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Salary</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Bonus</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Underlying Options</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Compensation</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(US$)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(US$) (1)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(#)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(US$)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Colin Sung, Chief Financial Officer</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">133,333</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">20,000</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,000,000 </TD>
    <TD nowrap valign="top">(2)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">56,929 </TD>
    <TD nowrap valign="top">(4)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Raymond Lei Yang, former Chief
Executive Officer</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">266,667</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">500,000 </TD>
    <TD nowrap valign="top">(3)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">100,173 </TD>
    <TD nowrap valign="top">(4)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Michael Guangxin Li, former Chief
Operating Officer and current
Chief Executive Officer and
director (5)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">170,000</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">77,365 </TD>
    <TD nowrap valign="top">(4)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Mark Begert, former Chief
Financial Officer and director (6)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">190,987</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">28,839 </TD>
    <TD nowrap valign="top">(4)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Xin Ye, former Chief Technology
Officer (7)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">160,000</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&#151;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">82,478 </TD>
    <TD nowrap valign="top">(4)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>The bonus amount earned was based upon our company&#146;s achievement of certain
corporate financial performance goals and designated individual goals
established during the fiscal year.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>These options have an exercise price of US$0.676 and expire on May&nbsp;2, 2015.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>These options have an exercise price of US$1.038 and expire on December&nbsp;31, 2015.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(4)</TD>
    <TD>&nbsp;</TD>
    <TD>Consists of expenses paid to the executive officer for housing allowance,
transportation, education and health insurance expenses and tax advisory
expenses.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(5)</TD>
    <TD>&nbsp;</TD>
    <TD>Mr.&nbsp;Li was appointed to serve as our Chief Executive Officer in April&nbsp;2006.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(6)</TD>
    <TD>&nbsp;</TD>
    <TD>Mr.&nbsp;Begert served as our Chief Financial Officer until May&nbsp;2005. His
compensation during 2005 includes certain severance benefits.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(7)</TD>
    <TD>&nbsp;</TD>
    <TD>Mr.&nbsp;Ye served as our chief Technology Officer until February&nbsp;2006.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Full-time employees of our company and our subsidiaries in China also participate in a
government-mandated multi-employer defined contribution plan pursuant to which pension benefits,
medical care, unemployment insurance and other welfare benefits are provided to those employees.
The total provision for such employee benefits, corresponding to the full amount of our company&#146;s
obligation in connection therewith was $1.3&nbsp;million for 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Employment Agreements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>General</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have entered into employment and related agreements with Colin Sung and Michael Guangxin
Li. The employment agreements with Mr.&nbsp;Sung and Mr.&nbsp;Li provide that neither Mr.&nbsp;Sung nor Mr.&nbsp;Li
will be entitled to receive severance benefits if he resigns other than for a good reason or is
discharged by us for cause. However, if Mr.&nbsp;Sung or Mr.&nbsp;Li is terminated without cause or resigns
for good reason, we are obligated to provide severance benefits to him. The term &#147;cause&#148; includes
actions by the officer involving:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a crime involving dishonesty, breach of trust or physical harm to any person,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>conduct which is in bad faith and materially injurious to the company,
including misappropriation of trade secrets, fraud or embezzlement,</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">73
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a material breach of the employment agreement or its related agreements,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>refusal to follow or implement a company directive, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>malfeasance or other similar conduct.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The term &#147;good reason&#148; includes:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a material reduction in the employee&#146;s monthly base salary, or</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>relocation of the officer&#146;s principal place of employment by more than 50 miles.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The severance benefits to which Mr.&nbsp;Sung and Mr.&nbsp;Li are entitled upon termination without
cause or resignation for a good reason include a payment by us equal to: (a)&nbsp;his then-current
monthly base salary multiplied by six plus the number of years between May&nbsp;2, 2005 and the
termination date, in the case of Mr.&nbsp;Sung, or (b)&nbsp;his then-current monthly base salary multiplied
by six plus the number of years between April&nbsp;3, 2006 and the termination date, in the case of Mr.
Li. Each of Mr.&nbsp;Sung and Mr.&nbsp;Li is also entitled to exercise his stock options which have vested
at the time of his termination without cause or resignation for good reason.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If a change of control occurs with respect to our company and Mr.&nbsp;Sung or Mr.&nbsp;Li is terminated
without cause or resigns for good reason, we will be obligated, in addition to the severance
benefits described in the preceding paragraph, to pay to Mr.&nbsp;Sung or Mr.&nbsp;Li (as the case may be) an
amount equal to the greater of (a)&nbsp;six times his then-current monthly base salary, or (b)&nbsp;12 times
his then-current monthly base salary, less any compensation paid to him during the period between
the change of control and the termination date. If a change of control occurs, we will also be
obligated to pay health and life insurance premiums for the greater of six months or the number of
months between the termination date and the first anniversary of the change in control.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Proprietary Rights and Information and Non-competition Agreements</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under proprietary rights and information agreements, each of Mr.&nbsp;Li and Mr.&nbsp;Sung has agreed,
among other things, to assign all rights in company-related inventions to us, and to keep our
proprietary information confidential. Under non-competition agreements, each of Mr.&nbsp;Li and Mr.
Sung is prohibited from directly or indirectly (i)&nbsp;being employed by or participate in the
management or operation of any business or entity that is or may be directly competitive with and
offering similar products or services as us, for a period of one year after termination of
employment for any reason, (ii)&nbsp;soliciting for employment any person who was employed by us during
his employment with us, for a period of two years after termination of employment for any reason or
(iii)&nbsp;working for any customer or potential customer of ours during his employment with us, for a
period of two years after termination of employment for any reason.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Option Grants in Last Fiscal Year</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth information regarding stock options granted to our current
Chief Financial Officer, former Chief Executive Officer, former Chief Operating Officer (who is now
our Chief Executive Officer), former Chief Technology Officer, and former Chief Financial Officer
during 2005:
</DIV>

<P align="center" style="font-size: 10pt">74
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="23%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="19" style="border-bottom: 1px solid #000000"><B>Individual Grants</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Ordinary</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>% of Total</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Options</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Potential Realizable Value at</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Underlying</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Granted to</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Assumed Annual Rate of Stock</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Options</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Employees in</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Exercise</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Price Appreciation for Option</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Granted</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Fiscal Year (1)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Price (2)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Date of Grant</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Date of Expiration</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>Term (3)</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>5%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>10%</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Colin Sung</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">14.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="right">US$</TD>
    <TD align="right">0.676</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">May 2, 2005</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center">May 2, 2015</TD>
    <TD>&nbsp;</TD>
    <TD align="right">US$</TD>
    <TD align="right">145,682</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">US$</TD>
    <TD align="right">313,732</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Raymond Lei Yang</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">7.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="right">US$</TD>
    <TD align="right">1.038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>December 31, 2005</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center" nowrap>December 31, 2015</TD>
    <TD>&nbsp;</TD>
    <TD align="right">US$</TD>
    <TD align="right">111,848</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">US$</TD>
    <TD align="right">240,868</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Michael Guangxin Li</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Xin Ye</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Mark Begert</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Based on a total of 7,022,900 options granted to our employees in 2005, including options
granted to the executive officers, but excluding all options which were granted and terminated
in that same year.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>The exercise price per share of options granted represented the fair market value of the
underlying shares of ordinary shares on the date the options were granted.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>The potential realizable value is calculated based upon the term of the option at its time of
grant. It is calculated assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the option, and that the
option is exercised and sold on the last day of its term for the appreciated stock price. The
appreciated stock prices used in these calculations do not represent our projections or
estimates of the price of our ordinary shares or ADSs. Tax consequences relating to stock
option transactions have not been taken into account.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth certain information with respect to stock options exercised by
the executive officers during 2005. In addition, the table sets forth the number of shares covered
by stock options as of December&nbsp;31, 2005, and the value of &#147;in-the-money&#148; stock options, which
represents the difference between the exercise price of a stock option and the market price of the
shares subject to such option on December&nbsp;31, 2005. The closing price of our ADSs as reported on
the Nasdaq National Market on December&nbsp;30, 2005 was $10.38.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Number of Ordinary Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Ordinary</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Underlying Unexercised</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Value of Unexercised</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Value</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>Options at</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>In-the-Money Options at</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Acquired on</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Realized</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>December 31, 2005 (#)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>December 31, 2005 (US$)</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Exercise</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(US$)(1)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Exercisable</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Unexercisable</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Exercisable</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Unexercisable</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Colin Sung</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,000,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">362,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Raymond Lei Yang</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,008,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,228,842</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">661,458</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,054,616</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Michael Guangxin Li</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">948,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,242,071</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80,729</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,135,426</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Xin Ye</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">660,417</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">639,583</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">173,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">159,850</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Mark Begert</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,997,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,866,976</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,150,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,072,800</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">400</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>The value realized upon the exercise of stock options represents the positive spread between
the exercise price of stock options and the fair market of the shares subject to such options
on the exercise date.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Summary of Stock Plans</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>2003 Stock Incentive Plan</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our board of directors and shareholders adopted our 2003 Plan in November&nbsp;2003. Under the 2003
Plan, we may grant awards (as defined below), including incentive stock options (also known as
ISOs) within the meaning of Section&nbsp;422 of the U.S. Internal Revenue Code of 1986, as amended, or
the Code, to qualifying plan participants who are located in the U.S. or who are U.S. taxpayers. As
of December&nbsp;31, 2005, our board of directors had authorized the issuance of an aggregate of up to
24,364,724 of our ordinary shares under the 2003 Plan. A general description of the terms of the
2003 Plan is set forth below.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Types of Awards. </I>Awards that can be granted under the 2003 Plan consist of:
</DIV>


<P align="center" style="font-size: 10pt">75
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our ordinary shares,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>options to purchase our ordinary shares,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>dividend equivalent rights, the value of which is measured by the
dividends paid with respect to our ordinary shares,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>stock appreciation rights the value of which is measured by
appreciation in the value of our ordinary shares, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any other securities the value of which is derived from the value of
our ordinary shares and which can be settled for cash, our ordinary shares or
other securities or a combination of cash, our ordinary shares or other
securities.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Plan Administration. </I>The compensation committee of our board, pursuant to delegated authority,
currently administers the 2003 Plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Eligibility. </I>Under the 2003 Plan, awards may be issued to employees, directors or consultants
of our company or our subsidiaries, although ISOs may only be issued to our employees or the
employees of our subsidiaries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Acceleration of Awards upon Corporate Transactions or Changes in Control. </I>The 2003 Plan
provides for acceleration of awards upon the occurrence of specified corporate transactions or
changes in control. In the event of certain corporate transactions, including specified types of
reorganizations and acquisition transactions, each outstanding award granted under the 2003 Plan
will automatically become fully vested and exercisable and be released from any restrictions on
transfer (other than transfer restrictions applicable to the award) and repurchase or forfeiture
rights immediately prior to the specified effective date of the corporate transaction, unless the
award is assumed by the successor company or its parent company in connection with the corporate
transaction. Upon consummation of the corporate transaction, each outstanding award will be
terminated unless the award is assumed by the successor company or its parent company. Assumed
options automatically become fully vested and exercisable if the grantee is terminated by the
successor company without cause within 12&nbsp;months of the corporate transaction.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the event of a change in control of our company (other than a change in control which is
also a specified corporate transaction described in the paragraph above), and upon the termination
of the continuous service of a grantee without cause by us or our related parties (including our
subsidiaries or other entities in which we or our subsidiaries hold a substantial ownership
interest) within 12&nbsp;months after such change in control, the grantee&#146;s awards will become fully
vested and exercisable and be released from any repurchase or forfeiture rights (other than
repurchase rights exercisable at fair market value).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Evergreen Provision. </I>The 2003 Plan includes a mechanism for an automatic annual increase in
the number of ordinary shares available under the plan equal to the lesser of 2.5% of the total
shares outstanding or 15,175,000 ordinary shares. This mechanism is known as an &#147;evergreen
provision.&#148; Pursuant to the evergreen provision, as of January&nbsp;2, 2006 the number of ordinary
shares available under the 2003 Plan was increased by 6,517,447 shares, resulting in a total of
30,882,171 shares authorized for issuance under the 2003 Plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Awards. </I>Awards under the 2003 Plan are evidenced by an award agreement which contains, among
other things, provisions concerning exercisability and forfeiture upon termination of employment or
consulting arrangement (by reason of death, disability, retirement or otherwise) as have been
determined by our board. In addition, in the case of stock options the award agreement also
specifies whether the option constitutes an ISO or a non-qualified stock option (also known as
NQSOs) and may,
but need not,
</DIV>

<P align="center" style="font-size: 10pt">76
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">include a provision whereby a grantee at any time during his or her employment with
us may exercise any part or all of the award prior to full vesting of the award.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Exercise Price and Term of Stock Options. </I>An option may be exercised when a holder delivers a
written notice of such exercise to us. The option price to exercise the option for our ordinary
shares must be paid at the time of exercise in full by cash, check or whole ordinary shares with a
fair market value at least equal to the option price (or in another appropriate manner approved by
us, such as in a combination of cash and whole ordinary shares or by cashless exercise of options
through a broker-dealer).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the 2003 Plan, the exercise price for the options is specified in the award agreement
for those options. In any event, the exercise price of ISOs cannot be less than the fair market
value of our ordinary shares on the date of grant. However, in the case of an ISO granted to a
grantee, who, at the time the ISO was granted, owned stock possessing more than 10.0% of the
combined voting power of all classes of our share capital, the option price may not be less than
110.0% of the fair market value of our ordinary shares on the date of grant of such ISO. To the
extent that the aggregate fair market value of our ordinary shares subject to options granted as
ISOs under the 2003 Plan which become exercisable for the first time by a recipient during any
calendar year exceeds $100,000, then options represented by ordinary shares in excess of the
$100,000 limitation shall be treated as NQSOs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The exercise price for NQSOs is determined by the administrator of the 2003 Plan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The term of all ISOs and NQSOs will be stated in the applicable award agreement. The term of
an ISO cannot exceed 10&nbsp;years. In addition, the term of an ISO granted to a person, who, at the
time of grant, owns stock possessing more than 10.0% of the combined voting power of all classes of
our share capital, is limited to five years from the date of the grant of the award.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Our First Right of Refusal. </I>Holders of our ordinary shares issued upon the exercise of options
are obligated to first offer our company the right to purchase those ordinary shares before
selling, hypothecating, encumbering or otherwise transferring any of such ordinary shares. Our
first right of refusal will terminate upon the closing of this offering.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Termination of Service. </I>The period following the termination of a grantee&#146;s employment with us
during which the grantee can exercise his or her option, if any, will be provided in the award
agreement, and it cannot end later than the last day of the original term of the award. Any ISO
granted under the 2003 Plan, if not exercised within the time period provided by law for the
exercise of ISOs following the termination of a grantee&#146;s employment with us, shall automatically
convert to a NQSO thereafter.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Amendment or Termination of 2003 Plan. </I>Under the 2003 Plan, our board may at any time
terminate, suspend, or amend the 2003 Plan in any respect, except that no termination, suspension
or amendment will be effective without shareholder approval if such approval is required to comply
with any law, regulation or stock exchange rule and no such change may adversely affect any award
previously granted without the written consent of the recipient. The 2003 Plan will expire on the
tenth anniversary of the date that it was approved by the shareholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>2000-1 Employee Stock Option Scheme</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In November&nbsp;2003, our board of directors approved the 2000-1 Scheme which governs all of our
stock option grants outstanding as of that date for an aggregate of 29,991,700 ordinary shares. It
is anticipated that all future stock incentive awards will be granted pursuant to the 2003 Plan or
any other plan which is adopted from time to time. The 2000-1 Scheme is substantially identical to
the 2003 Plan in all material aspects, except for the following:
</DIV>

<P align="center" style="font-size: 10pt">77
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Awards. </I>Awards granted under the 2000-1 Scheme consist only of options for our ordinary
shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Evergreen Provision. </I>The 2000-1 Scheme does not contain an evergreen provision as described
above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Exercise Price. </I>NQSOs granted pursuant to the 2000-1 Scheme can have an exercise price of no
less than 85% of the fair market value of our ordinary shares on the date of grant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Acceleration of Awards upon Corporate Transactions or Changes in Control. </I>The 2000-1 Scheme&#146;s
provision for acceleration of the vesting of awards upon the occurrence of specific significant
corporate transactions does not depend on whether the options are assumed by the successor company
or its parent company. In addition, the vesting of awards will accelerate in the event of a change
in control of our company whether or not the grantee&#146;s continuous service is terminated without
cause by us or our related parties within 12&nbsp;months after such change in control.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Board Practices</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For information regarding the terms of our current directors and the period during which our
officers and directors have served in their respective positions, please refer to Item&nbsp;6.A.
&#147;Directors and Senior Management&#148; above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During 2005, our board of directors met in person or passed resolutions by unanimous written
consent 11 times. All of the directors who were serving in office during 2005 attended at least
75% of all the meetings of our board of directors and its committees on which such director served
after becoming a member of our board of directors. We have no specific policy with respect to
director attendance at our annual general meetings of shareholders, and one of our directors
attended the annual general meeting of shareholders held on September&nbsp;7, 2005. Our board has
determined that a majority of our board of directors members, namely Messrs.&nbsp;Hubbs, Sulger, Wang,
Wu and Ms.&nbsp;La Roche, are &#147;independent&#148; as that term is defined in Rule&nbsp;4200 of the listing
standards of the Marketplace Rules of the Nasdaq Stock Market, Inc. (&#147;Nasdaq&#148;).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board has three committees: the audit committee, the compensation committee and the
nominating committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The audit committee held 14 formal meetings in 2004. The members of the audit committee are
Thomas Hubbs (Chairperson), Elaine La Roche and Derek Sulger. The audit committee is composed
solely of non-employee directors, as such term is defined in Rule&nbsp;16b-3 under the Exchange Act and
our board of directors has determined that all members of the audit committee are &#147;independent&#148; as
that term is defined in Rule&nbsp;4200(a)(15) of the Marketplace Rules of Nasdaq. The Board has further
determined that Mr.&nbsp;Hubbs is an &#147;audit committee financial expert&#148; as defined by Item&nbsp;16A. of Form
20-F.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The board of directors has adopted a written audit committee charter pursuant to which the
audit committee is responsible for overseeing the accounting and financial reporting processes of
our company, including the appointment, compensation and oversight of the work of our independent
auditors, monitoring compliance with our accounting and financial policies and evaluating
management&#146;s procedures and policies relative to the adequacy of our internal accounting controls.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The compensation committee met in person or passed resolutions by unanimous written consent
eight times in 2005. The members of the compensation committee are Elaine La Roche (Chairperson),
David C. Wang and Thomas Hubbs. The compensation committee&#146;s functions are to review and make
</DIV>

<P align="center" style="font-size: 10pt">78
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">recommendations to our board regarding our compensation policies and all forms of compensation to
be provided to our executive officers and directors. In addition, the compensation committee
reviews bonus and stock compensation arrangements for all of our other employees.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No interlocking relationships have existed between our board of directors or compensation
committee and the board of directors or compensation committee of any other company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The nominating committee held one meeting in 2005. The members of the nominating committee
are Jun Wu, Elaine La Roche and David C. Wang. The nominating committee&#146;s functions are to monitor
the size and composition of our board of directors and consider and make recommendations to our
board of directors with respect to the nomination or election of directors. The nominating
committee will consider and make recommendations to our board of directors regarding any
shareholder recommendations for candidates to serve on our board of directors. The nominating
committee will review periodically whether a more formal policy should be adopted. Shareholders
wishing to recommend candidates for consideration by the nominating committee may do so by writing
to the Vice President of Legal Affairs of Linktone Ltd. at 5/F, Eastern Tower, No.&nbsp;689, Beijing
Dong Road, Shanghai, 200001, People&#146;s Republic of China, providing the candidate&#146;s name,
biographical data and qualifications, a document indicating the candidate&#146;s willingness to act if
elected, and evidence of the nominating shareholder&#146;s ownership of our company&#146;s ordinary shares or
ADSs at least 120&nbsp;days prior to the next annual general meeting to assure time for meaningful
consideration by the nominating committee. There are no differences in the manner in which the
nominating committee evaluates nominees for director based on whether the nominee is recommended by
a shareholder. The company currently does not pay any third party to identify or assist in
identifying or evaluating potential nominees.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Employees</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2003, 2004 and 2005, we had 234, 518 and 825 full-time employees,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table summarizes the functional distribution of our full-time employees as of
December&nbsp;31, 2003, 2004 and 2005:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Department</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Business Development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Customer Research</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Customer Service</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">84</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Finance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Human Resources</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Investor Relations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Legal and Administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Sales and Marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">196</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Product Development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">64</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">312</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Technical Support</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">122</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">148</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">234</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">518</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">825</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our product development and other departments also included three part-time content editors
and seven service professionals as of December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None of our personnel are represented under collective bargaining agreements. We consider our
relations with our employees to be good.
</DIV>

<P align="center" style="font-size: 10pt">79
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>E. Share Ownership</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth certain information known to us with respect to the beneficial
ownership as of March&nbsp;31, 2006 by:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>all persons who are beneficial owners of five percent or more of our ordinary shares,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>our current executive officers and directors, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>all current directors and executive officers as a group.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of March&nbsp;31, 2006, 257,241,700 of our ordinary shares were outstanding. The amounts and
percentages of ordinary shares beneficially owned are reported on the basis of regulations of the
SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC,
a person is deemed to be a &#147;beneficial owner&#148; of a security if that person has or shares &#147;voting
power,&#148; which includes the power to vote or to direct the voting of such security, or &#147;investment
power,&#148; which includes the power to dispose of or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities of which that person has a right
to acquire beneficial ownership within 60&nbsp;days. Under these rules, more than one person may be
deemed a beneficial owner of securities as to which such person has no economic interest. To our
company&#146;s knowledge and unless otherwise indicated in the footnotes that follow, the parties named
below have sole voting and dispositive powers over the shares beneficially owned by them.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>Number of Ordinary Shares</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Beneficially Owned</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Name and Address of Beneficial Owners</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Percentage</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>5% or more shareholders</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Merry Asia Limited (1)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,865,549</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">13.2</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">FMR Corporation (2)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,380,420</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">10.3</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">RS Investment Management, L.P. (3)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,017,487</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">10.5</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Munder Capital Management (4)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,548,160</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">6.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Executive Officers, Directors and Director Nominees (5)</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Colin Sung (6)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">250,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">*</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Michael Guangxin Li</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">*</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Mark Begert (7)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,505,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">2.5</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Elaine La Roche (8)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">*</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Thomas Hubbs (9)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">140,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">*</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">David C. Wang (10)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">170,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">*</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Jun Wu (11)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,205,549</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">13.3</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Derek Sulger (12)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,533,921</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">3.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">All current directors, director nominees and executive
officers as a group (8 persons) (13)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,919,570</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">19.8</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Merry Asia Limited is a British Virgin Islands company which is 100%
owned by one of our directors, Jun Wu. Its address is c/o Haw
Technology Ltd., 18A1 Han Wei Plaza, 7 Guang Hua Road, Chao Yang
District, Beijing, 100004, People&#146;s Republic of China.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 14,555,740 ordinary shares held by Fidelity Management Trust
Company, 6,753,000 ordinary shares held by Fidelity New Millennium
Fund and 5,071,680 ordinary shares held by Fidelity International
Limited, which are affiliated with FMR Corporation. This information
is as of March&nbsp;31,</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">80
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">





<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>2006 and is based upon reports on Schedule&nbsp;13F
filed by Fidelity Management Trust Company and Fidelity International
Limited with the Securities and Exchange Commission. We have no
further information regarding the beneficial ownership of FMR
Corporation. The address of FMR Corporation is 82 Devonshire Street,
Boston, MA 02109.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 5,860,490 ordinary shares held by RS Emerging Growth Fund,
5,817,000 ordinary shares held by RS Diversified Growth Fund and
1,819,407 ordinary shares held by RS Internet Age Fund. RS Investment
Management, L.P. is the investment adviser for each of RS Emerging
Growth Fund, RS Diversified Growth Fund and RS Internet Age Fund.
This information is as of March&nbsp;31, 2006 and is based upon a report on
Schedule&nbsp;13F filed by RS Investment Management, L.P. with the
Securities and Exchange Commission. We have no further information
regarding the beneficial ownership of RS Investment Management, L.P.
The address of RS Investment Management, L.P. is 388 Market Street,
Suite&nbsp;1700, San Francisco, CA 94111.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(4)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 10,080,000 ordinary shares held by Comerica Bank, 2,890,000
ordinary shares held by Munder Internet Fund, 1,462,156 ordinary
shares held by Munder Micro-Cap Equity Fund and 1,116,004 ordinary
shares held by Aegon/Transamerica Series&nbsp;Trust-Munder Net50. Munder
Capital Management, which is majority owned by Comerica, Inc., is the
investment adviser for Munder Internet Fund and Munder Micro-Cap
Equity Fund and an investment sub-adviser for Aegon/Transamerica
Series&nbsp;Trust-Munder Net50. This information is as of March&nbsp;31, 2006
and is based upon a report on Schedule&nbsp;13F filed by Munder Capital
Management with the Securities and Exchange Commission. We have no
further information regarding the beneficial ownership of Munder
Capital Management. Munder Capital Management&#146;s address is 480 Pierce
Street, Birmingham, MI 48009.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(5)</TD>
    <TD>&nbsp;</TD>
    <TD>The address of our current executive officers and directors is c/o
Linktone Ltd., 5/F, Eastern Tower, No.&nbsp;689 Beijing Dong Road,
Shanghai, 200001, People&#146;s Republic of China.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(6)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes stock options to acquire an aggregate of 250,000 ordinary
shares, which are exercisable within 60&nbsp;days of March&nbsp;31, 2006, with
an exercise price of $0.676 per share and an expiration date of May&nbsp;2,
2015.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(7)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 5,305,200 ordinary shares held by Mr.&nbsp;Begert and 499,900
ordinary shares held by Mudhouse Trust of which Mr.&nbsp;Begert and his
spouse, Leslie Omana Begert, are the sole grantors and grantees. Also
includes stock options to acquire an aggregate of 700,000 ordinary
shares, which are exercisable within 60&nbsp;days of March&nbsp;31, 2006, with
an exercise price of $0.072 per ordinary share and an expiration date
of March&nbsp;1, 2011.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(8)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 15,000 ordinary shares held by Ms.&nbsp;La Roche.
Also includes stock options to acquire an aggregate of
100,000 ordinary shares which are exercisable within
60&nbsp;days of March&nbsp;31, 2006. The options have the
following features: (i)&nbsp;33,333 of the options have an
exercise price of $1.40 per ordinary share and an
expiration date of March&nbsp;3, 2014 and (ii)&nbsp;66,667 of
the options have an exercise price of $1.018 per
ordinary share and an expiration date of December&nbsp;1,
2015.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(9)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 40,000 ordinary shares held by the Hubbs
Family Trust, a revocable family trust, of which Mr.
Hubbs and his spouse, Helen K. Hubbs, are the
trustees. Also includes stock options to acquire an
aggregate of 100,000 ordinary shares which are
exercisable within 60&nbsp;days of March&nbsp;31, 2006. The
options have the following features: (i)&nbsp;33,333 of the
options have an exercise price of $1.40 per ordinary
share and an expiration date of March&nbsp;3, 2014; and
(ii)&nbsp;66,667 of the options have an exercise price of
$1.018 per ordinary share and an expiration date of
December&nbsp;1, 2015.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(10)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 70,000 ordinary shares held by David Wang &#038;
Darlene Wang TTE, Revocable Living Trust. Also
includes stock options to acquire an aggregate of
100,000 ordinary shares which are exercisable within
60&nbsp;days of March&nbsp;31, 2006. The options have the
following features: (i)&nbsp;33,333 of the options have an
exercise price of $1.40 per ordinary share and an
expiration date of March&nbsp;3, 2014; and (ii)&nbsp;66,667 of
the options have an exercise price of $1.018 per
ordinary share and an expiration date of December&nbsp;1,
2015.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(11)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 33,865,549 ordinary shares held by Merry Asia
Limited which is 100% owned by Mr.&nbsp;Wu. Also includes
stock options held by Mr.&nbsp;Wu to acquire an aggregate
of 340,000 ordinary shares which</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt">81
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">





<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>are exercisable
within 60&nbsp;days of March&nbsp;31, 2006. The options have
the following features: (i)&nbsp;90,000 of the options have
an exercise price of $0.0985 per ordinary share and an
expiration date of June&nbsp;1, 2010; and (ii)&nbsp;250,000 of
the options have an exercise price of $0.0985 per
ordinary share and an expiration date of June&nbsp;1, 2011.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(12)</TD>
    <TD>&nbsp;</TD>
    <TD>Includes 50,000 ordinary shares held by Mr.&nbsp;Sulger.
Also includes 68,510 ordinary shares held by Lunar
Group Stokenchurch Partners I LLC (&#147;Lunar
Stokenchurch&#148;), a Delaware limited liability company,
of which Sulger Foundation (USA)&nbsp;Trust (&#147;Sulger
Foundation&#148;), a Delaware trust established by Mr.
Sulger for the benefit of his family, holds a 0.10%
ownership interest therein and Sulger Trust (&#147;Sulger
Trust&#148;), a Delaware trust established by Michelle
Leung Sulger, Mr.&nbsp;Sulger&#146;s wife, for the benefit of
her family, holds a 99.90% ownership interest therein.
Also includes 9,075,411 ordinary shares held by
Cassia Finance Investment Incorporated (&#147;Cassia&#148;), a
company incorporated under the laws of the British
Virgin Islands, of which Sulger Trust holds 100%
ownership interest therein. As investment advisor of
Lunar Stokenchurch and Cassia, Mr.&nbsp;Sulger may, for
purposes of Rule&nbsp;13d-3 under the Securities Exchange
Act of 1934, as amended, be deemed to own beneficially
the ordinary shares held by Lunar Stokenchurch and
Cassia due to his voting and dispositive power over
the shares. Mr.&nbsp;Sulger disclaims beneficial ownership
of shares held by Michelle Leung Sulger, Cassia and
Lunar Stokenchurch, except to the extent of his
pecuniary interest therein. Also includes stock
options held by Mrs.&nbsp;Sulger to acquire an aggregate of
340,000 ordinary shares which are exercisable within
60&nbsp;days of March&nbsp;31, 2006. The options have the
following features: (i)&nbsp;90,000 of the options have an
exercise price of $0.0985 per ordinary share and an
expiration date of June&nbsp;1, 2010 and (ii)&nbsp;250,000 of
the options have an exercise price of $0.0985 per
ordinary share and an expiration date of June&nbsp;1, 2011.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(13)</TD>
    <TD>&nbsp;</TD>
    <TD>This amount also includes 1,930,000 ordinary shares
subject to stock options currently exercisable or
exercisable within 60&nbsp;days of March&nbsp;31, 2006 and
33,865,549 ordinary shares held by Merry Asia Limited.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of March&nbsp;31, 2006, based on public filings with the SEC, there are no major shareholders
holding 5% or more of our ordinary shares or ADSs representing ordinary shares, except as described
above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of April&nbsp;18, 2006, approximately 912,294 of our ordinary shares were held by 20 U.S.
holders of record, excluding shares held by our ADS depositary bank, The Bank of New York, on
behalf of our ADS holders. On that date, approximately 7,262,993 ADSs outstanding were held by
approximately 3,442 U.S. holders of record.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our company&#146;s major shareholders do not have different voting rights from each other or other
shareholders of our company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To our knowledge, except as disclosed above, we are not owned or controlled, directly or
indirectly, by another corporation, by any foreign government or by any other natural or legal
person or persons, severally or jointly.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To our knowledge, there are no arrangements the operation of which may at a subsequent date
result in us undergoing a change in control.
</DIV>
<DIV align="left">
<A name="109"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;7. Major Shareholders and Related Party Transactions</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Major Shareholders</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Please refer to Item&nbsp;6.E. &#147;Directors, Senior Management and Employees &#151; Share Ownership.&#148;
</DIV>

<P align="center" style="font-size: 10pt">82
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Related Party Transactions</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Item&nbsp;4.A. of this annual report under the headings &#147;History and Development of the
Company&#148; and &#147;Recent Developments&#148; and Item&nbsp;5 of this annual report under the headings &#147;Our
Corporate Structure&#148; and &#147;Arrangements with Consolidated Affiliates&#148; for information regarding our
corporate structure and our arrangements with our consolidated affiliates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our primary internal source of funds is dividend payments from Linktone Consulting, Shanghai
Huitong, Linktone Internet, Linktone Software, Brilliant and Wang You. Under current Chinese tax
regulations, dividends paid to us from Chinese entities are not subject to Chinese income or
withholding tax. However, Chinese legal restrictions permit payment of dividends only out of net
income as determined in accordance with Chinese accounting standards and regulations. Under
Chinese law, Linktone Consulting, Shanghai Huitong, Linktone Internet, Linktone Software and Wang
You are also required to set aside a portion of their net income each year to fund certain reserve
funds. These reserves are not distributable as cash dividends. Dividends paid to us by Brilliant,
which was incorporated in the British Virgin Islands, are not subject to tax.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Other Related Party Transactions</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In January&nbsp;2005, we entered into a cooperation agreement with Mitsubishi whereby we license
mobile entertainment content from Mitsubishi for distribution in the Chinese market. We pay
royalties equal to 45.0% of the net revenue generated from the sales of the entertainment content.
This agreement has a term of one year and is automatically renewable year to year unless otherwise
terminated by either party.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, we have entered into a shareholders&#146; agreement with Mitsubishi, Icon Ventures
Asia Limited, IP Fund One, L.P., Index Corp. and Cresciendo Investments Limited pursuant to which
such shareholders may require us at any time, subject to certain limitations, to register for
public sale all or any portion of our ordinary shares held by such shareholders so long as the
aggregate offering price of the registered securities is expected to be at least $10.0&nbsp;million. In
addition, such shareholders are entitled to require us to register their ordinary shares when we
register shares to be newly issued by us or to be sold by other shareholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Interests of Experts and Counsel</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="110"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;8. Financial Information</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Consolidated Statements and Other Financial Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Item&nbsp;18. &#147;Financial Statements&#148; for our audited consolidated financial statements filed as
part of this annual report.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>A.7 Legal Proceedings</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are not currently a party to any material litigation and are not aware of any pending or
threatened litigation.
</DIV>

<P align="center" style="font-size: 10pt">83
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>A.8 Dividend Policy</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have never declared or paid any cash dividends on our ordinary shares, but it is possible
that we may declare dividends in the future. We have historically retained earnings to finance
operations and the expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our financial condition,
operating results, capital requirements and such other factors as our board of directors deems
relevant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Significant Changes</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Item&nbsp;4.A. of this annual report under the heading &#147;Recent Developments&#148; and Item&nbsp;18. of
this annual report under the heading &#147;Financial Statements&#148; for information regarding significant
changes to us since December&nbsp;31, 2005.
</DIV>
<DIV align="left">
<A name="111"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;9. The Offer and Listing</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable except for Item&nbsp;9.A.4. and Item&nbsp;9.C.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;American Depositary Shares, or ADSs, each representing 10 of our ordinary shares, have been
listed on the Nasdaq National Market since March&nbsp;4, 2004. Our ADSs trade under the symbol &#147;LTON.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table provides the high and low prices for our ADSs on the Nasdaq National
Market for (1)&nbsp;each year since our initial public offering, (2)&nbsp;each quarter in the two most recent
financial years and the most recent quarter and (3)&nbsp;each of the most recent six months.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 0px solid #000000">Sales Price</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">High</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3">Low</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Annual highs and lows</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">2004 (March&nbsp;4, 2004 through December&nbsp;31, 2004)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">19.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">5.91</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">2005 (January&nbsp;1, 2005 through December&nbsp;31, 2005)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">11.57</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">6.00</TD>
    <TD>&nbsp;</TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Quarterly highs and lows</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">19.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">9.69</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">15.24</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7.37</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">12.13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">5.91</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">10.60</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7.01</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">8.53</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">6.72</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Second Quarter 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">8.95</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">6.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Third Quarter 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">11.28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7.65</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fourth Quarter 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">11.57</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">8.75</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">First Quarter 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">10.92</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">6.47</TD>
    <TD>&nbsp;</TD>
</TR>

<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Monthly highs and lows</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">December&nbsp;2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">10.80</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">9.45</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">January&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">10.92</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">8.36</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">February&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7.82</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">6.68</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">March&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">7.69</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">6.47</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">April&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">8.13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">6.80</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">May&nbsp;2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">8.44</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">6.75</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">84
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="112"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;10. Additional Information</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>A. Share Capital</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>B. Memorandum and Articles of Association</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Please see &#147;Description of Share Capital&#148; in our registration statement on Form F-1 filed on
February&nbsp;17, 2004, as amended, with the SEC.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>C. Material Contracts</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&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 in Item&nbsp;4. &#147;Information on the Company&#148; or elsewhere in this annual
report on Form 20-F.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Exchange Controls</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;China&#146;s government imposes control over the convertibility of Renminbi into foreign
currencies. Under the current unified floating exchange rate system, the People&#146;s Bank of China
publishes a daily exchange rate for Renminbi, or the PBOC Exchange Rate, based on the previous
day&#146;s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal
in foreign currency may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC Exchange Rate according to market conditions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January
29, 1996 and effective as of April&nbsp;1, 1996 (and amended on January&nbsp;14, 1997) and the Administration
of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July&nbsp;1,
1996 regarding foreign exchange control, or the Regulations, conversion of Renminbi into foreign
exchange by foreign investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors of joint ventures, is permissible. Foreign investment
enterprises are permitted to remit foreign exchange from their foreign exchange bank account in
China on the basis of, inter alia, the terms of the relevant joint venture contracts and the board
resolutions declaring the distribution of the dividend and payment of profits. Conversion of
Renminbi into foreign currencies and remittance of foreign currencies for capital account items,
including direct investment, loans and security investment, is still subject to the approval of
SAFE, in each such transaction. On January&nbsp;14, 1997, the State Council amended the Foreign Exchange
Control Regulations to provide, among other things, that the State shall not impose restrictions on
recurring international payments and transfers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Regulations, foreign investment enterprises are required to open and maintain
separate foreign exchange accounts for capital account items (but not for other items). In
addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies at
those banks authorized to conduct foreign exchange business upon the production of valid commercial
documents and, in the case of capital account item transactions, document approval from SAFE.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Currently, foreign investment enterprises are required to apply to SAFE for &#147;foreign exchange
registration certificates for foreign investment enterprises.&#148; With such foreign exchange
registration
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">certificates (which are granted to foreign investment enterprises upon fulfilling
specified conditions and which are subject to review and renewal by SAFE on an annual basis) or
with the foreign exchange sales
notices from the SAFE (which are obtained on a transaction-by-transaction basis),
foreign-invested enterprises may enter into foreign exchange transactions at banks authorized to
conduct foreign exchange business to obtain foreign exchange for their needs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, pursuant to regulations recently promulgated by SAFE, PRC subsidiaries of
offshore parent companies may be prohibited from making distributions of profits to such offshore
parent companies and from paying the offshore parent companies proceeds from any reduction in
capital, share transfer or liquidation in respect of such PRC subsidiaries, if PRC shareholders
with a direct or indirect stake in the offshore parent company fail to make the required SAFE
registrations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These new regulations require PRC residents to file with the competent SAFE offices
information about offshore companies in which they have directly or indirectly invested (including
with respect to investments already made as of the inception of the new regulation) and to make
follow-up filings in connection with certain material transaction involving such offshore
companies, such as mergers or acquisitions, capital increases or decreases, and external equity
investments or equity transfers. For additional information on the new SAFE regulations and the
related risks to our company, see Item&nbsp;3.D. &#147;Risk Factors &#151; Risks Related to Doing Business in
China &#151; Recent Chinese regulations relating to acquisitions of Chinese companies by foreign
entities may limit our ability to acquire Chinese companies and adversely affect the implementation
of our acquisition strategy as well as our business and prospects.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>E. Taxation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following summary of the material Cayman Islands and United States federal income tax
consequences relevant to the purchase, ownership or sale of our ADSs is based upon laws and
relevant interpretations thereof in effect as of the date of this annual report, all of which are
subject to change. The summary does not purport to be a comprehensive description of all of the
tax considerations that may be relevant to any particular investor depending on its individual
circumstances. Accordingly beneficial owners of shares should consult their own tax advisors
regarding the application of the considerations discussed below to their particular situations and
the consequences, including U.S. federal estate or gift tax laws, foreign, state, or local laws,
and tax treaties.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Cayman Islands Taxation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Cayman Islands currently levy no taxes on individuals or corporations based upon profits,
income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate
duty. There are no other taxes likely to be material to Linktone levied by the Government of the
Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands are not party
to any double tax treaties. There are no exchange control regulations or currency restrictions in
the Cayman Islands.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>United States Federal Income Taxation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a summary of material United States federal income tax consequences under
present law relating to the purchase, ownership, and disposition of the ordinary shares or ADSs.
This description does not provide a complete analysis of all potential tax consequences. The
information provided below is based on the Internal Revenue Code of 1986, as amended, or the Code,
Treasury Regulations, proposed Treasury Regulations, Internal Revenue Service, or the IRS,
published rulings and court decisions, all as of the date hereof. These authorities may change,
possibly on a retroactive basis, or the IRS might interpret the existing authorities differently.
In either case, the tax consequences of
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">purchasing, owning or disposing of ordinary shares or ADSs
could differ from those described below. We
do not intend to obtain a ruling from the IRS with respect to the tax consequences of acquiring or
holding the ordinary shares or ADSs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This description is general in nature and does not discuss all aspects of U.S. federal income
taxation that may be relevant to a particular investor in light of the investor&#146;s particular
circumstances, or to certain types of investors subject to special treatment under U.S. federal
income tax laws, such as:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>banks or financial institutions,</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>life insurance companies,</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>tax-exempt organizations,</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>dealers in securities or foreign currencies,</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>traders in securities that elect to apply a mark-to-market method of accounting,</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons holding ordinary shares or ADSs as part of a position in a &#147;straddle&#148;
or as part of a &#147;hedging,&#148; &#147;conversion&#148; or &#147;integrated&#148; transaction for U.S.
federal income tax purposes,</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons subject to the alternative minimum tax provisions of the Code, and</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons that have a &#147;functional currency&#148; other than the U.S. dollar.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This description generally applies to purchasers of the ordinary shares or ADSs as capital
assets. This description does not consider the effect of any foreign, state, local or other tax
laws that may be applicable to particular investors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Investors considering the purchase of ADSs should consult their own tax advisors regarding the
application of the U.S. federal income tax laws to their particular situations and the consequences
of U.S. federal estate or gift tax laws, foreign, state, or local laws, and tax treaties.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>U.S. Holders</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As used herein, the term &#147;U.S. Holder&#148; means a beneficial owner of ordinary shares or ADSs
that is:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a citizen or resident of the U.S. or someone treated as a U.S. citizen or resident for U.S. federal
income tax purposes;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a corporation or other entity taxable as a corporation for U.S. federal income tax purposes
organized in or under the laws of the U.S. or any political subdivision thereof;</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an estate the income of which is subject to U.S. federal income taxation regardless of its source; or</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a trust, if such trust validly elects to be treated as a U.S. person for U.S. federal income tax
purposes, or if (a)&nbsp;a court within the U.S. can exercise primary supervision over its administration
and (b)&nbsp;one or more U.S. persons have the authority to control all of the substantial decisions of
such trust.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If a partnership (including for this purpose any entity treated as a partnership for U.S. tax
purposes) is a beneficial owner of the ordinary shares or ADSs, the U.S. tax treatment of a partner
in the partnership will generally depend on the status of the partner and the activities of the
partnership. A holder of the ordinary shares or ADSs that is a partnership and partners in such
partnership should consult their individual tax advisors about the U.S. federal income tax
consequences of holding and disposing of the ordinary shares or ADSs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For U.S. federal income tax purposes, U.S. Holders of ADSs will be treated as owners of the
underlying shares represented by such ADSs.
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>If you are not a U.S. Holder, this subsection does not apply to you and you should refer to
&#147;Non-U.S. Holders&#148; below.</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Taxation of Dividends and Other Distributions on Ordinary Shares or ADSs</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subject to the passive foreign investment company rules discussed below, all distributions to
a U.S. Holder with respect to the ordinary shares or ADSs, other than certain pro rata
distributions of our shares, will be includible in a U.S. Holder&#146;s gross income as ordinary
dividend income when received, but only to the extent that the distribution is paid out of our
current or accumulated earnings and profits. For this purpose, earnings and profits will be
computed under U.S. federal income tax principles. The dividends will not be eligible for the
dividends-received deduction allowed to corporations. To the extent that the amount of the
distribution exceeds our current and accumulated earnings and profits, it will be treated first as
a tax-free return of your tax basis in the ordinary shares or ADSs, and to the extent the amount of
the distribution exceeds the U.S. Holder&#146;s tax basis, the excess will be taxed as capital gain. Any
gain recognized by a non-corporate U.S. Holder on the sale or exchange of ordinary shares or ADSs
generally will be subject to a maximum tax rate of 15%, which maximum tax rate will increase under
current law to 20% for dispositions occurring during taxable years beginning on or after January&nbsp;1,
2009.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dividends paid in Renminbi will be included in your income as a U.S. dollar amount based on
the exchange rate in effect on the date that the U.S. Holder receives the dividend, regardless of
whether the payment is in fact converted into U.S. dollars. If the U.S. Holder does not receive
U.S. dollars on the date the dividend is distributed, the U.S. Holder will be required to include
either gain or loss in income when the U.S. Holder later exchanges the Renminbi for U.S. dollars.
The gain or loss will be equal to the difference between the U.S. dollar value of the amount that
the U.S. Holder includes in income when the dividend is received and the amount that the U.S.
Holder receives on the exchange of the Renminbi for U.S. dollars. The gain or loss generally will
be ordinary income or loss from United States sources. If we distribute as a dividend non-cash
property, the U.S. Holder will generally include in income an amount equal to the U.S. dollar
equivalent of the fair market value of the property on the date that it is distributed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dividends will constitute foreign source income for foreign tax credit limitation purposes.
The limitation on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by us with respect to the
ordinary shares or ADSs will be &#147;passive income&#148; or, in the case of certain U.S. Holders,
&#147;financial services income.&#148; In particular circumstances, a U.S. Holder that:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>has held the ordinary shares or ADSs for less than a specified minimum
period during which it is not protected from risk of loss,</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>is obligated to make payments related to the dividends, or</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>holds the ordinary shares or ADSs in arrangements in which the U.S.
Holder&#146;s expected economic profit, after non-U.S. taxes, is
insubstantial will not be allowed a foreign tax credit for foreign
taxes imposed on dividends paid on the ordinary shares or ADSs.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Distributions to a U.S. Holder of shares or rights to subscribe for shares that are received
as part of a pro rata distribution to all our shareholders should not be subject to U.S. federal
income tax. The basis of the new shares or rights so received will be determined by allocating the
U.S. Holder&#146;s tax basis in the ordinary shares between the ordinary shares and the new shares or
rights received, based on their relative fair market values on the date of distribution. However,
the basis of the new shares or rights will be zero if (i)&nbsp;the fair market value of the new shares
or rights is less than 15.0% of the fair market value of the old ordinary shares at the time of
distribution and (ii)&nbsp;the U.S. Holder does not make an election to determine the basis of the new
shares by allocation as described above. The U.S. Holder&#146;s holding period
in the new
shares or rights will generally include the holding period of the old ordinary shares on
which the distribution was made.
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Taxation of Disposition of Ordinary Shares or ADSs</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subject to the passive foreign investment company rules discussed below, a U.S. Holder will
recognize taxable gain or loss on any sale or exchange of ordinary shares or ADSs equal to the
difference between the amount realized (in U.S. dollars) for the ordinary shares or ADSs and the
U.S. Holder&#146;s tax basis (in U.S. dollars) in the ordinary shares or ADSs. The gain or loss will be
capital gain or loss. Any gain or loss that you recognize will generally be treated as United
States source income or loss, except that losses will be treated as foreign source losses to the
extent you received dividends that were includible in the financial services income basket during
the 24-month period prior to the sale. If the units are not stock in a passive foreign investment
company with respect to a U.S. Holder in either the taxable year of the distribution or the
preceding taxable year, the distribution otherwise constitutes qualified dividend income for United
States federal income tax purposes, certain holding period and other requirements are met, and the
distribution is received in a taxable year beginning prior to January&nbsp;1, 2009, the distribution
will be taxable to a non-corporate U.S. Holder at a maximum rate of 15%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Passive Foreign Investment Company</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that we are not a passive foreign investment company for U.S. federal income tax
purposes, but we cannot be certain whether we will be treated as a passive foreign investment
company for any future taxable year. If we are a passive foreign investment company in any year in
which a U.S. Holder holds ordinary shares or ADSs, the U.S. Holder generally will be subject to
increased U.S. tax liabilities and reporting requirements on receipt of certain dividends or on a
disposition of ordinary shares or ADSs, in that year and all subsequent years although a
shareholder election to terminate such deemed passive foreign investment company status may be made
in certain circumstances. U.S. Holders should consult their own tax advisors regarding our status
as a passive foreign investment company, the consequences of an investment in a passive foreign
investment company, and the consequences of making a shareholder election to terminate deemed
passive foreign investment company status if we no longer meet the income or asset test for passive
foreign investment company status in a subsequent taxable year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">A company is considered a passive foreign investment company for any taxable year if either
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>at least 75.0% of its gross income is passive income, or</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>at least 50.0% of the value of its assets (based on an average of the
quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive
income.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We will be treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own, directly or indirectly,
more than 25.0% (by value) of the stock of such corporation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our belief that we are not a passive foreign investment company is based on our estimate of
the fair market value of our intangible assets, including goodwill, not reflected in our financial
statements under U.S. GAAP. In the future, in calculating the value of these intangible assets, we
will value our total assets, in part, based on our total market value determined using the average
of the quarterly selling prices of the ADSs for the relevant year. We believe this valuation
approach is reasonable. However, it is possible that the IRS will challenge the valuation of our
intangible assets, which may result in our classification as a passive foreign investment company.
In addition, if our actual acquisitions and capital
expenditures do
not match our projections, the likelihood that we are or will be classified as a
passive foreign investment company may also increase.


</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A separate determination must be made each year as to whether we are a passive foreign
investment company. As a result, our passive foreign investment company status may change.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If we are a passive foreign investment company for any taxable year during which a U.S. Holder
holds ordinary shares or ADSs, the U.S. Holder will be subject to special tax rules with respect
to:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any &#147;excess distribution&#148; that the U.S. Holder receives on ordinary shares or ADSs and</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any gain the U.S. Holder realizes from a sale or other disposition (including a
pledge) of the ordinary shares or ADSs, unless the U.S. Holder makes a
&#147;mark-to-market&#148; election as discussed below.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Distributions the U.S. Holder receives in a taxable year that are greater than 125% of the
average annual distributions the U.S. Holder received during the shorter of the three preceding
taxable years or the U.S. Holder&#146;s holding period for the ordinary shares will be treated as an
excess distribution. Under these special tax rules:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the excess distribution or gain will be allocated ratably over your
holding period for the ordinary shares or ADSs,</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the amount allocated to the current taxable year, and any taxable year
prior to the first taxable year in which we were a passive foreign
investment company, will be treated as ordinary income, and</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>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>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The tax liability for amounts allocated to years prior to the year of disposition or &#147;excess
distribution&#148; cannot be offset by any net operating losses, and gains (but not losses) realized on
the sale of the ordinary shares or ADSs cannot be treated as capital, even if the U.S. Holder holds
the ordinary shares or ADSs as capital assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A U.S. shareholder of a passive foreign investment company may avoid taxation under the excess
distribution rules discussed above by making a &#147;qualified electing fund&#148; election to include the
U.S. Holder&#146;s share of our income on a current basis. However, a U.S. Holder may make a qualified
electing fund election only if the passive foreign investment company agrees to furnish the
shareholder annually with certain tax information, and we do not presently intend to prepare or
provide such information.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Alternatively, a U.S. Holder of &#147;marketable stock&#148; in a passive foreign investment company may
make a mark-to-market election for stock of a passive foreign investment company to elect out of
the excess distribution rules discussed above. If a U.S. Holder makes a mark-to-market election for
the ordinary shares or ADSs, the U.S. Holder will include in income each year an amount equal to
the excess, if any, of the fair market value of the ordinary shares or ADSs as of the close of your
taxable year over the U.S. Holder&#146;s adjusted basis in such ordinary shares or ADSs. A U.S. Holder
is allowed a deduction for the excess, if any, of the adjusted basis of the ordinary shares or ADSs
over their fair market value as of the close of the taxable year only to the extent of any net
mark-to-market gains on the ordinary shares or ADSs included in the U.S. Holder&#146;s income for prior
taxable years. Amounts included in a U.S. Holder&#146;s income under a mark-to-market election, as well
as gain on the actual sale or other disposition of the ordinary shares or ADSs, are treated as
ordinary income. Ordinary loss treatment also applies to the deductible portion of any
mark-to-market loss on the ordinary shares or ADSs, as well as to any loss realized on the actual
sale or disposition of the ordinary shares or ADSs, to the extent that the
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">amount of such loss does not exceed the net mark-to-market gains previously included for such
ordinary shares ADSs. A U.S. Holder&#146;s basis in the ordinary shares or ADSs will be adjusted to
reflect any such income or loss amounts. The tax rules that apply to distributions by corporations
which are not passive foreign investment companies would apply to distributions by us.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The mark-to-market election is available only for stock which is regularly traded on a
national securities exchange that is registered with the Securities and Exchange Commission or on
Nasdaq, or an exchange or market that the U.S. Secretary of the Treasury determines has rules
sufficient to ensure that the market price represents a legitimate and sound fair market value. The
mark-to-market election would be available to a U.S. Holder unless our ordinary shares or ADSs are
delisted from The Nasdaq National Market and do not subsequently become regularly traded on The
Nasdaq SmallCap Market or other qualified exchange or market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A U.S. Holder who holds our ordinary shares or ADSs in any year in which we are a passive
foreign investment company would be required to file IRS Form&nbsp;8621 regarding distributions received
on our ordinary shares and any gain realized on the disposition of our ordinary shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Non-U.S. Holders</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A Non-U.S. Holder generally will not be subject to U.S. federal income tax on dividends paid
by us with respect to our ordinary shares or ADSs unless the income is effectively connected with
the Non-U.S. Holder&#146;s conduct of a trade or business in the United States.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain
attributable to a sale or other disposition of our ordinary shares or ADSs unless such gain is
effectively connected with the Non-U.S. Holder&#146;s conduct of a trade or business within the United
States or the Non-U.S. Holder is a natural person who is present in the United States for 183&nbsp;days
or more and certain other conditions exist.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dividends and gains that are effectively connected with a Non-U.S. Holder&#146;s conduct of a trade
or business in the United States generally will be subject to tax in the same manner as they would
be if the Non-U.S. Holder were a U.S. Holder, except that the passive foreign investment company
rules will not apply. Effectively connected dividends and gains received by a corporate Non-U.S.
Holder may also be subject to an additional branch profits tax at a 30.0% rate or a lower tax
treaty rate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Information Reporting and Backup Withholding</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In general, information reporting requirements will apply to dividends in respect of our
ordinary shares or ADSs or the proceeds received on the sale, exchange or redemption of our
ordinary shares or ADSs paid within the United States (and, in certain cases, outside the United
States) to U.S. Holders other than certain exempt recipients, such as corporations, and backup
withholding tax may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer
identification number or to report interest and dividends required to be shown on its U.S. federal
income tax returns. The amount of any backup withholding from a payment to a U.S. Holder will be
allowed as credit against the U.S. Holder&#146;s U.S. federal income tax liability provided that the
appropriate returns are filed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup
withholding by providing certification of its foreign status to the payor, under penalties of
perjury, on IRS Form W-8BEN.
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Enforcement of Civil Liabilities</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are incorporated in the Cayman Islands because of the following benefits found there:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>political and economic stability;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an effective judicial system;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a favorable tax system;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the absence of exchange control or currency restrictions; and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the availability of professional and support services.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;However, certain disadvantages accompany incorporation in the Cayman Islands. These
disadvantages include:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) the Cayman Islands has a less developed body of securities laws as compared to the
United States and provides significantly less protection to investors; and
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) Cayman Islands companies may not have standing to sue before the federal courts of
the United States.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our constituent documents do not contain provisions requiring that disputes, including those
arising under the securities laws of the United States, between us, our officers, directors and
shareholders be arbitrated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A substantial portion of our current operations is conducted in China through our wholly-owned
subsidiaries which are incorporated in China or the British Virgin Islands. All or most of our
assets are located in China. We have appointed CT Corporation System, 111 Eighth Avenue, New York,
NY 10011, as our agent upon whom process may be served in any action brought against us under the
securities laws of the United States. A majority of our directors and officers are nationals or
residents of jurisdictions other than the United States and a substantial portion of their assets
are located outside the United States. As a result, it may be difficult for a shareholder to
effect service of process within the United States upon these persons, or to enforce against us or
them judgments obtained in United States courts, including judgments predicated upon the civil
liability provisions of the securities laws of the United States or any state in the United States.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Maples and Calder, our counsel as to Cayman Islands law, and Fangda Partners, our counsel as
to Chinese law, have advised us that there is uncertainty as to whether the courts of the Cayman
Islands or China would:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1) recognize or enforce judgments of United States courts obtained against us or our
directors or officers predicated upon the civil liability provisions of the securities laws
of the United States or any state in the United States; or
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2) entertain original actions brought in the Cayman Islands or China against us or our
directors or officers predicated upon the securities laws of the United States or any state
in the United States.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Maples and Calder has further advised us that a final and conclusive judgment in the federal
or state courts of the United States under which a sum of money is payable, other than a sum
payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement
proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of
obligation.
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Fangda Partners has advised us further that the recognition and enforcement of foreign
judgments are provided for under Chinese Civil Procedures Law. Chinese courts may recognize and
enforce foreign judgments in accordance with the requirements of Chinese Civil Procedures Law based
either on treaties between China and the country where the judgment is made or on reciprocity
between jurisdictions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>F. Dividends and Paying Agents</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>G. Statement by Experts</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>H. Documents on Display</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have previously filed with the Commission our registration statement on Form F-1 and
prospectus under the Securities Act of 1933, as amended, with respect to our ADSs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the Securities and Exchange Commission.
Specifically, we are required to file annually a Form 20-F no later than six months after the close
of each fiscal year, which is December&nbsp;31. Copies of reports and other information, when so filed,
may be inspected without charge and may be obtained at prescribed rates at the public reference
facilities maintained by the Securities and Exchange Commission at Room&nbsp;1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents upon payment
of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The SEC also maintains a Web site at
<I>www.sec.gov </I>that contains reports, proxy and information statements, and other information
regarding registrants that make electronic filings with the SEC using its EDGAR system. As a
foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the
furnishing and content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section&nbsp;16 of the Exchange Act.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our financial statements have been prepared in accordance with U.S. GAAP.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We will furnish our shareholders with annual reports, which will include a review of
operations and annual audited consolidated financial statements prepared in conformity with U.S.
GAAP.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>I. Subsidiary Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="113"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;11. Quantitative and Qualitative Disclosures About Market Risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Please refer to Item&nbsp;5. &#147;Operating and Financial Review and Prospects &#151; Quantitative and
Qualitative Disclosures About Market Risk.&#148;
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="114"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;12. Description of Securities Other than Equity Securities</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not Applicable.
</DIV>
<DIV align="left">
<A name="115"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART II</B>
</DIV>

<DIV align="left">
<A name="116"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;13. Defaults, Dividend Arrearages and Delinquencies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not Applicable.
</DIV>
<DIV align="left">
<A name="117"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;14. Material Modifications to the Rights of Security Holders and Use of Proceeds</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Use of Proceeds</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following &#147;Use of Proceeds&#148; information relates to the registration statement on Form F-1
(File No.&nbsp;333-112903) (the &#147;Registration Statement&#148;) for our initial public offering of 6,140,000
American Depositary Shares, each representing 10 of our ordinary shares, which were sold by us and
certain selling shareholders for an aggregate offering price of $85.96&nbsp;million. Our Registration
Statement was declared effective by the SEC on March&nbsp;3, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We received net proceeds of approximately $67.05&nbsp;million from our initial public offering
(taking into account underwriting discounts of approximately $6.02&nbsp;million, but not taking into
account transaction expenses of approximately $1.43&nbsp;million). None of the transaction expenses
included payments to directors or officers of our company or their associates, persons owning 10%
or more of our equity securities or our affiliates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have used the net proceeds from our initial public offering to satisfy past indebtedness,
reduce our accounts payable and to fund expenses primarily for marketing, employee compensation,
next generation service research and development, software and technology infrastructure products
and other capital expenditures. None of the net proceeds from the initial public offering were
paid, directly or indirectly, to any of our directors or officers of our company or their
associates, persons owning 10% or more of our equity securities or our affiliates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Credit Suisse First Boston, JP Morgan, Piper Jaffray and CLSA Asia Pacific Markets were the
underwriters for our initial public offering.
</DIV>
<DIV align="left">
<A name="118"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;15. Controls and Procedures</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Disclosure Controls and Procedures</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As disclosed under Item&nbsp;5. &#147;Operating and Financial Review and Prospects,&#148; we have restated
our consolidated financial statements for the years ended December&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of the end of the period covered by this report, our principal executive officer and
principal financial officer have performed an evaluation of the effectiveness of our disclosure
controls and procedures within the meaning of Rules&nbsp;13a-15(e) and 15d-15(e) of the Exchange Act.
Based upon that evaluation, they have concluded that as of December&nbsp;31, 2005, our disclosure
controls and procedures were not effective due to certain material weaknesses as
described more fully below. The material weaknesses related to (1)&nbsp;management&#146;s inadequate
knowledge and experience in
</DIV>

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<DIV align="left" style="font-size: 10pt; margin-top: 6pt">application of U.S. GAAP, commensurate with our financial reporting requirements, which had led to
the restatement of our financial statements for year ended December&nbsp;31, 2004, and (2)&nbsp;lack of
policy and procedures over data security/access, data backup, system change and spreadsheet
control.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Changes in Internal Control Over Financial Reporting</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are aware of the importance of maintaining controls and procedures and are working towards
improving our controls and procedures. Beginning with the fiscal year ending December&nbsp;31, 2006,
Section&nbsp;404 of the Sarbanes-Oxley Act of 2002, or Section&nbsp;404, will require us to include an
internal control report of management with our annual report on Form 20-F. The internal control
report must contain (1)&nbsp;a statement of management&#146;s responsibility for establishing and maintaining
adequate internal control over financial reporting, (2)&nbsp;a statement identifying the framework used
by management to conduct the required evaluation of the effectiveness of our internal control over
financial reporting, (3)&nbsp;management&#146;s assessment of the effectiveness of our internal control over
financial reporting as of the end of our most recent fiscal year, including a statement as to
whether or not our internal control over financial reporting is effective and (4)&nbsp;a statement that
our independent auditors have issued an attestation report on management&#146;s assessment of our
internal control over financial reporting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the required Section&nbsp;404 evaluation described above, we have been
performing the system and process evaluation and testing required (and any necessary remediation)
in an effort to comply with such requirements by the effective date for compliance. Our efforts to
implement standardized internal control procedures and develop the internal tests necessary to
verify the proper application of the internal control procedures and their effectiveness will be a
key area of focus for our board of directors, our audit committee and our senior management. This
evaluation is expected to underlie the internal control report of management and auditor
attestation requirements of Section&nbsp;404.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Also, in connection with the audit of our financial statements for the year ended December&nbsp;31,
2005, we have identified a number of control deficiencies, some of which constitute material
weaknesses. A control deficiency exits when the design of operation of a control does not enable
management or employees, in the normal course of performing their assigned functions, to prevent or
detect misstatements on a timely basis; a material weakness is a control deficiency, or combination
of control deficiencies, that result in more than a remote likelihood that a material misstatement
of the financial statements will not be prevented or detected. Areas classified as material
weaknesses are management&#146;s inadequate knowledge and experience in application of U.S. GAAP and
lack of policy and procedures over data security/access, data backup, system change and spreadsheet
control.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We consulted with our audit committee and undertook or are undertaking remedial measures to
make improvements as soon as practicable. Our board of directors and the audit committee have been
advised of these issues. Under the supervision and with the participation of our senior
management, including our principal executive officer and principal financial officer, we are in
the process of conducting further evaluation of our internal control over financial reporting,
designing enhanced processes and controls to address these and any other issues that might be
identified through our review. As we are still in the evaluation and design process, we may
identify other conditions that may result in significant deficiencies or material weaknesses in the
future. Should we discover such conditions, we will take action to correct them. We are committed
to taking appropriate steps for remediation, as needed.
</DIV>
<DIV align="left">
<A name="119"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16A. Audit Committee Financial Expert</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our board of directors has determined that Mr.&nbsp;Thomas Hubbs qualifies as an Audit Committee
Financial Expert as defined by the applicable rules of the SEC and that Mr.&nbsp;Hubbs is &#147;independent&#148;
as
that term is defined in Rule&nbsp;4200 of the listing standards of the Marketplace Rules of the Nasdaq
Stock Market, Inc.


</DIV>

<P align="center" style="font-size: 10pt">95
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="120"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16B. Code of Ethics</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have adopted a Code of Business Conduct which applies to our employees, officers and
non-employee directors, including our principal executive officer, principal financial officer,
principal accounting officer or controller, and persons performing similar functions. This code is
intended to qualify as a &#147;code of ethics&#148; within the meaning of the applicable rules of the SEC,
and has been included as Exhibit&nbsp;11.1 to this annual report.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Code of Business Conduct is available on our website at www.english.linktone.com. To the
extent required by law, any amendments to, or waivers from, any provision of the Code of Business
Conduct will be promptly disclosed to the public. Copies of the Code of Business Conduct will be
provided to any shareholder upon written request to the Vice President of Legal Affairs of Linktone
Ltd., 5/F, Eastern Tower, No.&nbsp;689, Beijing Dong Road, Shanghai, 200001, People&#146;s Republic of China.
</DIV>
<DIV align="left">
<A name="121"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16C. Principal Accountant Fees and Services</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Disclosure of Fees Charged by Independent Accountants</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table summarizes the fees charged by PricewaterhouseCoopers (our independent
accountants from the fourth quarter of 2000 until the present time) for certain services rendered
to our company during 2004 and 2005.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7"><B>For the year ended</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Audit fees(1)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">325,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">307,500</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Audit related fees (2)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">300,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tax related fees(3)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168,562</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95,919</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other fees(4)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114,989</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,088</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>&#147;Audit fees&#148; means the aggregate fees billed in each of the fiscal years listed for our
calendar year audits and reviews of financial statements.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>&#147;Audit-related fees&#148; means the aggregate fees billed in each of the fiscal years listed for
professional services related to the audit of our financial statements that are not reported
under &#147;Audit fees&#148; and consultation on accounting standards or transactions.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>&#147;Tax related fees&#148; means the aggregate fees billed in each of the fiscal years listed for
professional services rendered for tax compliance, tax advisor and tax planning (domestic and
international). These services include assistance regarding federal, state and international
tax compliance and tax planning.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(4)</TD>
    <TD>&nbsp;</TD>
    <TD>&#147;All other fees&#148; means fees for advisory services for the compliance with the Sarbanes-Oxley
Act.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Audit Committee Pre-approval Policies and Procedures</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our audit committee has adopted procedures which set forth the manner in which the committee
will review and approve all audit and non-audit services to be provided by PricewaterhouseCoopers
before that firm is retained for such services. The pre-approval procedures are as follows:
</DIV>

<P align="center" style="font-size: 10pt">96
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Any audit or non-audit service to be provided to us by the independent accountant
must be submitted to the audit committee for review and approval, with a description of
the services to be performed and the fees to be charged.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="4%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The audit committee in its sole discretion then approves or disapproves the proposed
services and documents such approval, if given, through written resolutions or in the
minutes of meetings, as the case may be.</TD>
</TR>

</TABLE>
</DIV>
<DIV align="left">
<A name="122"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16D. Exemptions from the Listing Standards for Audit Committees</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have not been granted an exemption from the applicable listing standards for the audit
committee of our board of directors.
</DIV>
<DIV align="left">
<A name="123"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(c) Total Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(d) Maximum Number of</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Ordinary Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Ordinary Shares (or</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(a) Total Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(b) Average Price</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Purchased as Part of a</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Dollar Value) That May</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>of Ordinary</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Paid per Ordinary</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Publicly Announced</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Yet be Purchased Under</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Period</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Shares Purchased</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Share (1)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Plan or Program (2)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>the Plan or Program (3)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">September&nbsp;1, 2005 &#150; September&nbsp;30, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">150,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1.022</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">150,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">14,846,700</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">October&nbsp;1, 2005 &#150; October&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">540,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1.008</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">540,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">14,302,380</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">November&nbsp;1, 2005 &#150; November&nbsp;30, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">510,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">1.037</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">510,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">13,773,510</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">December&nbsp;1, 2005 &#150; December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,180,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.998</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,180,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">11,597,870</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>Average price paid per ordinary share includes brokerage commission.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>Such share repurchase plan was announced on May&nbsp;10, 2005 and became effective on September&nbsp;7,
2005 when our shareholders approved it at a general meeting. Under the plan, we may purchase
up to $15&nbsp;million worth of our issued and outstanding ADSs in open-market transactions on the
Nasdaq National Market. There is no expiration date for the plan.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(3)</TD>
    <TD>&nbsp;</TD>
    <TD>The share repurchase plan was still in effect as of December&nbsp;31, 2005.</TD>
</TR>

</TABLE>


<DIV align="left">
<A name="124"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>PART III</B>
</DIV>

<DIV align="left">
<A name="125"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;17. Financial Statements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has elected to provide financial statements pursuant to Item&nbsp;18.
</DIV>
<DIV align="left">
<A name="126"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;18. Financial Statements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The consolidated financial statements for Linktone Ltd. and its subsidiaries are included at
the end of this annual report.
</DIV>

<P align="center" style="font-size: 10pt">97
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="127"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;19. Exhibits</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">1.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Amended and Restated Memorandum and Articles of Association of the
Company (incorporated by reference to Exhibit&nbsp;3.1 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Specimen American Depositary Receipt of the Company (incorporated
by reference to Exhibit&nbsp;1 to the Company&#146;s Registration Statement
on Form&nbsp;F-6 (Registration No.&nbsp;333-112897) as filed with the
Securities and Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Specimen Share Certificate of the Company (incorporated by
reference to Exhibit&nbsp;4.2 to the Company&#146;s Registration Statement on
Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as filed with the Securities
and Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Deposit Agreement dated March&nbsp;3, 2004 among the Company, The Bank
of New York and owners and beneficial owners of the American
Depositary Receipts issued thereunder (incorporated by reference to
Exhibit&nbsp;1 to the Company&#146;s Registration Statement on Form&nbsp;F-6
(Registration No.&nbsp;333-112897) as filed with the Securities and
Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Amended and Restated Shareholders&#146; Agreement dated as of November
19, 2001 among IP Fund One, L.P., Intrinsic Technology (Holdings)
Ltd, Jun Wu, Lee Haichao, Shao Xiaoli and Lunar Occidental Group
LLC, Mitsubishi Corporation, Index Corporation, Hong Lim Investment
Pte Ltd, the other shareholders of the Company and the Company
(incorporated by reference to Exhibit&nbsp;4.4 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.5
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Amendment to the Shareholders Agreement dated as of November&nbsp;19,
2001 (by written resolution of the shareholders of the Company
dated December&nbsp;13, 2002) (incorporated by reference to Exhibit&nbsp;4.5
to the Company&#146;s Registration Statement on Form&nbsp;F-1 (Registration
No.&nbsp;333-112903) as filed with the Securities and Exchange
Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Amendment to Shareholders Agreement dated February&nbsp;4, 2004
(incorporated by reference to Exhibit&nbsp;4.7 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.7
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Lock-up Agreement by and among the Company and certain of its
shareholders (incorporated by reference to Exhibit&nbsp;4.6 to the
Company&#146;s Registration Statement on Form&nbsp;F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February&nbsp;17, 2004).</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">98
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.8
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Accession to Lock-up Agreement dated August&nbsp;30, 2004, by and among
the Company and Asiainfo (Indigo) Holdings Ltd, Fidelity Investors
III Limited Partnership, Hiking Corporation Ltd, Icon Ventures Asia
Ltd, Carlos Cordeiro, Kipp Nelson, Hu An Kai, Greenacre Ventures
Ltd., Fidelity International Limited and FIL Ventures Limited.
(incorporated by reference to Exhibit&nbsp;2.8 to the Company&#146;s Annual
Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005 filed with
the Securities and Exchange Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">2.9
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Accession to Lock-up Agreement dated August&nbsp;30, 2004, by and among
the Company and IP Fund One, L.P. (incorporated by reference to
Exhibit&nbsp;2.9 to the Company&#146;s Annual Report on Form&nbsp;20-F for the
year ended December&nbsp;31, 2005 filed with the Securities and Exchange
Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of 2000-1 Employee Stock Option Scheme (incorporated by
reference to Exhibit&nbsp;10.1 to the Company&#146;s Registration Statement
on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as filed with the
Securities and Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of 2003 Stock Incentive Plan (incorporated by reference to
Exhibit&nbsp;10.2 to the Company&#146;s Registration Statement on Form&nbsp;F-1
(Registration No.&nbsp;333-112903) as filed with the Securities and
Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Form of Indemnification Agreement with the Company&#146;s directors and
officers (incorporated by reference to Exhibit&nbsp;10.3 to the
Company&#146;s Registration Statement on Form&nbsp;F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.4
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Agreement dated October&nbsp;1, 2004 between the Company and
Raymond Yang Lei (incorporated by reference to Exhibit&nbsp;4.4 to the
Company&#146;s Annual Report on Form&nbsp;20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.5
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Termination Agreement dated February&nbsp;24, 2006 between
the Company and Raymond Yang Lei.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.6
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Agreement dated October&nbsp;1, 2004 between the Company and
Michael Guangxin Li (incorporated by reference to Exhibit&nbsp;4.5 to
the Company&#146;s Annual Report on Form&nbsp;20-F for the year ended
December&nbsp;31, 2005 filed with the Securities and Exchange Commission
on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.7
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Termination Agreement dated August&nbsp;31, 2005 between the
Company and Michael Guangxin Li.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.8
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Agreement dated April&nbsp;3, 2006 between the Company and
Michael Guangxin Li.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.9
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Agreement dated October&nbsp;1, 2004 between the Company and
Ye Xin (incorporated by reference to Exhibit&nbsp;4.6 to the Company&#146;s
Annual Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005
filed with the Securities and Exchange Commission on June&nbsp;30,
2005).</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">99
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.10
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Termination Agreement dated March&nbsp;20, 2006 between the
Company and Ye Xin.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.11
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Agreement dated May&nbsp;2, 2005 between the Company and
Colin Sung (incorporated by reference to Exhibit&nbsp;4.7 to the
Company&#146;s Annual Report on Form&nbsp;20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.12
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Employment Separation Agreement dated May&nbsp;23, 2005 between the
Company and Mark Begert (incorporated by reference to Exhibit&nbsp;4.8
to the Company&#146;s Annual Report on Form&nbsp;20-F for the year ended
December&nbsp;31, 2005 filed with the Securities and Exchange Commission
on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.13
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Summary of Key Terms in the
Monternet(TM) SMS Cooperation Agreement
dated June&nbsp;18, 2003 between Shanghai Weilan Computer Co., Ltd. and
Jiangsu Mobile Communication Co., Ltd. (incorporated by reference
to Exhibit&nbsp;10.7 to the Company&#146;s Registration Statement on Form&nbsp;F-1
(Registration No.&nbsp;333-112903) as filed with the Securities and
Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.14
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Cooperation Agreement dated June&nbsp;3, 2003 between Shanghai Linktone
Consulting Co., Ltd. and Satellite Television Asian Region Limited
(incorporated by reference to Exhibit&nbsp;10.8 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.15
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Mobile License Agreement dated May&nbsp;1, 2003 between Shanghai
Linktone Consulting Co., Ltd., Shanghai Weilan Computer Co., Ltd.
and Turner Broadcasting System Asia Pacific, Inc. (incorporated by
reference to Exhibit&nbsp;10.9 to the Company&#146;s Registration Statement
on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as filed with the
Securities and Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.16
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Copyright License Agreement dated September&nbsp;1, 2005
between Shanghai Weilan Computer Co., Ltd. and Shanghai Yide
Networking Co., Ltd.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.17
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Sales Agreement in Relation to True Tone, Ringback
Tone and IVR dated April&nbsp;11, 2005 between Shanghai Huitong
Information Co., Ltd. and Sony BMG Music Entertainment (Hong Kong)
Ltd. (incorporated by reference to Exhibit&nbsp;4.14 to the Company&#146;s
Annual Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005
filed with the Securities and Exchange Commission on June&nbsp;30,
2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.18
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Finder&#146;s Fee Agreement for Licensing dated August&nbsp;26, 2004 between
Shanghai Linktone Consulting Co., Ltd. and Mitsubishi Corporation
(incorporated by reference to Exhibit&nbsp;4.15 to the Company&#146;s Annual
Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005 filed with
the Securities and Exchange Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.19
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Cooperation Agreement dated January&nbsp;1, 2005 between Shanghai
Huitong Information Co., Ltd. and Mitsubishi Corporation
(incorporated by reference to Exhibit&nbsp;4.16 to the Company&#146;s Annual
Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005 filed with
the Securities and Exchange Commission on June&nbsp;30, 2005).</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">100
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.20
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Exclusive Technical Consulting and Services
Agreement dated as of November&nbsp;27, 2003 between Shanghai Linktone
Consulting Co., Ltd. and Shanghai Weilan Computer Co., Ltd.
(incorporated by reference to Exhibit&nbsp;10.14 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.21
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Exclusive Technical Consulting and Services
Agreement dated as of November&nbsp;27, 2003 between Shanghai Huitong
Information Co., Ltd. and Shanghai Unilink Computer Co., Ltd.
(incorporated by reference to Exhibit&nbsp;10.15 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.22
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Loan Agreement dated as of November&nbsp;27, 2003 between
the Company and Hu Ankai (incorporated by reference to Exhibit
10.16 to the Company&#146;s Registration Statement on Form&nbsp;F-1
(Registration No.&nbsp;333-112903) as filed with the Securities and
Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.23
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Loan Agreement dated as of November&nbsp;27, 2003 between
the Company and Li Dong (incorporated by reference to Exhibit&nbsp;10.17
to the Company&#146;s Registration Statement on Form&nbsp;F-1 (Registration
No.&nbsp;333-112903) as filed with the Securities and Exchange
Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.24
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Loan Agreement dated as of August&nbsp;25, 2004 between
the Company and Wei Long (incorporated by reference to Exhibit&nbsp;4.21
to the Company&#146;s Annual Report on Form&nbsp;20-F for the year ended
December&nbsp;31, 2005 filed with the Securities and Exchange Commission
on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.25
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Loan Agreement dated as of August&nbsp;25, 2004 between
the Company and Jing Wang (incorporated by reference to Exhibit
4.22 to the Company&#146;s Annual Report on Form&nbsp;20-F for the year ended
December&nbsp;31, 2005 filed with the Securities and Exchange Commission
on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.26
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Equity Interests Pledge Agreement dated November&nbsp;27,
2003 between Shanghai Linktone Consulting Co., Ltd. and Hu Ankai
(incorporated by reference to Exhibit&nbsp;10.20 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.27
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Equity Interests Pledge Agreement dated November&nbsp;27,
2003 between Shanghai Linktone Consulting Co., Ltd. and Li Dong
(incorporated by reference to Exhibit&nbsp;10.21 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.28
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Equity Interests Pledge Agreement dated August&nbsp;25,
2004 between Shanghai Huitong Information Co., Ltd. and Wei Long
(incorporated by reference to Exhibit&nbsp;4.25 to the Company&#146;s Annual
Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005 filed with
the Securities and Exchange Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.29
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Equity Interests Pledge Agreement dated August&nbsp;25,
2004 between Shanghai Huitong Information Co., Ltd. and Jing Wang
(incorporated by reference to Exhibit&nbsp;4.26 to the Company&#146;s Annual
Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005 filed with
the Securities and Exchange Commission on June&nbsp;30, 2005).</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">101
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.30
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Contract Relating to the Exclusive Purchase Right of
an Equity Interest dated as of November&nbsp;27, 2003 among the Company,
Hu Ankai and Shanghai Weilan Computer Co., Ltd. (incorporated by
reference to Exhibit&nbsp;10.25 to the Company&#146;s Registration Statement
on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as filed with the
Securities and Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.31
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Contract Relating to the Exclusive Purchase Right of
an Equity Interest dated as of November&nbsp;27, 2003 among the Company,
Li Dong and Shanghai Weilan Computer Co., Ltd. (incorporated by
reference to Exhibit&nbsp;10.26 to the Company&#146;s Registration Statement
on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as filed with the
Securities and Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.32
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Contract Relating to the Exclusive Purchase Right of
Equity Interest dated as of August&nbsp;25, 2004 among the Company, Wei
Long and Shanghai Unilink Company Ltd. (incorporated by reference
to Exhibit&nbsp;4.29 to the Company&#146;s Annual Report on Form&nbsp;20-F for the
year ended December&nbsp;31, 2005 filed with the Securities and Exchange
Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.33
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Contract Relating to the Exclusive Purchase Right of
Equity Interest dated as of August&nbsp;25, 2004 among the Company, Jing
Wang and Shanghai Unilink Company Ltd. (incorporated by reference
to Exhibit&nbsp;4.30 to the Company&#146;s Annual Report on Form&nbsp;20-F for the
year ended December&nbsp;31, 2005 filed with the Securities and Exchange
Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.34
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Operating Agreement dated November&nbsp;27, 2003 among
Shanghai Linktone Consulting Co., Ltd., Shanghai Weilan Computer
Co., Ltd., Hu Ankai and Li Dong (incorporated by reference to
Exhibit&nbsp;10.30 to the Company&#146;s Registration Statement on Form&nbsp;F-1
(Registration No.&nbsp;333-112903) as filed with the Securities and
Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.35
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Operating Agreement dated August&nbsp;25, 2004 among
Shanghai Huitong Information Co., Ltd., Jing Wang, Wei Long, and
Shanghai Unilink Computer Co., Ltd. (incorporated by reference to
Exhibit&nbsp;4.32 to the Company&#146;s Annual Report on Form&nbsp;20-F for the
year ended December&nbsp;31, 2005 filed with the Securities and Exchange
Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.36
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Domain Name License Agreement dated as of November
27, 2003 between the Company and Shanghai Weilan Computer Co., Ltd.
(incorporated by reference to Exhibit&nbsp;10.32 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.37
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Domain Name License Agreement dated as of November
27, 2003 between Shanghai Linktone Consulting Co., Ltd. and
Shanghai Unilink Computer Co., Ltd. (incorporated in by reference
to Exhibit&nbsp;10.33 to the Company&#146;s Registration Statement on Form
F-1 (Registration No.&nbsp;333-112903) as filed with the Securities and
Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">102
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.38
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Domain Name Assignment Agreement dated as of
November&nbsp;27, 2003 between Shanghai Weilan Computer Co., Ltd. and
Shanghai Linktone Consulting Co., Ltd. (incorporated by reference
to Exhibit&nbsp;10.34 to the Company&#146;s Registration Statement on Form
F-1 (Registration No.&nbsp;333-112903) as filed with the Securities and
Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.39
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Domain Name License Agreement dated as of November
27, 2003 between Shanghai Linktone Consulting Co., Ltd. and
Shanghai Weilan Computer Co., Ltd. (incorporated by reference to
Exhibit&nbsp;10.35 to the Company&#146;s Registration Statement on Form&nbsp;F-1
(Registration No.&nbsp;333-112903) as filed with the Securities and
Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.40
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Trademark License Agreement dated as of November&nbsp;27,
2003 between the Company and Shanghai Weilan Computer Co., Ltd.
(incorporated by reference to Exhibit&nbsp;10.36 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.41
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Trademark License Agreement dated as of November&nbsp;27,
2003 between the Company and Shanghai Unilink Computer Co., Ltd.
(incorporated by reference to Exhibit&nbsp;10.37 to the Company&#146;s
Registration Statement on Form&nbsp;F-1 (Registration No.&nbsp;333-112903) as
filed with the Securities and Exchange Commission on February&nbsp;17,
2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.42
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Power of Attorney dated November&nbsp;27, 2003 granted by
Hu Ankai (incorporated by reference to Exhibit&nbsp;10.39 to the
Company&#146;s Registration Statement on Form&nbsp;F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.43
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Power of Attorney dated November&nbsp;27, 2003 granted by
Li Dong (incorporated by reference to Exhibit&nbsp;10.40 to the
Company&#146;s Registration Statement on Form&nbsp;F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.44
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Power of Attorney dated August&nbsp;25, 2004 granted by
Wei Long (incorporated by reference to Exhibit&nbsp;4.42 to the
Company&#146;s Annual Report on Form&nbsp;20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.45
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Power of Attorney dated August&nbsp;25, 2004 granted by
Jing Wang (incorporated by reference to Exhibit&nbsp;4.43 to the
Company&#146;s Annual Report on Form&nbsp;20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.46
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Service Agreement dated January&nbsp;16, 2002 between the
Company and Hu Ankai (incorporated by reference to Exhibit&nbsp;10.44 to
the Company&#146;s Registration Statement on Form&nbsp;F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.47
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Service Agreement dated January&nbsp;16, 2002 between the
Company and Li Dong (incorporated by reference to Exhibit&nbsp;10.45 to
the Company&#146;s Registration Statement on Form&nbsp;F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February&nbsp;17, 2004).</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">103
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.48
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Lease Agreement, effective March&nbsp;22, 2004, between
Shanghai Linktone Consulting Co., Ltd. and Shanghai Allianz
Investment and Development Company (incorporated by reference to
Exhibit&nbsp;4.46 to the Company&#146;s Annual Report on Form&nbsp;20-F for the
year ended December&nbsp;31, 2005 filed with the Securities and Exchange
Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.49
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Summary of Lease Agreement, effective September&nbsp;7, 2005, between
Shanghai Linktone Consulting Co., Ltd. and Beijing Sunbase Real
Estate Ltd.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.50
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Monternet(TM) MMS Cooperation Agreement dated June
25, 2003 between Shanghai Weilan Computer Co. Ltd. and China Mobile
Communications Corporation (incorporated by reference to Exhibit
10.64 to the Company&#146;s Registration Statement on Form&nbsp;F-1
(Registration No.&nbsp;333-112903) as filed with the Securities and
Exchange Commission on March&nbsp;1, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.51
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Summary of Key Terms in SMS Cooperation Agreement dated January&nbsp;16,
2004 between Guangdong Mobile Communications Corporation and
Shanghai Weilan Computer Co., Ltd. (incorporated by reference to
Exhibit&nbsp;10.65 to the Company&#146;s Registration Statement on Form&nbsp;F-1
(Registration No.&nbsp;333-112903) as filed with the Securities and
Exchange Commission on February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.52
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Mobile Value-added Service Cooperation Agreement
dated March&nbsp;31, 2005 between Shanghai Weilan Computer Co., Ltd. and
China United Telecommunications Corporation (incorporated by
reference to Exhibit&nbsp;4.50 to the Company&#146;s Annual Report on Form
20-F for the year ended December&nbsp;31, 2005 filed with the Securities
and Exchange Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.53
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Music Copyright License Agreement, effective January
1, 2004, among Speedline Enterprise Limited, Shanghai Linktone
Consulting Co., Ltd. and its affiliate, and Shanghai BigIn Digital
Technology Co., Ltd. (incorporated by reference to Exhibit&nbsp;10.68 to
the Company&#146;s Registration Statement on Form&nbsp;F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February&nbsp;17, 2004).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.54
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Licensing Contract for Ringtones dated December&nbsp;6, 2004, between
Shanghai Linktone Consulting Co., Ltd. and BMG Music Publishing
Hong Kong Ltd. (incorporated by reference to Exhibit&nbsp;4.54 to the
Company&#146;s Annual Report on Form&nbsp;20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.55
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Mobile Ringback Tone Contract dated January&nbsp;18,
2005, between Shanghai Linktone Consulting Co., Ltd. and EMI Music
(China) (incorporated by reference to Exhibit&nbsp;4.55 to the Company&#146;s
Annual Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005
filed with the Securities and Exchange Commission on June&nbsp;30,
2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.56
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Share Purchase Agreement, dated April&nbsp;22, 2005, by and among
Linktone Ltd., Linktone Information Technology Co., Ltd., Mingji
Guan, Shubing Zheng, Crown River Enterprises Ltd., Yuanhang Wang,
Dong Li, Brilliant Concept Investments Ltd., Wangyou Digital
Science &#038; Technology (Shenzhen) Co., Ltd. and Shenzhen Yuanhang
Science and Technology Co., Ltd. (incorporated by reference to
Exhibit&nbsp;99.1 to the Company&#146;s Report of Foreign Issuer on Form&nbsp;6-K
as filed with the Securities and Exchange Commission on May&nbsp;24,
2005).</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">104
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.57
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Equity Transfer Agreement, dated April&nbsp;22, 2005, by and among
Mingji Guan, Shubing Zheng, Yuanhang Wang and Dong Li (incorporated
by reference to Exhibit&nbsp;99.2 to the Company&#146;s Report of Foreign
Issuer on Form&nbsp;6-K as filed with the Securities and Exchange
Commission on May&nbsp;24, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.58
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Instrument of Transfer, dated May&nbsp;13, 2005, by and among Crown
River Enterprises Ltd. and Linktone Ltd. (incorporated by
reference to Exhibit&nbsp;99.3 to the Company&#146;s Report of Foreign Issuer
on Form&nbsp;6-K as filed with the Securities and Exchange Commission on
May&nbsp;24, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.59
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Software License Agreement dated January&nbsp;1, 2005
between Shanghai Huitong Information Co., Ltd. and Shanghai Weilan
Computer Company Limited (Short Message Platform System Software).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.60
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Software License Agreement dated January&nbsp;1, 2005
between Shanghai Huitong Information Co., Ltd. and Shanghai Weilan
Computer Co., Ltd. (Database Software).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.61
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Software License Agreement dated September&nbsp;1, 2003
between Shanghai Huitong Information Co., Ltd. and Shanghai Weilan
Computer Co., Ltd. (PETS Cellphone Games Software V1.0)
(incorporated by reference to Exhibit&nbsp;4.61 to the Company&#146;s Annual
Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005 filed with
the Securities and Exchange Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.62
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Supplemental Agreement, dated July&nbsp;1, 2005, to the
Software License Agreement dated September&nbsp;1, 2003 between Shanghai
Huitong Information Co., Ltd. and Shanghai Weilan Computer Co.,
Ltd. (PETS Cellphone Games Software V1.0).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.63
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Software License Agreement dated January&nbsp;1, 2004
between Shanghai Huitong Information Co., Ltd. and Shanghai Weilan
Computer Co., Ltd. (Photos and Tones Cellphone Software V1.0)
(incorporated by reference to Exhibit&nbsp;4.62 to the Company&#146;s Annual
Report on Form&nbsp;20-F for the year ended December&nbsp;31, 2005 filed with
the Securities and Exchange Commission on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.64
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Supplemental Agreement, dated July&nbsp;1, 2005, to the
Software License Agreement dated January&nbsp;1, 2004 between Shanghai
Huitong Information Co., Ltd. and Shanghai Weilan Computer Co.,
Ltd. (Photos and Tones Cellphone Software V1.0).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.65
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Software License Agreement dated January&nbsp;12, 2005
between Shanghai Linktone Internet Technology Co., Ltd. and
Shanghai Weilan Computer Co., Ltd. (RBT Software V1.0).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.66
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Supplemental Agreement, dated July&nbsp;1, 2005, to the
Software License Agreement dated January&nbsp;12, 2005 between Shanghai
Linktone Internet Technology Co., Ltd. and Shanghai Weilan Computer
Co., Ltd. (RBT Software V1.0).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.67
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Software License Agreement dated January&nbsp;12, 2005
between Shanghai Linktone Internet Technology Co., Ltd. and
Shanghai Weilan Computer Co., Ltd. (MMS Software V1.0).</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">105
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.68
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Supplemental Agreement, dated July&nbsp;1, 2005, to the
Software License Agreement dated January&nbsp;12, 2005 between Shanghai
Linktone Internet Technology Co., Ltd. and Shanghai Weilan Computer
Co., Ltd. (MMS Software V1.0).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.69
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Software License Agreement dated January&nbsp;12, 2005
between Shanghai Linktone Internet Technology Co., Ltd. and
Shanghai Weilan Computer Co., Ltd. (IVR Software V1.0).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.70
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Supplemental Agreement, dated July&nbsp;1, 2005, to the
Software License Agreement dated January&nbsp;12, 2005 between Shanghai
Linktone Internet Technology Co., Ltd. and Shanghai Weilan Computer
Co., Ltd. (IVR Software V1.0).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.71
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Exclusive Consulting and Service Agreement dated
January&nbsp;1, 2005 between Shanghai Linktone Consulting Co., Ltd. and
Shanghai Weilan Computer Co., Ltd.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.72
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Exclusive Consulting and Service Agreement dated
July&nbsp;1, 2005 between Shanghai Linktone Consulting Co., Ltd. and
Shanghai Weilan Computer Co., Ltd.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.73
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Mobile Value-added Service Business Cooperation Agreement, between
China Unicom and Shanghai Unilink, dated as of May&nbsp;18, 2005.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.74
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Loan Agreement dated as of June&nbsp;1, 2005 between the
Company and Yuan Jinhua.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.75
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Loan Agreement dated as of June&nbsp;1, 2005 between the
Company and Zhao Teng.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.76
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Equity Interests Pledge Agreement dated June&nbsp;1, 2005
between Shanghai Huitong Information Co., Ltd. and Yuan Jinhua.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.77
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Equity Interests Pledge Agreement dated June&nbsp;1, 2005
between Shanghai Huitong Information Co., Ltd. and Zhao Teng.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.78
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Contract Relating to the Exclusive Purchase Right of
an Equity Interest dated as of June&nbsp;1, 2005 among the Company, Yuan
Jinhua and Hainan Zhong Tong Computer Co., Ltd.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.79
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Contract Relating to the Exclusive Purchase Right of
an Equity Interest dated as of June&nbsp;1, 2005 among the Company, Zhao
Teng and Hainan Zhong Tong Computer Co., Ltd.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.80
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Exclusive Consulting and Service Agreement dated
June&nbsp;1, 2005 between Shanghai Huitong Information Co., Ltd. and
Hainan Zhong Tong Computer Co., Ltd.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.81
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Equity Transfer Agreement, dated June&nbsp;15, 2005, by and among
Shanghai Weilan Computer Co., Ltd., Yuan Jinhua, Zhao Teng, Jing
Shengmei, Zhao Huiping, Chen Huawei and Huang Chang in relation to
Hainan Zhong Tong Computer Co., Ltd.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">4.82
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Translation of Operating Agreement dated June&nbsp;1, 2005 among
Shanghai Huitong Information Co., Ltd., Hainan Zhong Tong Computer
Co., Ltd., Yuan Jinhua and Zhao Teng.</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">106
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="9%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="86%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center">Exhibit</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Number</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000">Document</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">8.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Significant Subsidiaries.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">11.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Code of Business Conduct (incorporated by reference to Exhibit&nbsp;11.1
to the Company&#146;s Annual Report on Form&nbsp;20-F for the year ended
December&nbsp;31, 2005 filed with the Securities and Exchange Commission
on June&nbsp;30, 2005).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">12.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of Chief Executive Officer Required by Rule&nbsp;13a-14(a).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">12.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of Chief Financial Officer Required by Rule&nbsp;13a-14(a).</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">13.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of Chief Executive Officer Required by Rule&nbsp;13a-14(b)
and Section&nbsp;1350 of Chapter&nbsp;63 of Title 18 of the United States
Code.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">13.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Certification of Chief Financial Officer Required by Rule&nbsp;13a-14(b)
and Section&nbsp;1350 of Chapter&nbsp;63 of Title 18 of the United States
Code.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">15.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company,
Independent Registered Public Accounting Firm.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">15.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Maples and Calder.</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top"><DIV style="margin-left:0px; text-indent:-0px">15.3
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Fangda Partners.</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">107
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="128"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>SIGNATURES</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;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.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="49%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="25%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="24%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><B>LINKTONE LTD.</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Colin Sung</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Colin Sung</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chief Financial Officer</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">Date: June&nbsp;30, 2006</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<!-- TOC -->
</DIV>
<DIV align="left">
<A name="tocpage"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>INDEX TO CONSOLIDATED FINANCIAL STATEMENTS</B>

</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Page</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#300">Report of Independent Registered Public Accounting Firm</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-2</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#301">Consolidated Balance Sheets as of December&nbsp;31, 2004 and 2005</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-3</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#302">Consolidated Statements of Operations and Comprehensive Income for the years ended
December&nbsp;31, 2003, 2004 and 2005</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#303">Consolidated Statements of Shareholders&#146; Equity for the years ended December&nbsp;31, 2003,
2004 and 2005</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-5</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#304">Consolidated Statements of Cash Flows for the years ended December&nbsp;31, 2003, 2004 and 2005</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><A href="#305">Notes to the Consolidated Financial Statements</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">F-7</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">F-1
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<!-- /TOC -->
</DIV>
<DIV align="left">
<A name="300"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF<BR>
LINKTONE LTD.

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations and comprehensive income, shareholders&#146; equity and cash flows present
fairly, in all material respects, the financial position of Linktone Ltd. (&#147;the Company&#148;) and its
subsidiaries at December&nbsp;31, 2005 and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended December&nbsp;31, 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 align="left" style="font-size: 10pt; margin-top: 6pt">As discussed in note 2 to the consolidated financial statements, the Company has restated its
2004 consolidated financial statements.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">PricewaterhouseCoopers Zhong Tian CPAs Limited Company<BR>
Shanghai, People&#146;s Republic of China

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">April&nbsp;11, 2006
</DIV>


<P align="center" style="font-size: 10pt">F-2
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>

<DIV align="left">
<A name="301"></A>
</DIV>
<DIV align="center" style="font-size: 10pt"><B>CONSOLIDATED BALANCE SHEETS</B></DIV>


<DIV align="center" style="font-size: 10pt"><B>(In U.S. dollars, except share data)</B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Note</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Restated)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Assets</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Current assets:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">63,413,629</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">36,252,678</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Short term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,860,365</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,580,530</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accounts receivable, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,445,535</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,945,662</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Tax refund receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,597,167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,131,128</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Deposits and other receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,900,433</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,136,949</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">416,632</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">811,014</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Total current assets</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">94,633,761</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">101,857,961</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Property and equipment, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,527,813</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,565,446</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,234,185</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,171,219</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other long term assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">282,784</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">763,597</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,051,469</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Total assets</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">98,207,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">118,880,280</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Liabilities and shareholders&#146; equity</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Current liabilities:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Taxes payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,078,967</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,898,782</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Accrued liabilities and other payables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,181,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,886,705</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Due to related parties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,792</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Deferred revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">93,327</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Deferred tax liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,115,351</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">881,279</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Total current liabilities</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,389,456</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,760,093</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long term liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Other long term liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">149,411</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,276</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Total liabilities</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,538,867</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,790,369</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Commitments and contingencies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Shareholders&#146; equity</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Ordinary shares ($0.0001 par value; 500,000,000
shares authorized, 253,772,990 and 257,317,900 shares
issued and outstanding as of December&nbsp;31, 2004 and
December&nbsp;31, 2005)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,377</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,732</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Additional paid-in capital</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">6, 22</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78,345,352</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78,674,885</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred stock-based compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2, 23</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,227,018</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Statutory reserves</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,531,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,007,776</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated other comprehensive (loss)/income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,825</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">726,837</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Retained earnings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,058,442</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,654,681</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Total shareholders&#146; equity</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">87,669,088</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100,089,911</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Total liabilities and shareholders&#146; equity</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">98,207,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">118,880,280</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">The accompanying notes are an integral part of these consolidated financial statements.
</DIV>


<P align="center" style="font-size: 10pt">F-3
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>

<DIV align="left">
<A name="302"></A>
</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME</B>

</DIV>
<DIV align="center" style="font-size: 10pt"><B>(In U.S. dollars, except per share data)</B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>For the year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Note</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Restated)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,601,492</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">50,318,744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,608,603</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Business tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,115,822</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,235,044</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,121,347</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,485,670</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,083,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,487,256</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,819,391</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,305,416</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(26,483,694</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,666,279</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,778,284</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44,003,562</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Product development</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(748,209</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,807,720</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,229,976</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Selling and marketing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,144,540</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,794,568</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,719,763</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Stock-based compensation *</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">2, 23</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,119,529</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,464,807</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,012,425</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other general and administrative</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,070,141</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,809,947</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9,774,570</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total operating expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,082,419</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(21,877,042</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(32,736,734</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income from operations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,583,860</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,901,242</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,266,828</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,223</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">815,447</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,965,801</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">346,652</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">720,763</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,616,083</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,063,341</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,953,392</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income tax expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(997,307</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,504,329</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,616,083</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,066,034</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accretion on Series&nbsp;B convertible redeemable preferred
shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(143,936</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28,206</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amount allocated to participating preferred shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,769,080</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(794,307</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income attributable to ordinary shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,703,067</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">10,243,521</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other comprehensive income/(loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">457</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,414</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">791,662</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,616,540</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,001,620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">13,240,725</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Earning per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average ordinary shares:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,390,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">224,569,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257,020,040</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,556,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">248,081,126</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">275,385,579</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">*</TD>
    <TD>&nbsp;</TD>
    <TD>Stock-based compensation is a component of general and administrative expenses.</TD>
</TR>

</TABLE>



<DIV align="center" style="font-size: 10pt; margin-top: 18pt">The accompanying notes are an integral part of these consolidated financial statements.
</DIV>


<P align="center" style="font-size: 10pt">F-4
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<!-- LANDSCAPE -->
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>

<DIV align="left">
<A name="303"></A>
</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>CONSOLIDATED STATEMENTS OF SHAREHOLDERS&#146; EQUITY/(DEFICIT)</B>

</DIV>
<DIV align="center" style="font-size: 10pt"><B>(In U.S. dollars, except share data)</B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="19%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Retained</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Additional</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Deferred</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>other</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>earnings/</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Ordinary shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>paid-in</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>Convertible</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>stock based</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>Statutory</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>comprehensive</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>(Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 0px solid #000000"><B>shareholders&#146;</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>capital</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>preferred shares</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>compensation</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>reserves</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>income/(loss)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Deficit)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>equity/(deficit)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance as of December&nbsp;31, 2002</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,390,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,739</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,525,388</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">(868</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">(3,919,773</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">(385,514</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accretion of Series&nbsp;B redeemable
convertible preferred shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(143,936</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(143,936</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred stock-based compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,811,354</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,691,825</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,119,529</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other comprehensive income:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">457</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">457</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,616,083</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,616,083</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Appropriations to statutory
reserves</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(500,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance as of December&nbsp;31, 2003</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,390,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,739</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,811,354</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,525,388</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,691,825</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(411</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(947,626</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,206,619</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issuance of ordinary shares in
initial public offering</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">51,500,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67,046,483</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">67,051,633</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Costs of initial public offering</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,941,409</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,941,409</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Conversion of redeemable preferred
shares to ordinary shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,294,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,129</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,579,539</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,583,668</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Conversion of convertible
preferred shares to ordinary
shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">59,870,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,987</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,519,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,525,388</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issuance of ordinary shares
from exercise of stock option</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,717,990</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">372</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">301,778</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">302,150</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accretion of series B redeemable
convertible preferred shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,206</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28,206</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred stock&#150;based
compensation (Restated)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,464,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,464,807</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other comprehensive income:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Translation adjustment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">264</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">264</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Unrealized loss on investments
in marketable securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,678</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,678</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income (Restated)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,066,034</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,066,034</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Appropriation to Statutory reserves</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,031,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,031,760</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance as of December&nbsp;31,
2004 (Restated)</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">253,772,990</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">25,377</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">78,345,352</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,227,018</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,531,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">(64,825</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,058,442</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">87,669,088</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Issuance of ordinary shares from
exercise of stock options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,924,910</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">693</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">568,777</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">569,470</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Retirement of shares from stock
repurchase</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,380,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(338</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,024,651</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,376,808</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,401,797</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred stock&#150;based compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">785,407</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,227,018</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,012,425</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other comprehensive income:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Translation adjustment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">823,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">823,301</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Unrealized loss on investments
in marketable securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(31,639</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(31,639</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Appropriation to Statutory reserves</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">476,016</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(476,016</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance as of December&nbsp;31, 2005</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257,317,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">25,732</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">78,674,885</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,007,776</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">726,837</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,654,681</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">100,089,911</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">The accompanying notes are an integral part of these consolidated financial statements.
</DIV>




<P align="center" style="font-size: 10pt">F-5
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>

<DIV align="left">
<A name="304"></A>
</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>CONSOLIDATED STATEMENTS OF CASH FLOWS</B>

</DIV>
<DIV align="center" style="font-size: 10pt"><B>(In U.S. dollars)</B></DIV>


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>For the year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Restated)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Cash flow from operating activities</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,616,083</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,066,034</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Adjustments to reconcile net
income to net cash provided
by operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Stock compensation costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,119,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,464,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,012,425</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Loss on disposal of fixed assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49,064</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">90,856</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">429,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,419,609</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Amortization of intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">760,299</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Provision for bad debts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">161,478</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">176,813</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(190,054</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Deferred income tax benefits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,878</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(914,668</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Loss on foreign exchange</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,415</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Gain on short term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(81,094</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,060,041</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Changes in assets and liabilities net of effect of
acquisitions and disposals:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,690,310</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,529,729</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,550,229</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Tax refund receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,597,167</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">532,431</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Deposits and other receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(429,087</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,198,857</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(561,247</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Taxes payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">704,645</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,092,219</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">689,980</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Accrued liabilities and other payables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">307,552</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,847,399</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,047,894</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:75px; text-indent:-15px">Due to related parties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,145</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net cash provided by operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,880,751</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,654,127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,561,944</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Cash flow from investing activities</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Purchase of property and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(304,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,422,079</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,967,541</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Purchase of intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(306,050</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Proceeds from sale of short term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,001,194</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Cash paid for short term investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,866,131</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(52,692,957</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Cash paid for business acquisitions, net off cash acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,459,324</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Cash paid for convertible loans</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(581,782</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Cash paid to staff for business acquisitions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(433,694</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net cash used in investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(304,380</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(17,266,029</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(34,440,154</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Cash flow from financing activities:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from initial public offering, net of issuance costs
paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65,110,224</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Proceeds from the exercise of stock options</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">302,150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">569,470</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash paid for repurchase of stock</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,401,797</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net cash provided by financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65,412,374</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,832,327</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of exchange rate change on cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">457</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">264</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">549,586</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Net (decrease)/increase in cash and cash
equivalents</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,576,828</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57,800,736</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(27,160,951</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Cash and cash equivalents, beginning of
year</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,036,065</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,612,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">63,413,629</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Cash and cash equivalents, end of
year</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,612,893</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">63,413,629</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">36,252,678</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Supplemental disclosures of cash flow
information</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Cash paid during the year for:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Cash paid for business and other taxes on
revenues</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">681,161</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,224,397</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">8,800,560</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Cash received for value added tax refund</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,960,196</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Cash paid for income tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">518,262</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">607,940</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Cash paid for interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">The accompanying notes are an integral part of these consolidated financial statements.
</DIV>


<P align="center" style="font-size: 10pt">F-6
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>

<DIV align="left">
<A name="305"></A>
</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B>

</DIV>
<DIV align="center" style="font-size: 10pt"><B>(In U.S. dollar, unless otherwise stated)</B></DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>1 Organization and Nature of Operations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Linktone Ltd. (&#147;Linktone&#148; or the &#147;Company&#148;), a Cayman Islands Corporation, is a provider of
wireless media, entertainment and communication services or wireless value added services (&#147;WVAS&#148;)
to mobile phone users in the People&#146;s Republic of China (&#147;PRC&#148;). The Company specializes in the
development, aggregation, marketing and distribution of consumer wireless applications for access
by mobile phone users in the PRC.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The accompanying consolidated financial statements include the results of operations of the
Company, its subsidiaries, Shanghai Linktone Consulting Co., Ltd. (&#147;Linktone Consulting&#148;), Shanghai
Huitong Information Co., Ltd. (&#147;Huitong&#148;), Shanghai Linktone Internet Technology Co., Ltd.
(&#147;Linktone Internet&#148;), Shanghai Linktone Software Co., Ltd. (&#147;Linktone Software&#148;), Brilliant
Concept Investment Ltd. (&#147;Brilliant&#148;) and Wang You Digital Technology Co., Ltd. (&#147;Wang You&#148;), and
variable interest entities (&#147;VIE&#148; or &#147;VIEs&#148;) for which the Company is the primary beneficiary.
Brilliant and Wang You were acquired by the Company in May&nbsp;2005 (note 7). The Company and its
subsidiaries and consolidated VIEs (see below) are collectively referred to as the &#147;Group&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The business in which the Group is engaged is subject to a number of industry-specific risk
factors, including, but not limited to, dependence on mobile and fixed line network operators,
rapid development of the market, large number of competitors, and evolving regulatory environment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To comply with PRC laws and regulations that prohibit or restrict foreign ownership of
companies that provide value-added telecommunications services, which includes wireless value-added
services and Internet content services, the Company conducts substantially all of its operations
via its VIEs. These VIEs are wholly owned by certain shareholders or employees of the Company. The
capital and additional payments to the selling shareholders are funded by the Company and recorded
as interest-free loans to these PRC shareholders and employees. The portion of the loans for
capital injection was eliminated with the capital of the VIEs during consolidation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under various contractual agreements, employee shareholders of the VIEs are required to
transfer their ownership in these entities to the Company&#146;s subsidiaries in the PRC when permitted
by PRC laws and regulations or to designees of the Company at any time for the amount of loans
outstanding. All voting rights of the VIEs are assigned to the Company and the Company has the
right to appoint all directors and senior management personnel of the VIEs. As of December&nbsp;31,
2005, the Company entered into exclusive technical service and software licensing agreements with
Shanghai Weilan Computer Co., Ltd. (&#147;Weilan&#148;) and Shanghai Unilink Computer Co., Ltd. (&#147;Unilink&#148;)
under which the Company provides technical and other services and software products to these VIEs
in exchange for substantially all net income of the VIEs. In addition, employee shareholders of the
VIEs have pledged their shares in the VIEs as collateral for the non-payment of loans or for the
fees for technical and other services and use of software due to the Company. The amounts of
interest-free loans to the employee shareholders of VIEs listed below as of December&nbsp;31, 2004 and
December&nbsp;31, 2005 were $1.8&nbsp;million and $8.4&nbsp;million respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a summary of the VIEs of the Company:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD> Weilan, a PRC company controlled through contractual agreements. Weilan was registered
on December&nbsp;2, 1999 and is 50.0% owned by each of the two of our shareholders, Ankai Hu and
Dong Li. As of December&nbsp;31, 2004 and 2005, total interest free loans to shareholders
amounted to $0.6&nbsp;million.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD> Unilink, a PRC company controlled through contractual agreements. Unilink was registered
in June&nbsp;2003 and is 50.0% owned by our former Vice President of Product Development, Jing
Wang and 50% owned by our former Vice President of Business Development, Wei Long. Their
ownerships are in the process of being transferred to our Financial Controller Jinhua Yuan
and our Human Resource manager Rong Zhang. As of December&nbsp;31, 2004 and 2005, total interest
free loans to shareholders amounted to $1.2&nbsp;million.</TD>
</TR>



</TABLE>
</DIV>
<P align="center" style="font-size: 10pt">F-7
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD> Shenzhen Yuan Hang Technology Co., Ltd. (&#147;Yuan Hang&#148;), a PRC company controlled through
contractual agreements. Yuan Hang was registered in June&nbsp;2001 and acquired by the Company
in May&nbsp;2005 (note 7). Yuan Hang is 50% owned by our Vice president of Business Development,
Yan Ma, and our Financial Controller, Jinhua Yuan. As of December&nbsp;31, 2005, total interest
free loans to shareholders amounted to $0.6&nbsp;million.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Beijing Cosmos Digital Technology Co., Ltd. (&#147;Cosmos&#148;), a PRC company controlled through
contractual agreements. Cosmos was registered in May&nbsp;2003 and acquired by the Company in
June&nbsp;2005 (note 7). Cosmos is 50% owned by our Human Resource manager Rong Zhang and
Product Development Manager Teng Zhao. As of December&nbsp;31, 2005, total interest free loans
to shareholders amounted to $1.7&nbsp;million.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD> Hainan Zhong Tong Computer Network Co., Ltd.(&#147;Zhong Tong&#148;), a PRC company controlled
through contractual agreements. Zhong Tong was registered in October&nbsp;2000, and acquired by
the Company in June&nbsp;2005 (note 7). Zhong Tong is 50.0% owned by our Finance Controller,
Jinhua Yuan and our Product Development Manager, Teng Zhao. As of December&nbsp;31, 2005, total
interest free loans to shareholders amounted to $1.7&nbsp;million.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Beijing Lian Fei Wireless Communication Technology Co., Ltd.(&#147;Lian Fei&#148;), a PRC company
controlled through contractual agreements. Lian Fei was registered in June&nbsp;2002, and
acquired by the Company in June&nbsp;2005 (note 7). Lian Fei is 50% owned by our Vice president
of Business Development, Yan Ma, and our Human Resource manager, Rong Zhang. As of December
31, 2005, total interest free loans to shareholders amounted to $1.7&nbsp;million.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><FONT style="font-family: Wingdings">&#108;</FONT></TD>
    <TD width="1%">&nbsp;</TD>
    <TD> Shanghai Qimingxing E-commerce Co., Ltd. (&#147;Qimingxing&#148;), a PRC company controlled
through contractual agreements. Qimingxing was registered in February&nbsp;2000, and acquired by
the Company in August&nbsp;2005 (note 7). Qimingxing is 50% owned by our Financial Controller,
Jinhua Yuan and our Technical senior manager, Xingyong Ding. As of December&nbsp;31, 2005, total
interest free loans to shareholders amounted to $0.9&nbsp;million.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All the above VIEs are engaged in the business of providing WVAS to mobile phone users in
China via third party operators except Yuan Hang, which is engaged in providing online gaming
services in China.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>2 Restatement of 2004 Consolidated Financial Statements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has restated its consolidated financial statements for the year ended December&nbsp;31,
2004 (&#147;the Restatement&#148;). The determination to restate these consolidated financial statements was
made by our management in consultation with the Audit Committee of the Board of Directors in
February&nbsp;2006, as a result of an error related to the accounting for stock options. In October
2004, the Company amended certain of its executive officers&#146; prior stock option grants to provide
that if the Company terminates an officer without cause, as defined in the Company&#146;s stock option
plans, or if any such officer resigns voluntarily, all or a portion of those options would
immediately become fully vested and exercisable at that time. Since upon voluntary termination a
portion of those options vest and become immediately exercisable, the Company determined that the
full amount of the deferred compensation relating to that portion of the options should have been
expensed in the fourth quarter of 2004, when the amendments were effected. The Restatement
increases the stock compensation expense for the year ended December&nbsp;31, 2004 by $1,444,000 and
decreases net income before and after tax by $1,444,000, or $0.006 per diluted share and per basic
share. This non-cash adjustment does not impact the Company&#146;s cash flow from operating activities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>3 Basis of presentation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These consolidated financial statements have been prepared in accordance with the accounting
principles generally accepted in the United States of America (&#147;U.S. GAAP&#148;).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All transactions and balances between the Group&#146;s businesses have been eliminated upon
consolidation.
</DIV>

<P align="center" style="font-size: 10pt">F-8
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>4 Use of estimates</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The preparation of financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported assets, liabilities, revenue and expenses
and the disclosure of contingent assets and liabilities. Actual results could differ from these
estimates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>5 Summary of significant accounting policies</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp; <I>(a)&nbsp;Basis of consolidation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The consolidated financial statements include the financial statements of the Company, its
subsidiaries, and the VIEs for which the Company is the primary beneficiary. All subsidiaries are
wholly-owned by the Company, and the Company does not hold any investments accounted for under the
cost or equity method.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has adopted FASB Interpretation No.&nbsp;46R (&#147;FIN 46R&#148;), Consolidation of variable
interest entities &#150; an interpretation of ARB No.&nbsp;51, which requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company began to consolidate the operating results of newly acquired subsidiaries and VIEs
as follows:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Brilliant, Wang You and Yuan Hang since June&nbsp;2005;</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Cosmos, Zhong Tong and Lian Fei since July&nbsp;2005 and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">(c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Qimingxing since September&nbsp;2005.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2005, the aggregate accumulated profits of all VIEs were approximately $9.4
million and have been reflected in the consolidated financial statements.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(b)&nbsp;Cash and cash equivalents</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group considers all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents are composed primarily of investments in
money market accounts stated at costs, plus accrued interest, which approximates fair value.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(c)&nbsp;Short-term investments</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Short-term marketable securities are classified as available-for-sale and carried at estimated
fair value with unrealized gains and losses recorded as a component of accumulated other
comprehensive income. Management determines the appropriate classification of its short-term
investments and re-evaluates such determination at each balance sheet date.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(d)&nbsp;Accounts receivable</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;An allowance for doubtful debts is provided based on an ageing analysis of accounts receivable
balances, historical bad debt rates, repayment patterns, customer credit worthiness and industry
trend analysis. The Group also makes a specific allowance if there is strong evidence showing that
the receivable is likely to be irrecoverable. Accounts receivables in the balance sheet are stated
net of such allowance of $338,291 and $148,237 as of December&nbsp;31, 2004 and 2005.
</DIV>

<P align="center" style="font-size: 10pt">F-9
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(e)&nbsp;Property and equipment, net</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and equipment are stated at cost less accumulated depreciation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and equipment are depreciated over their estimated useful lives on a straight-line
basis. As a result of experience, management considered that the original estimates on residual
value and useful life of property and equipment require revision. Effective from January&nbsp;1, 2005,
the Group has changed its estimation on residual value and useful life of property and equipment.
The estimated residual value has been changed from 10% to zero. The estimated useful lives have
been changed as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="29%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="29%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" style="border-bottom: 1px solid #000000">Old Estimation</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" style="border-bottom: 1px solid #000000">New Estimation</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Computer hardware/equipment
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">60&nbsp;months
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">36-60&nbsp;months</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Office equipment
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">60&nbsp;months
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">12-36&nbsp;months</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Leasehold improvements
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">the shorter of
their estimated
useful lives or the
lease term
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">the shorter of
their estimated
useful lives or the
lease term</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No retrospective adjustment has been applied in the change of accounting estimation. The
changes increased the depreciation expense by $436,934 and reduced the income tax expense by
$123,976 for the year ended December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Expenditures for repairs and maintenance are expensed as incurred. The gain or loss on
disposal of property and equipment, if any, is the difference between the net sales proceeds and
the carrying amount of the relevant assets, and is recognized in the statement of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;<I>(f)&nbsp;Goodwill and intangible assets</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Goodwill represents the excess of the purchase price over the fair value of the identifiable
assets and liabilities acquired as a result of the Company&#146;s acquisitions of interests in its
subsidiaries and variable interest entities. The Company adopted Statement of Financial Accounting
Standards (&#147;SFAS&#148;) No.&nbsp;142 &#147;Goodwill and Intangible Assets&#148; (&#147;SFAS 142&#148;). Under SFAS 142, goodwill
is no longer amortized, but tested for impairment upon first adoption and annually thereafter, or
more frequently if events or changes in circumstances indicate that it might be impaired. The
Company assess goodwill for impairment in accordance with SFAS 142. In December of each year, the
Company tests impairment of goodwill at the reporting unit level and recognizes impairment in the
event that the carrying value exceeds the fair value of each reporting unit.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company applies the criteria specified in SFAS No.&nbsp;141 &#147;Business Combinations&#148; (&#147;SFAS
141&#148;) to determine whether an intangible asset should be recognized separately from goodwill.
Intangible assets acquired through business acquisitions are recognized as assets separate from
goodwill if they satisfy either the &#147;contractual-legal&#148; or &#147;separability&#148; criterion. Per SFAS 142,
intangible assets with definite lives are amortized over their estimated useful life and reviewed
for impairment in accordance with Statement of Financial Accounting Standards No.&nbsp;144 (note 5(g))
&#147;Accounting for the Impairment or Disposal of Long-lived Assets&#148; (&#147;SFAS 144&#148;). Intangible assets,
such as purchased technology, licenses, domain names, partnership, and non-compete agreements,
arising from the acquisitions of subsidiaries and variable interest entities are recognized and
measured at fair value upon acquisition. Intangible assets are amortized over their estimated
average useful lives from one to three years. The Company reviews the amortization methods and
estimated useful lives of intangible assets regularly.
</DIV>

<P align="center" style="font-size: 10pt">F-10
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(g)&nbsp;Impairment of long-lived assets and intangible assets</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Long-lived assets and intangible assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company
assesses the recoverability of the long-lived assets and intangible assets (other than goodwill) by
comparing the carrying amount to the estimated future undiscounted cash flow associated with the
related assets. The Company recognizes impairment of long-lived assets and intangible assets in the
event that the net book value of such assets exceeds the estimated future undiscounted cash flow
attributable to such assets. The Company uses estimates and judgments in its impairment tests and
if different estimates or judgments had been utilized, the timing or the amount of the impairment
charges could be different. No impairment of long-lived assets and intangible assets was recognized
for any of the years presented.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(h)&nbsp;Revenue and cost of services recognition</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Wireless value added services</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The vast majority of the Group&#146;s revenues are derived from entertainment-oriented wireless
value-added services including Short Messaging Services (&#147;SMS&#148;), Multimedia Messaging Services
(&#147;MMS&#148;), Wireless Application Protocol (&#147;WAP&#148;), Java<SUP style="font-size: 85%; vertical-align: text-top">TM </SUP>(&#147;Java games&#148;), Interactive Voice
Response Services (&#147;IVR&#148;) and Ring Back (&#147;RB&#148;) services (IVR and RB, collectively known as &#147;Audio
Related Services&#148;) to phone users through various subsidiaries of China Mobile Communications
Corporation (&#147;China Mobile&#148;), China United Communications Corporation (&#147;China Unicom&#148;), China
Telecom Corporation and China Netcom Corporation (collectively the &#147;Operators&#148;). Fees for these
services are charged on a per message basis or on a monthly subscription basis, and vary according
to the type of products and services delivered.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group recognizes all revenues in the period in which the services are performed, provided
that persuasive evidence of a contractual arrangement exists, delivery has occurred, the sales
price is fixed or determinable, and collectibility is reasonably assured. A substantial portion of
the Group&#146;s revenue is recorded based on monthly statements received from provincial level
subsidiaries of the Operators. In certain instances, when a statement is not received within a
reasonable period of time, the Group is required to make an estimate of the revenues and cost of
services earned during the period covered by the statement. On a quarterly basis, the Group
evaluates its estimates based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. For the year ended December&nbsp;31, 2005,
approximately 2% of the Group&#146;s revenues were estimated respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group contracts with the Operators for the transmission of wireless value-added services
as well as for billing and collection services. The Group measures its revenues based on the total
amount paid by its customers, for which the Operators bill and collect on the Group&#146;s behalf. For
this billing and collection services, the Operators retain a fixed percentage fee, which is
reflected as a cost of services in the financial statements. In addition, for SMS and MMS services,
the Operators charge the Group a network usage fee based on a fixed per message rate multiplied by
the excess of messages sent over message received. These network usage fees are likewise retained
by the Operators, and are reflected as a cost of services in the financial statements. Network
usage fees charged to the Group are reduced for messages received by the Group because the
Operators separately charge the sender a fee for these transmissions. The Group has assessed its
relationship with the Operators and the terms of the fee arrangement under Emerging Issue Task
Force Issue No 99-19, and has concluded that reporting the gross amounts billed to its customers is
appropriate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group licenses content from independent content providers. Certain of these agreements
determine the fees payable for content based on a percentage of revenues of the Group generated
from the use of the content. The Group records its revenues inclusive of fees to be paid to content
providers as the Group acts as the principal in these arrangements.
</DIV>

<P align="center" style="font-size: 10pt">F-11
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Casual Online Games Services</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group currently provides its casual online game services through its subsidiaries,
Brilliant and Wang You, and VIE, Yuan Hang. The Group receives subscription fees from distributors
for the sales of game cards, in either physical or virtual form, with certain number of game points
incorporated in the cards. The corresponding revenue is recognized as the game points are consumed
by game players in games. Any sold out game cards which are not activated by users and activated
points which are not consumed in games constitute deferred revenue.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(i)&nbsp;Income and other taxes</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group accounts for income tax using SFAS No.&nbsp;109 &#147;Accounting for Income Taxes,&#148; which
requires the asset and liability approach for financial accounting and reporting for income taxes.
Under this approach, deferred taxes are provided for the tax consequences of temporary differences
by applying enacted statutory rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities. The tax basis of
an asset or liability is the amount attributed to that asset or liability for tax purposes. The
effect on deferred taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax
assets if it is considered more likely than not that some portion of, or all of, the deferred tax
asset will not be realized. Shanghai Unilink and Qimingxing are currently considered small
businesses and are subject to a 2.4% tax on revenues and 4.8% on the difference between revenue and
cost of service, as defined for tax purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group is also subject to business taxes (BT)&nbsp;of 3-5% on the provision of taxable services,
which includes services provided to customers and in certain instances to the variable interest
entities. All business taxes paid are accrued for as a reduction of revenues.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group charges software license fees to the variable interest entities which are subject to
value added tax (&#147;VAT&#148;) at 17%. The Group is entitled to a tax refund equivalent to portion of VAT
expense in excess of 3%.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(j)&nbsp;Advertising expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Advertising expenses generally represents the cost of promotions to create or stimulate a
positive image of the Group or a desire to buy the Group&#146;s products and services, and are expensed
as incurred. Advertising expenses totaled approximately $938,750, $3,441,117 and $6,151,167 during
the years ended December&nbsp;31, 2003, 2004 and 2005, respectively.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(k)&nbsp;Product development expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Product development expenses consist primarily of compensation and related costs for employees
associated with the development of the content of our products and development, enhancement to and
maintenance of related product technical platforms and customer databases.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group accounts for the cost of developing the content of our products in accordance with
FAS 86, &#147;Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed&#148;
and would capitalize, if criteria under FAS 86 were met, direct costs incurred during the
development phase and amortize on a straight-line basis over the estimated product life or on the
ratio of current revenues to total projected product revenue, which ever is greater.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group accounts for product development costs of technical platform and customer database
under SOP 98-1, &#147;Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use&#148; and would capitalize, if criteria under SOP 98-1 were met, direct costs associated in
developing or obtaining internal-use computer software during the application development stage.
Cost incurred in the enhancement and maintenance of the Group&#146;s existing platforms and database are
charged to product development expense as incurred.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To date, the amount of costs qualifying for capitalization under FAS 86 and SOP98-1 has been
immaterial and as a result, all product development costs have been expensed as incurred.
</DIV>

<P align="center" style="font-size: 10pt">F-12
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(l)&nbsp;Stock-based compensation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group accounts for share-based employee compensation arrangements in accordance with APB
No.&nbsp;25, &#147;Accounting for Stock Issued to Employees&#148; (&#147;APB No.&nbsp;25&#148;) and related interpretations. In
general, compensation cost under APB No.&nbsp;25 is recognized based on the difference, if any, between
the estimated fair value of the Group&#146;s ordinary shares on the measurement date and the amount an
employee must pay to acquire the shares. The measurement date is determined when the number of
shares and the exercise price are fixed. Total compensation cost as determined at the date of
option grant is recorded in shareholders&#146; equity/(deficit) as additional paid-in capital with an
offsetting entry to deferred stock-based compensation. Deferred stock-based compensation is
amortized on a straight-line basis and charged to expense over the vesting period of the underlying
options. The Group accounts for stock-based arrangements issued to non-employees using the fair
value method, which recognizes compensation expense based on the fair value of the options using
the Black-Scholes option pricing model on the date of grant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other than the recognition of the full amount of the deferred compensation relating to that
portion of the options that would have become vested upon voluntarily termination of certain
executive officers as stated in note 2, the stock option amendment in October&nbsp;2004 (detail stated
in note 2) also created a re-measurement under FIN44 &#147;Accounts for Certain Transactions Involving
Stock Compensation&#148;. The incremental compensation arising from the re-measurement would be recorded
when the event of early terminations occurred or became probable. Our chief operating officer
(&#147;COO&#148;) and chief executive officer (&#147;CEO&#148;), resigned on January&nbsp;3, 2006 and February&nbsp;24, 2006
respectively (note 26), both officers have stock option plans covered by the amendment mentioned in
note 2. As a result, for the year ended December&nbsp;31, 2005 the Company recorded an incremental
compensation expense of $776,411 under APB No.25, measured at the excess of the fair value of the
shares at the date of amendment over the original intrinsic value for accelerated options.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As required by SFAS No.&nbsp;148, accounting for Stock-Based Compensation &#150; Transition and
Disclosure &#150; an amendment of FASB Statement No.&nbsp;123, the following table shows the estimated effect
on net income and earnings per share if the Company had applied the fair value recognition
provision of SFAS No.&nbsp;123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>For the year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Restated)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,616,083</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,066,034</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Add: Compensation
expense for employees
under APB No.&nbsp;25</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,119,529</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,464,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,012,425</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: Compensation
expense for employees
under fair value based
methods</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(87,861</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,183,519</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,653,862</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pro forma net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,647,751</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,347,322</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,807,626</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accretion on Series&nbsp;B
convertible redeemable
preferred
shares
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(143,936</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28,206</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amount allocated to
participating preferred
shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,368,058</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(958,473</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pro forma net income
attributable to ordinary
shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,135,757</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,360,643</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,807,626</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic earning per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; As reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; Pro forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.06</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted earning per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; As reported</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&#151; Pro forma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Restatement reduces the pro forma net income for the year ended December&nbsp;31, 2004 by
$82,400. The incremental compensation expense under fair value based methods as a result of the
acceleration was $1,112,467 for the year ended December&nbsp;31, 2005.
</DIV>

<P align="center" style="font-size: 10pt">F-13
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We calculated the fair value of each option grant on the date of grant using the Black-Scholes
option pricing model. The following are the assumptions used for each respective period:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>For the year ended December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Risk-free interest rate (%)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3.19</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">1.73-3.61</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">1.73-4.36</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected life (years)(1)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">2-5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">2-6</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected dividend yield (%)(2)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Volatility (%)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">60</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 16pt; width: 18%; border-top: 1px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">(1)</TD>
    <TD>&nbsp;</TD>
    <TD>In the absence of sufficient historical data in the exercise behavior of our staff, the
Company decided for the short term to use the shortcut method which applies the mid point
of option life and average vesting period.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD nowrap align="left">(2)</TD>
    <TD>&nbsp;</TD>
    <TD>The Company used a 6-year period historical data of similar entities in the industry to
estimate expected stock price volatility used in the computation of stock based
compensation under the fair value method.</TD>
</TR>

</TABLE>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In December&nbsp;2004, the FASB issued SFAS No.&nbsp;123R, Shared Based Payment. This statement
establishes standards for the accounting for transactions in which an entity exchanges its equity
instruments for goods and services. It focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions (employee stock options). The
statement requires the measurement of the cost of employee services received in exchange for an
award of equity instruments (such as employee stock options) at the fair value on the grant date.
That cost will be recognized over the period during which an employee is required to provide
services in exchange for the award (the requisite service period). Beginning the first quarter of
2006, the Company will adopt the provisions of SFAS No.123R under modified prospective transaction
method using the Black-Scholes option pricing model. We estimate the stock option compensating
expense related to the unvested options at December&nbsp;31, 2005 upon adoption of FAS123R to be $2
million to $2.5&nbsp;million which would be recognized in 2006 and thereafter.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(m)&nbsp;Foreign currency translation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s functional and reporting currency is the U.S. dollar (&#147;US$&#148;). The functional
currency of the Company&#146;s operating subsidiaries and consolidated variable interest entities in
China is the Renminbi (&#147;RMB&#148;). Transactions denominated in currencies other than RMB are translated
into RMB at the exchange rates quoted by the People&#146;s Bank of China (the &#147;PBOC&#148;) prevailing at the
dates of the transactions. Gains and losses resulting from foreign currency transactions are
included in the consolidated statement of operations. Monetary assets and liabilities denominated
in foreign currencies are translated into RMB using the applicable exchange rates quoted by the
PBOC at the balance sheet dates. All such exchange gains and losses are included in the statement
of operations. All assets and liabilities of our subsidiaries and consolidated VIEs in China are
translated into US$ at the exchange rates in effect at the balance sheet date and revenues and
expenses are translated into US$ at the average exchange rates in effect during the reporting
periods. The exchange differences resulting from translating the PRC entity financial statements
into US$ are included in Accumulated Other Comprehensive Income which is a separate component of
shareholders&#146; equity/(deficit) on the consolidated balance sheets.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(n)&nbsp;Comprehensive income</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Comprehensive income is defined as the change in equity of the Group during a period from
transactions and other events and circumstances excluding transactions resulting from investments
by owners and distributions to owners. For this purpose, holders of redeemable convertible equity
securities are deemed to be owners. Accumulated other comprehensive income of the Group represents
the cumulative foreign currency translation adjustment and unrealized gain or loss on short term
investments.
</DIV>

<P align="center" style="font-size: 10pt">F-14
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(o)&nbsp;Earnings/(Loss) per share</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In accordance with SFAS No.&nbsp;128 &#147;Computation of Earnings Per Share,&#148; basic earnings/(loss) per
share is computed by dividing net income/(loss) attributable to ordinary shareholders by the
weighted average number of ordinary shares outstanding during the period. Diluted earnings/(loss)
per share is calculated by dividing net income/(loss) by the weighted average number of ordinary
and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares
consist of the ordinary shares issuable upon the conversion of the convertible preferred shares
(using the if-converted method) and ordinary shares issuable upon the exercise of outstanding share
options (using the treasury stock method). Ordinary equivalent shares in the diluted
earnings/(loss) per share computation are excluded in net loss periods as their effect would be
anti-dilutive.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has adopted the consensus reached in EITF 03-06, &#147;Participating Securities and the
Two-Class&nbsp;Method under SFAS No.&nbsp;128,&#148; which provides further guidance on the definition of
participating securities and requires the use of the two &#150; class method in calculating earnings per
share for enterprises with participating securities. The Company determined that all its preferred
stock outstanding through March&nbsp;31, 2004 qualified as participating securities.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(p)&nbsp;Segment reporting</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group follows SFAS No.&nbsp;131 &#147;Disclosures about Segment of an Enterprise and Related
Information.&#148; The Group operates and manages its wireless value added service business and casual
game business as two separate segments. For the year ended 31 December&nbsp;2005, the casual game
business was not material, accounts for 2% of the Group&#146;s total revenue. The Group generates its
revenues solely from phone users in China and accordingly, no geographical segments are presented.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>6 Preferred shares</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the reorganization in April of 2001, the Company capitalized 66,172 shares
of Series&nbsp;B redeemable convertible preferred share at an assigned value of $274,303 and 336,848
shares of Series&nbsp;A convertible preferred stock at an assigned value of $1,245,200. Simultaneous
with the reorganization, the Company issued warrants to purchase 110,287 shares of Series&nbsp;B
convertible preferred share with an exercise price of $0.01 per share, which were exercised on May
30, 2001. Subsequent to the reorganization, the Company issued an additional 34,980 shares of
Series&nbsp;A preferred share in 2001 for consideration of $9.85 per share, and an additional 3,555
shares of Series&nbsp;A preferred share in 2002 for consideration of $9.84 per share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In April&nbsp;2001, the Company issued 245,203 shares of Series&nbsp;C redeemable convertible preferred
share (&#147;Series&nbsp;C&#148;) for consideration of $8.15 per share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In July&nbsp;2001, the Company issued 101,570 shares of Series&nbsp;D convertible preferred share
(&#147;Series&nbsp;D&#148;) for consideration of $9.84 per share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In February&nbsp;2002, the Company issued 101,570 shares of Series&nbsp;E redeemable convertible
preferred share (&#147;Series&nbsp;E&#148;) for consideration of $9.84 per share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Holders of the Company&#146;s preferred stock have various rights and preferences as follows:
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>Voting</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Holders of preferred shares have voting rights equal to the voting rights to which the
ordinary share then issuable upon conversion of such preferred share are entitled.
</DIV>

<P align="center" style="font-size: 10pt">F-15
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>Dividends</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The holder of each preferred share is entitled to participate in dividends, when and if
declared by the Board of Directors. No dividends have been declared by the Board of Directors from
inception of the Company through December&nbsp;31, 2003.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>Liquidation</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the
Group, or the sale of all or substantially all of its assets, holders of Series&nbsp;B, C, D and E
preferred shareholders, and Icon (a specified holder of Series&nbsp;A preferred share), each as a class,
shall receive $1,500,000, $2,000,000, $1,000,000, $999,997 and $750,000, respectively, after which
the remaining liquidation proceeds shall be distributed pro rata amongst all the shareholders,
including the Series&nbsp;A preferred shareholders other than Icon, in accordance with each
shareholders&#146; respective shareholding percentages, with each preferred share participating as if
converted into ordinary shares.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>Conversion</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each preferred share shall be convertible into one ordinary share, as such conversion may be
adjusted from time to time, including stock splits, in accordance with the conversion provisions in
the Company&#146;s Articles of Incorporation. Each preferred share shall be automatically converted into
such number of ordinary shares, as such conversion may be adjusted, upon (i)&nbsp;the closing of a
qualified initial public offering (&#147;IPO&#148;), or (ii)&nbsp;upon the terms and conditions as each may be
agreed between the Company and the holders of the relevant shares.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>Mandatory redemption</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The holders of Series&nbsp;B and Series&nbsp;C shares are entitled to redeem all of the outstanding
Series&nbsp;B and Series&nbsp;C shares on or after April&nbsp;30, 2007. The holders of Series&nbsp;E shares are
entitled to redeem all of the outstanding Series&nbsp;E shares on or after September&nbsp;3, 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The redemption price for the original Series&nbsp;B shares capitalized upon spin-off is $1,500,000.
The redemption price for the Series&nbsp;B shares purchased upon exercise of the Series&nbsp;B warrants is
$1,100. Due to the insignificance of the redemption price, these Series&nbsp;B shares purchased upon the
exercise of Series&nbsp;B warrants are classified as convertible preferred shares in shareholders&#146;
equity/(deficit). The redemption prices of the Series&nbsp;C and Series&nbsp;E shares are $2,000,000 and
$1,000,000, respectively. If on the redemption date the number of shares that may be legally
redeemed by the Group is less than the number of such shares to be redeemed, then the shares to be
redeemed shall be allocated to Series&nbsp;B redeemable preferred shareholders and Series&nbsp;C redeemable
preferred shareholders pro rata in accordance with each of its shareholding percentage at such
time, and the remaining shares that may not legally be redeemed shall be carried forward until the
Group has legally available funds for such redemption.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each of the Company&#146;s preferred shares was converted into 100 ordinary shares upon the closing
of the Company&#146;s IPO process on March&nbsp;4, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>7 Business Combinations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group accounts for its business combinations using the purchase method of accounting. This
method requires that the acquisition cost to be allocated to the assets, including separate
identifiable tangible assets, and liabilities the Group acquired based on their estimated fair
values. The Company makes estimates and judgments in determining the fair value of the acquired
assets and liabilities based on independent appraisal reports as well as its experience with
similar assets and liabilities in similar industries. If different judgment or assumptions were
used, the amounts assigned to the individual acquired assets or liabilities could be materially
affected.
</DIV>

<P align="center" style="font-size: 10pt">F-16
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(a)&nbsp;Acquisition of Brilliant</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In May&nbsp;2005, the Company completed the acquisition of Brilliant Concept Investments Ltd.
(&#147;Brilliant&#148;), a British Virgin Islands limited liability corporation. As a result of such
acquisition, Brilliant Group became a wholly-owned subsidiary of Linktone. Brilliant, through its
subsidiary Wang You and exclusive contractual arrangements with a local entity, Yuan Hang, is
engaged in providing online gaming services in the PRC. Brilliant, its subsidiary and affiliated
company are collectively known as Brilliant Group. As a result of acquisition, Yuan Hang became a
VIE of Linktone. The primary purposes of the acquisition was to complement and leverage Linktone&#146;s
core WVAS business as the Company builds a robust interactive entertainment community.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate purchase price is comprised of initial consideration and a contingent
consideration calculated on an earn out basis at 65% of 8 times of the Brilliant Group&#146;s net profit
for the year 2005. The initial consideration comprised of $3,141,374 cash to selling shareholders
and $238,016 legal and professional costs related to the acquisition. As of December&nbsp;31, 2005,
the Company finalized the additional consideration related to the earn out period in the amount of
$5,709,644, which was recorded as additional goodwill in the year ended December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The total purchase price of $9,089,034 was allocated as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">379,025</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">234,170</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Fixed assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,143</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">602,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(322,511</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,099,207</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase price</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">9,089,034</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortizable intangible assets acquired, including customer list, technology, operation license
and agreements and non-compete agreements with certain Brilliant&#146;s executives, have an estimated
average useful life of approximately one year. The amortization expense of intangible assets for
the year ended December&nbsp;31, 2005 was $387,146. As of December&nbsp;31, 2005, total goodwill recorded for
the Brilliant acquisition was $8,099,207, representing the excess of the total purchase price over
the fair value of the net tangible and identifiable intangible assets acquired. Immediately after
the closing of the acquisition, the operating results of Brilliant Group were consolidated with
those of the Company starting from June&nbsp;2005.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(b)&nbsp;Acquisition of Cosmos</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;2005, the Company completed the acquisition of Cosmos, a leading privately-held
provider of WAP services to China Unicom. As a result of such acquisition, Cosmos became a VIE of
Linktone. Cosmos is wholly owned by two employees of Linktone. The primary purposes of the
acquisition were to strengthen the Company&#146;s overall WAP service portfolio and development
capabilities and increase its share in the 2.5 WVAS market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate purchase price is comprised of an initial consideration and a contingent
consideration. The initial consideration is comprised of three elements: (a) $845,768 cash paid to
Cosmos for settling the loan owned by the selling shareholders to Cosmos (b) $230,307 cash paid to
selling shareholders for the net working capital of Cosmos as of May&nbsp;31, 2005 and (c)&nbsp;approximately
$295,570 in legal and professional costs related to the acquisition. The contingent consideration
will be calculated on an earn out basis at approximately 3.8 times of Cosmos&#146;s net profit for the
period from May&nbsp;1, 2005 to April&nbsp;30, 2006. The contingent consideration is subject to a cap of $3.1
million. The Company has paid $604,120 (note 12) cash to shareholders as part of the advance
payment for the contingent consideration. In addition, the Company recorded an acquisition related
payable of $897,205 as of December&nbsp;31,2005.
</DIV>

<P align="center" style="font-size: 10pt">F-17
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The initial purchase price of $1,371,645 was allocated as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">938,630</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">358,817</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Fixed assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,307</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,243,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(408,151</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">102,247</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Acquisition related payable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(897,205</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase price</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,371,645</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortizable intangible assets acquired, including technology, VASP license and agreements and
non-compete agreements with certain Cosmos executives, have an estimated average useful life of
approximately 3.3&nbsp;years. The amortization expense of intangible assets for the year ended December
31, 2005 was $187,627. The prepayment and additional payment after deducting the acquisition
related payable will be recorded as goodwill. The operating results of Cosmos were consolidated
with those of the Company starting July&nbsp;1, 2005 after the Company took effective control over the
operations of Cosmos.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(c)&nbsp;Acquisition of Zhong Tong</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;2005, the Company completed the acquisition of Zhong Tong, a privately held provider
of SMS services to China Mobile. As a result of such acquisition, Zhong Tong became a VIE of
Linktone. Zhong Tong is wholly owned by two employees of Linktone. The primary purpose of the
acquisition was to provide a separate network access codes for the Company&#146;s specific project.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate purchase price was $1,715,923 and comprised of three elements: (a) $730,696 cash
to selling shareholders; (b) $966,592 cash paid to Zhong Tong for settling the loan owned by the
selling shareholders to Zhong Tong and (c)&nbsp;approximately $18,635 in legal and professional costs
related to the acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The purchase prices of $1,715,923 was allocated as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,029,137</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">165,847</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Fixed assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,057</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">230,436</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(227,909</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">497,355</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase price</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,715,923</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortizable intangible assets acquired, including VASP license and agreements have an
estimated average useful life of approximately 3.3&nbsp;years. The amortization expense of intangible
assets for the year ended December&nbsp;31, 2005 was $34,922. As of December&nbsp;31, 2005, total goodwill
recorded for the Zhong Tong acquisition was $497,355, representing the excess of the purchase price
over the fair value of the net tangible and identifiable intangible assets acquired. Immediately
after the closing of the acquisition, the operating results of Zhong Tong were consolidated with
those of the Company starting from July&nbsp;2005.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(d)&nbsp;Acquisition of Lian Fei</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June&nbsp;2005, the Company completed the acquisition of Lian Fei, a privately held provider of
MVAS services to China Mobile. As a result of such acquisition, Lian Fei became a VIE of Linktone.
Lian Fei is wholly owned by two employees of Linktone. The primary purpose of the acquisition was
to provide a separate network access code in order to increase the Company&#146;s market share in the
PRC WVAS market.
</DIV>

<P align="center" style="font-size: 10pt">F-18
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate purchase price was $2,025,395 and comprised of three elements: (a) $1,472,866
cash to selling shareholders; (b) $543,708 cash paid to Lian Fei for settling the loan owned by the
selling shareholders to Lian Fei and (c)&nbsp;approximately $8,821 in legal and professional costs
related to the acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The purchase prices of $2,025,395 was allocated as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">601,712</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">441,994</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">283,284</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(286,833</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">985,238</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase price</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,025,395</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortizable intangible assets acquired, including VASP license and agreements have an
estimated average useful life of 3.3&nbsp;years. The amortization expense of intangible assets for the
year ended December&nbsp;31, 2005 was $43,096. As of December&nbsp;31, 2005, total goodwill recorded for the
Lian Fei acquisition was $985,238, representing the excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets acquired. Immediately after the
closing of the acquisition, the operating results of Lian Fei were consolidated with those of the
Company starting from July&nbsp;2005.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(e)&nbsp;Acquisition of Qimingxing</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August&nbsp;2005, the Company completed the acquisition of Qimingxing, a privately held provider
of MVAS services to China Mobile. As a result of such acquisition, Qimingxing became a VIE of
Linktone. Qimingxing is wholly owned by two employees of Linktone. The primary purpose of the
acquisition was to provide a separate network access code in order to increase it market share in
the PRC WVAS market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate purchase price was $1,866,072 and comprised of three elements: (a) $747,052 cash
to selling shareholders; (b) $1,110,015 cash payable to Qimingxing for settling the loan owned by
the selling shareholders to Qimingxing and (c)&nbsp;approximately $9,005 in legal and professional costs
related to the acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The purchase prices of $1,866,072 was allocated as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,026</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,154,451</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">233,764</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,341</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">487,172</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase price</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,866,072</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortizable intangible assets acquired, including VASP license and agreements have an
estimated average useful life of approximately 3.3&nbsp;years. The amortization expense of intangible
assets for the year ended December&nbsp;31, 2005 was $23,841. As of December&nbsp;31, 2005, total goodwill
recorded for the Qimingxing acquisition was $487,172, representing the excess of the purchase price
over the fair value of the net tangible and identifiable intangible assets acquired. Immediately
after the closing of the acquisition, the operating results of Qimingxing were consolidated with
those of the Company starting from September&nbsp;2005.
</DIV>

<P align="center" style="font-size: 10pt">F-19
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table summarizes the goodwill arising from acquisitions:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Brilliant</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">8,099,207</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cosmos</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">102,247</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Zhong Tong</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">497,355</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Lian Fei</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">985,238</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Qimingxing</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">487,172</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">10,171,219</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In accordance with SFAS 142, goodwill is not amortized but is subject to annual impairment
assessment. The Company performed impairment tests relating to goodwill arising from the above
acquisitions and concluded there were no impairment as to the carrying value of the goodwill as of
December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on an assessment on all the acquired companies&#146; financial performance made by the Group
in 2005, only Brilliant Group is considered material to the Group. The following un-audited pro
forma financial information reflects the consolidated results of operations of the Group as if the
acquisition of Brilliant Group had taken place on January&nbsp;1, 2005. The pro forma information
includes adjustment for amortization of intangible assets acquired. The pro forma financial
information is not necessarily indicative of the results of operations as it would have been had
the transaction been affected on the assumed date.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000">(Pro forma)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">2005</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" colspan="2">(unaudited)</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,918,603</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,306,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Earning per basic share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Earning per dilutive share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Brilliant Group started to provide online games services from April&nbsp;2004 and its revenue and
expenses for 2004 were not material to the Group. Given the insignificance of Brilliant Group&#146;s
financial results in 2004 and the minimal impact of any related purchase adjustments, the
management believes the presentation of the un-audited pro forma information with regards to a
summary of the results of operations of the Group assuming the acquisition of Brilliant Group had
occurred on January&nbsp;1, 2004 is not necessary.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>8 Cash and Cash equivalents</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">53,235,397</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">24,527,083</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Investment in money market accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,178,232</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,725,595</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">63,413,629</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">36,252,678</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Interest income earned from the above cash and cash equivalents amounted to $734,372 and
$1,005,854 for the years ended December&nbsp;31, 2004 and 2005 respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>9 Short term investments</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The investment in marketable debt securities is classified as available for sale securities.
The Company invests in these securities with the intent to make such funds readily available for
operating or acquisition purposes and accordingly, classifies them as short term investments. All
the marketable debt securities are due within one year and the aggregate fair values of these
securities as of December&nbsp;31, 2004 and December&nbsp;31, 2005 were $14,860,365 and $41,580,530
respectively.
</DIV>

<P align="center" style="font-size: 10pt">F-20
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the years ended December&nbsp;31, 2004 and December&nbsp;31, 2005, the Group recorded $64,678 and
$ 96,317 respectively of unrealized losses on its marketable debt securities as a component of
comprehensive income. The Company considers that the declines in value are not an other than
temporary impairment, because the declines in market value were attributable to changes in
interests rates, not credit quality and because the Company has the ability and intent to hold
these investments until maturity. Investments in available-for-sale debt securities at fair value
were as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>As of December 31, 2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accrued</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Estimated fair</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>interest</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Unrealized loss</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>value</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate bond and
notes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">14,843,949</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">81,094</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(64,678</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">14,860,365</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>As of December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accrued</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Estimated fair</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>interest</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Unrealized loss</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>value</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Government and
government agency
bonds</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,493,880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">262,393</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(21,410</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">18,734,863</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate bonds</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,110,705</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">570,742</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(74,907</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,606,540</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Time deposit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,239,127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,239,127</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,843,712</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">833,135</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(96,317</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">41,580,530</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>10 Accounts receivable, net</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">10,783,826</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,093,899</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: Allowance for doubtful accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(338,291</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(148,237</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,445,535</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,945,662</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Movement in allowance for doubtful accounts:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(161,478</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(338,291</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Reverse/ (charge)&nbsp;to expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(176,813</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">190,054</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(338,291</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(148,237</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>11 Tax refund receivable</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Receivable related to invoiced revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,994,621</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,361,630</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Receivable related to un-invoiced revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">602,546</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">769,498</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,597,167</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,131,128</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the years ended December&nbsp;31, 2004 and December&nbsp;31, 2005, pursuant to various software
license agreements signed between Huitong, Linktone Internet, Weilan and Unilink, Huitong charged
Weilan and Unilink a total fee (based on invoiced revenue) of $18.4&nbsp;million and $26.2&nbsp;million
respectively for the use of its software products. For the year ended December&nbsp;31, 2005, Linktone
Internet charged Weilan and Unilink a total fee (based on invoiced revenue) of $9.8&nbsp;million for the
use of its software products. These fees are subject to a 17% VAT. Under applicable tax
regulations, Huitong and Linktone Internet are entitled to a tax refund equivalent to portion if
VAT expenses in excess of 3%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the year ended December&nbsp;31, 2005, Huitong and Linktone Internet paid a total of $5.7
million ($3.4&nbsp;million relates to year 2004) and $0.6&nbsp;million respectively for the 17% VAT and
received a total of $4.5&nbsp;million ($2.6&nbsp;million
relates to year 2004) and $0.5&nbsp;million tax refund respectively, representing the 14% VAT
expenses in excess of 3%.
</DIV>

<P align="center" style="font-size: 10pt">F-21
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, as of December&nbsp;31, 2005 Huitong and Linktone Internet accrued VAT refund
receivable and payable of $2.1&nbsp;million and $2.6&nbsp;million (note 17) respectively for the remaining
software license fees that they earned in 2005 (including $11.4&nbsp;million relating to revenue
invoiced in 2005 and $6.4&nbsp;million relating to revenue expected to invoice in 2006). Management
believes the full amount of $2.1&nbsp;million is refundable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>12 Deposits and other receivables</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Rental and other deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">424,025</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">579,899</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Staff advances</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">307,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">833,047</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Convertible loan receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">581,782</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Prepayments to advertising suppliers, content and other providers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">983,853</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,325,879</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Prepayments for fixed assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49,092</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Prepayment for acquisition of VIE (note 7(b))</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">604,120</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Restricted cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,123,184</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">122,868</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">89,354</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,900,433</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,136,949</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Staff advances include advances to employees for settlement of investment related payables for
acquisition of VIEs. The settlement is expected to be made within a year. As of December&nbsp;31, 2004
and December&nbsp;31, 2005, such advances amounted to $nil and $433,694 respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Convertible loan receivable relates to part of the drawdown of an interest free convertible
loan totaling $2,555,000, pursuant to senior secured convertible loan agreements, signed with 9
Sky International Ltd. and its related parties, Shanghai Yue Sheng Information Technology Co., Ltd.
and Shanghai Yin Zhi Yue Information Technology Co., Ltd. (collectively known as &#147;9 Sky entities&#148;)
and the shareholders&#146; representative of 9 Sky entities on October&nbsp;12, 2005. These loans are
convertible into certain percentage of shares of the 9 Sky entities upon occurrence of certain
conditions within six months of October&nbsp;12, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Restricted cash relates mainly to proceeds from exercise of stock options received on behalf
of employees. The related liability to employees is recorded in accrued liabilities and other
payables (note 18).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>13 Components of revenue</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group&#146;s revenue comprises SMS, 2.5G services including MMS, WAP and Java games, audio
related services including RB and IVR services, and casual games. Gross revenues for the years
ended December&nbsp;31, 2003, 2004 and 2005 are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">SMS</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,539,201</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">40,180,566</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">46,702,269</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Audio related services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,659,007</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,963,773</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2.5G services</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,449,366</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,300,826</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Casual games</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,374,995</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">62,291</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,805</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">266,740</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">16,601,492</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">50,318,744</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">73,608,603</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">F-22
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>14 Concentrations</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(a)&nbsp;Dependence on the Operators</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group&#146;s revenue is mainly derived from cooperative arrangements with the Operators in
Mainland China. The Operators are entitled to a portion of the revenues earned from the
transmission of wireless short messages as well as for the billing and collection of service. If
the strategic relationship with either the Operators in the PRC is terminated or scaled-back, or if
the Operators alter the revenue sharing arrangements, the Group&#146;s wireless value-added service
business would be adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues earned from China Mobile for the years ended December&nbsp;31, 2003, 2004 and 2005 are
approximately $14,667,344, $44,313,720 and $62,416,761, representing 88%, 88% and 85% of revenues,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amounts due from China Mobile as of December&nbsp;31, 2003, 2004 and 2005 amounted to approximately
$2,907,553, $9,319,663 and $13,173,196, respectively, representing 82%, 89% and 82% of accounts
receivable, respectively.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(b)&nbsp;Credit risk</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group depends on the billing system of the Operators to charge the mobile phone users
through mobile phone bills and collect payments from the users on behalf of the Group. The Group
generally does not require collateral for its accounts receivable. The Group has not experienced
any significant credit losses for any periods presented.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>15 Property and equipment</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Computer hardware/equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,266,944</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,983,058</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Office equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">761,170</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,002,484</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Leasehold improvements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,102,338</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,585,997</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,130,452</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,571,539</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: Accumulated depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(602,639</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,006,093</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net book value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,527,813</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,565,446</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the years ended December&nbsp;31, 2003, 2004 and 2005, the depreciation charges amounted to
approximately $90,856, $429,516 and $1,419,609, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Upon retirement or disposal of fixed assets, the cost and related amount of accumulated
depreciation or amortization are eliminated from the asset and accumulated depreciation accounts,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>16 Intangible assets</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Intangible assets from acquisitions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,592,484</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">402,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,994,484</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: Accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(760,299</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net book value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,234,185</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">F-23
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table summarizes the intangible assets acquired from Brilliant, Cosmos, Zhong
Tong, Lian Fei and Qimingxing:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;Brilliant
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Technology</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">180,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Customer base</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Licenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">95,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Partnership and non-compete agreements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">299,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">602,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(387,146</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net book value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">214,854</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;Cosmos
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Technology</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">524,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Licenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">64,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Partnership and non-compete agreements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">642,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Domain names</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,243,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(187,627</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net book value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,055,373</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;Zhong Tong
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Licenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">64,400</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Partnership and non-compete agreements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">159,370</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Domain names</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,666</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">230,436</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(34,922</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net book value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">195,514</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iv)&nbsp;Lian Fei
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Licenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">64,400</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Partnership and non-compete agreements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">206,370</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Domain names</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,514</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">283,284</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(43,096</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net book value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">240,188</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt">F-24
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(v)&nbsp;Qimingxing
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>As of December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Licenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">64,400</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Partnership and non-compete agreements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">162,680</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Domain names</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,684</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">233,764</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less: accumulated amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(23,841</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net book value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">209,923</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on the current amount of above intangible assets subject to amortization, the Company
estimated amortization expense for each of the succeeding three years is $817,646, $602,792 and
$495,414 for the years ended December&nbsp;31, 2006, 2007 and 2008 respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>17 Taxes payable</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Value added taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,419,283</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,625,588</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Business tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">763,479</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">501,028</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Enterprise income tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">630,667</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,465,238</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">265,538</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">306,928</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,078,967</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">5,898,782</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>18 Accrued liabilities and other payables</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Payable for acquisition of subsidiary and VIEs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">6,921,973</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,105,266</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,321,904</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued payroll</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">585,538</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">293,989</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued welfare benefits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">179,465</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">382,226</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Option proceeds due to staff</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">929,213</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">122,868</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Payable for purchase of fixed assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,168</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">272,575</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other payables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">223,696</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">571,170</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">4,181,346</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,886,705</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>19 Mainland China contribution plan and profit appropriation</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Full time employees of the Company and its subsidiaries in the PRC participate in a
government-mandated multi-employer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits
are provided to employees. Chinese labor regulations require that the Company and its subsidiaries
accrue for these benefits based on certain percentages of the employees&#146; salaries. The total
provision for such employee benefits was $188,762, $655,887 and $1,334,964, for the years ended
December&nbsp;31, 2003, 2004 and 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company is required to make contributions to the plan out of the amounts accrued for
medical and pension benefits to relevant local labor bureaus. The contributions for the years ended
December&nbsp;31, 2003, 2004 and 2005 amounted to $150,818, $509,744 and $1,318,296, respectively. The
local labor bureaus are responsible for the medical benefits and the pension liability to be paid
to these employees. The Company has no further commitments beyond its monthly contribution.
</DIV>

<P align="center" style="font-size: 10pt">F-25
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s subsidiaries and variable interest entities in the PRC must make appropriations
from after-tax profit to non-distributable reserve funds. Its subsidiaries, in accordance with the
laws on Enterprise with Foreign Investment of China, must make appropriations to a (i)&nbsp;general
reserve, (ii)&nbsp;enterprise expansion fund and (iii)&nbsp;staff bonus and welfare fund. The general reserve
fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at
each year-end) until such fund has reached 50% of the company&#146;s registered capital; the other fund
appropriations are at the company&#146;s discretion. The Company&#146;s VIEs, in accordance with the China
Company Laws, must make appropriations to a (i)&nbsp;statutory reserve fund, (ii)&nbsp;statutory public
welfare fund and (iii)&nbsp;discretionary surplus fund. The statutory reserve fund requires annual
appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end) until
such fund has reached 50% of the company&#146;s registered capital; the statutory public welfare fund
requires annual appropriations of at least 5~10% of after-tax profit (as determined under PRC GAAP
at each year-end); the other fund appropriation is at the company&#146;s discretion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General reserve fund and statutory reserve fund can only be used for specific purposes, such
as setting off of accumulated losses, enterprise expansion or increasing the registered capital.
Statutory public welfare fund must be used for capital expenditures for the collective welfare of
employees. These funds are not transferable to the Company in the form of cash dividends, loans or
advances.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In respect of the years ended December&nbsp;31,2004 and December&nbsp;31, 2005,the Group had
appropriated after-tax profits of $1,031,760 and $476,016 respectively to the statutory reserve and
statutory public welfare funds; the Group made no appropriations to the enterprise expansion fund,
staff bonus and welfare fund and statutory surplus fund. As of December&nbsp;31, 2004 and 2005, the
Group had appropriated $1,531,760 and $2,007,776 respectively to non-distributable reserve funds.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>20 Income Taxes</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cayman Islands and British Virgin Islands</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the current laws of the Cayman Islands and British Virgin Islands, Linktone and
Brilliant are not subject to tax on income or capital gain.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>China</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s subsidiaries and VIEs are subject to Enterprise Income Taxes (&#147;EIT) of the PRC
at a statutory rate which comprises national income tax and local income tax.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The statutory rate varies among the subsidiaries and VIEs as follows:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Linktone Consulting and Weilan
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The applicable statutory rate is 33% which comprises 30% national income tax and 3% local
income tax.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Zhong Tong and Linktone Software
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since these entities are located in the economic development zones in coastal cities, they are
subject to a preferential statutory rate of 15% which comprises 15% national income tax and the
local income tax is nil.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Huitong and Linktone Internet
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These entities qualify as foreign investment production enterprises and were established in a
coastal economic development zone in the old urban district , the applicable tax rate is 27% which
comprises 24% national income tax and 3% local income tax. In addition, they are entitled to a two
year tax EIT exemption followed by three years with a 50% reduction in the tax rate, commencing
from the first profitable year. Huitong was entitled to tax exemption in
2003 and 2004 and was at its first 50% reduction in tax rate year in 2005. Linktone Internet
was entitled to its first year of tax exemption in 2005.
</DIV>

<P align="center" style="font-size: 10pt">F-26
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Yuan Hang, Cosmos and Lian Fei
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These entities qualify as high technology enterprises. Lian Fei and Cosmos are entitled to a
three year tax exemption followed by three years with a 50% reduction in the tax rate, commencing
from the first operating year. Yuan Hang is entitled to a two year exemption followed by three
years with a 50% reduction in the tax rate, commencing from the first profitable year. Lian Fei was
entitled to tax exemption from 2002 to 2004 and Cosmos was entitled to tax exemption from 2003 to
2005. Lian Fei was at its first 50% reduction tax rate in year 2005. Yuan Hang was entitled to tax
exemption in 2004 and 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Unilink and Qimingxing are currently considered as small businesses and are subject to a tax
on revenue instead of income.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The provision for taxes on income consists of:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,062,185</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(2,420,655</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">64,878</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">916,326</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(997,307</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,504,329</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>Reconciliation of the difference between statutory tax rate and the effective tax rate:</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a reconciliation between statutory EIT rate and the Group&#146;s effective tax
rate:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11"><B>(Restated)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Statutory EIT
rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">33</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">33</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">33</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of tax
holiday</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(78</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(28</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(25</TD>
    <TD nowrap>)%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Non-deductible
expenses incurred
outside the
PRC</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">4</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Non-deductible
stock-based
compensation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">10</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">9</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">5</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other
non-deductible
expenses/non-taxable
income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">1</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Change in valuation
allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">25</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(8</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1</TD>
    <TD nowrap>)%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tax differential
from statutory rate
applicable to the
subsidiary</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(4</TD>
    <TD nowrap>)%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(5</TD>
    <TD nowrap>)%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Adjustment to prior
year tax provision</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(1</TD>
    <TD nowrap>)%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effective EIT rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">11</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate dollar and per share effect of the tax holiday in 2003, 2004 and 2005 was
$2,812,536, $3,785,401 and $3,450,000, $0.03, $0.02 and $0.01 per share, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other non-taxable income consists primarily of income at Unilink and Qimingxing that is
subject to a tax on revenue instead of income.
</DIV>

<P align="center" style="font-size: 10pt">F-27
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group&#146;s deferred tax assets and deferred tax liabilities at each balance sheet date are as
follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current deferred tax assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Establishment costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">74,562</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">53,176</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,074</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accruals and other liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">342,070</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">525,376</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net operating loss carry forwards</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">274,921</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">416,632</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">874,547</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Less: Valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(63,533</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net current deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">416,632</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">811,014</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current deferred tax liabilities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,115,351</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">711,147</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">170,132</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net current deferred tax liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,115,351</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">881,279</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net operating loss carry forwards</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,214,182</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">570,545</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Property, plant and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">243,414</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intangibles</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Advertising expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">393,964</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Establishment costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">51,851</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,266,033</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,307,923</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(502,436</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(256,454</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">763,597</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,051,469</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Movement of valuation allowance for deferred tax assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at beginning of the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(1,433,586</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(502,436</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Provision for the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Recoveries of deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">931,150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">182,449</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at end of the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(502,436</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">$</TD>
    <TD align="right">(319,987</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subject to the approval of the relevant tax authorities, Linktone Group had total tax loss
carryforwards of approximately $2.8&nbsp;million as of December&nbsp;31, 2005 for EIT purposes. Approximately
$0.02&nbsp;million, $0.04&nbsp;million, $2.3&nbsp;million, $0.4&nbsp;million and $0.03&nbsp;million of such losses will
expire in 2006, 2007, 2008, 2009 and 2010 respectively. These tax loss carryforwards give rise to
potential deferred tax assets totaling $0.8&nbsp;million. Under our current tax planning, we expect that
Linktone Group will generate enough taxable income and a portion of loss carry forwards will be
utilized before expiration. The Group reduced the valuation allowance based on our probability
assessment as of December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>21 Financial instruments</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The carrying amount of the Group&#146;s cash and cash equivalents approximates their fair value due
to the short maturity of those instruments. The Group&#146;s short-term investments are carried at their
fair value. The carrying value of receivables and payables approximated their market values based
on their short-term maturities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>22 Capital structure</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Paid-in capital represents the consolidated issued and registered capital of the Group.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;7, 2005, the Company&#146;s shareholders authorized the repurchase of up to $15
million worth of American Depositary Shares or ADSs. The Company entered into an agreement dated
December&nbsp;15, 2005 with its broker to purchase ADSs from the open market based on prices range from
$8.0 to $11.25 for an aggregate of no more
than 750,000 ADSs or the equivalent of $3.5&nbsp;million worth of ADSs. These ADSs will be
converted to shares, retired and no longer be issued and outstanding.
</DIV>

<P align="center" style="font-size: 10pt">F-28
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2005, the Company repurchased 338,000 ADS for a total consideration of $3.4
million including brokerage commission and they were in the process of being retired.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>23 Stock option plans</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Board of Directors has approved two stock option plans that provide for the issuance of up
to 45,946,024 ordinary shares. The plans provide for the grant to employees of incentive share
options within the meaning of Section&nbsp;422 of the United States Internal Revenue Code and for grants
to employees, directors and consultants of non-statutory share options. The plans are administered
by the Board of Directors or a committee designated by the
Board.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>average</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Options</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>exercise</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Options</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>exercise</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Options</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>exercise</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>price</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>price</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>price</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Outstanding at beginning of period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,668,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.08</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,900,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,235,090</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.30</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Granted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,338,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.11</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,639,900</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,380,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.78</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Exercised</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,717,990</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.08</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,924,910</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.08</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Forfeited/cancelled</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,106,700</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.08</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,587,120</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,852,280</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.90</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Outstanding at period end</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,900,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35,235,090</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.30</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,838,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.40</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Exercisable and vested at end of period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,863,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,448,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.08</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,592,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Weighted average fair value of options
granted during period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.64</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.46</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is additional information relating to options outstanding as of December
31, 2005:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="30%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>Options outstanding as at December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>Options exercisable as at December 31, 2005</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Weighted average</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Weighted</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Weighted average</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Weighted</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>remaining</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>remaining</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>average</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Range of</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Options</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>contractual life</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>exercise</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>contractual life</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>exercise</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>exercise price</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Outstanding</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(years)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>price</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>exercisable</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>(years)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>price</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD nowrap><DIV style="margin-left:15px; text-indent:-15px">$0.05 &#151; $0.10</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,305,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,303,281</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD nowrap><DIV style="margin-left:15px; text-indent:-15px">$0.74 &#151; $0.995</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,002,830</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.03</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.76</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,097,122</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.76</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$1.02 &#151; $1.10</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,280,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.50</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,035,708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.08</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">$1.37 &#151; $1.40</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">249,770</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.32</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.38</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">156,150</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.26</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.39</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,838,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.61</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,592,261</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6.97</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.19</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s option plans are fixed in nature, so the compensation expense under APB No.&nbsp;25
has been measured at the excess, if any, of the fair value of the shares of the date of grant over
the intrinsic value.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with the stock options granted during the years ended December&nbsp;31, 2003, 2004
and 2005, the Company recognized deferred share-based compensation amounted to $5,811,354, $nil and
$nil, respectively. These amounts are being amortized over vesting periods of two to three years.
Stock-based compensation expense recognized during the years ended December&nbsp;31, 2003, 2004 and 2005
amounted to $1,119,529, $3,464,807 (as restated) and $2,012,425, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As disclosed in notes (2)&nbsp;and (5) (l), the Company has restated its historical consolidated
financial statements for 2004 as a result of an error related to the accounting for stock option
caused by an amendment to the stock option grants to certain of our executive officers. The
restatement increases the stock compensation expense for 2004 by $1,444,000. In connection with
the amendment, in 2005, the Company also recorded an incremental compensation expense of $776,411
under APB No.&nbsp;25 related to the acceleration of vesting that occurred following the resignation of
two executive officers in January and February&nbsp;2006.
</DIV>

<P align="center" style="font-size: 10pt">F-29
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>24 Commitments and contingencies</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(a)&nbsp;Operating lease commitments</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group rented offices under operating lease agreements. The net aggregate minimum future
lease payments under non-cancelable operating leases as of December&nbsp;31, 2005 are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,498,556</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">716,984</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">457,074</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,324</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,722,938</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2005, the Group had no operating lease commitments beyond February&nbsp;2009.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the year ended December&nbsp;31, 2003, 2004 and 2005 the Group incurred rental expenses of
approximately $177,354, $925,280, and $1,439,903, respectively.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(b)&nbsp;Other commitments</I>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Advertisement
agreements with third
parties</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,223,391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">2,384,236</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(c)&nbsp;Mainland Chinese market macro-economic and regulatory and uncertainties</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Chinese market in which the Group operates poses certain macro-economic and regulatory
risks and uncertainties. These uncertainties extend to the ability of the Group to develop its
wireless internet business and to provide internet content in the PRC. Though the PRC has, since
1978, implemented a wide range of market-oriented economic reforms, continued reforms and progress
towards a full market-oriented economy are uncertain. In addition, the telecommunication,
information, and media industries remain highly regulated. Restrictions are currently in place or
are unclear regarding in what specific industry segments foreign owned entities, like the Group,
may operate. The Group&#146;s legal structure and scope of operations in the PRC could be subject to
restrictions which could result in severe limitations on the Group&#146;s ability to conduct business in
the PRC, and this could have a material adverse impact on the Group&#146;s financial position, results
of operations and cash flows.
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;<I>(d)&nbsp;Other risks</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Group&#146;s sales, purchase and expense transactions are generally denominated in RMB and a
significant portion of the Group&#146;s assets and liabilities are denominated in RMB. The RMB is not
freely convertible into foreign currencies. In Mainland China, foreign exchange transactions are
required by law to be transacted only by authorized financial institutions at exchange rates set by
the People&#146;s Bank of China (&#147;PBOC&#148;). Remittances in currencies other than RMB by the Group in
Mainland China must be processed through the PBOC or other Mainland China foreign exchange
regulatory bodies and require certain supporting documentation in order to effect the remittance.
</DIV>

<P align="center" style="font-size: 10pt">F-30
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>25 Earnings per share</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth the computation of basic and diluted net earnings per share for
the periods indicated based on the requirements of EITF 03-06:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31,</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10">(Restated)</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Numerator:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income for the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">3,616,083</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">11,066,034</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accretion for Series&nbsp;B Redeemable
Convertible Preferred Shares</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(143,936</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28,206</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amount allocated to participating
preferred shareholders</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,769,080</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(794,307</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Numerator for basic earnings per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,703,067</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">10,243,521</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Numerator for diluted earnings per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">1,703,067</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">10,243,521</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">12,449,063</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Denominator:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Denominator for basic earnings per share
&#151; weighted-average ordinary shares
outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">97,390,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">224,569,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257,020,040</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of dilutive option securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,166,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,511,650</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,365,539</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Denominator for diluted earnings per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">109,556,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">248,081,126</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">275,385,579</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Basic earnings per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted earnings per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">0.05</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prior to the Company&#146;s IPO in March&nbsp;2004, the Company&#146;s Preferred Shares were not included in
the calculation of diluted earnings per share because of their antidilutive effects.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>26 Subsequent events</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On December&nbsp;20, 2005, the Company entered into definitive agreements to acquire a 51% share of
Ojava Overseas Ltd, a British Virgin Islands limited liability Corporation (&#147;Ojava Overseas&#148;), and
an 80% share of Beijing Ojava Wuxian Co., Ltd. (&#147;Ojava Wuxian&#148;), a local entity in the PRC with
exclusive contractual arrangements with Ojava Overseas. Ojava Overseas and Ojava Wuxian are
collectively known as Ojava Group. Ojava Group is a leading mobile game developer and game
publisher in the PRC. According to the agreements, the initial payments consist of three elements:
(a) $1.8&nbsp;million cash to shareholders of Ojava Overseas; (b) $1.6&nbsp;million cash to Ojava Overseas
for subscription of additional shares issued and (c) $1&nbsp;million paid to Ojava Wuxian for settling
the loan owned by shareholders to Ojava Wuxian. The Company also has an option to purchase the
remaining 49% interest in Ojava Overseas and 20% of interest in Ojava Wuxian based on Ojava&#146;s
achievement of agreed performance objectives in 2007 and 2008. The further payment is capped at
$7.84&nbsp;million. The acquisition of 51% share in Ojava Overseas and 80% share in Ojava Wuxian was
completed in January&nbsp;2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s Chief Operating Officer, Michael Guangxin Li, Chief Executive Officer and
Executive Director, Raymond Yang, Chief Technology Officer, Xin Ye resigned on January&nbsp;3, 2006,
February&nbsp;24, 2006 and February&nbsp;28, 2006 respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;24, 2006, the Company&#146;s Board of Directors appointed Michael Guangxin Li as a
director. On April&nbsp;3, 2006, the Company&#146;s Board of Directors appointed Michael Guangxin Li as the
Company&#146;s Chief Executive Officer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company launched a cost and restructuring plan in late February as part of its efforts to
create a leaner and more efficient organization. The plan has been largely completed in early
April&nbsp;2006.
</DIV>

<P align="center" style="font-size: 10pt">F-31
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>LINKTONE LTD.</B>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<BR>
(In U.S. dollar, unless otherwise stated)</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On March&nbsp;27, 2006, the Company and the selling shareholders of Cosmos entered into an
agreement to modify the terms of the existing share purchase agreements. According to the new
agreement, the contingent consideration of $3.1&nbsp;million will be paid on the basis of 3.8 times of
Cosmos&#146;s net profit for the period of 11&nbsp;months from May&nbsp;1, 2005 to March&nbsp;31, 2006 because 3.8
times of Cosmos&#146;s net profit for the 11&nbsp;months (12&nbsp;months according to the existing share purchase
agreement) had already reached the $3.1&nbsp;million cap (note 7(b)).
</DIV>


<P align="center" style="font-size: 10pt">F-32
</DIV>

</BODY>
</HTML>
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LINKTONE LTD
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(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
For the transition period from
to
.
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-50596
LINKTONE LTD
.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
5/F, Eastern Tower, No. 689, Beijing Dong Road
Shanghai 200001, People's Republic of China
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Name of each exchange and Title of each class on which registered:
American Depositary Shares, each representing 10 ordinary shares, par value US$0.0001 per share,
Nasdaq National Market
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or
common stock as of the close of the period covered by the annual report: 257,317,900 ordinary
shares, par value US$0.0001 per share.
Indicate 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. (Check one):
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
INTRODUCTION
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
Item 2.
Offer Statistics and Expected Timetable
Item 3.
Key Information
Item 4.
Information on the Company
Item 4A.
Unresolved Staff Comments
Item 5.
Operating and Financial Review and Prospects
Item 6.
Directors, Senior Management and Employees
Item 7.
Major Shareholders and Related Party Transactions
Item 8.
Financial Information
Item 9.
The Offer and Listing
Item 10.
Additional Information
Item 11.
Quantitative and Qualitative Disclosures About Market Risk
Item 12.
Description of Securities Other than Equity Securities
PART II
Item 13.
Defaults, Dividend Arrearages and Delinquencies
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15.
Controls and Procedures
Item 16.
Reserved
Item 16A.
Audit Committee Financial Expert
Item 16B.
Code of Ethics
Item 16C.
Principal Accountant Fees and Services
Item 16D.
Exemptions from the Listing Standards for Audit Committees
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
PART III
Item 17.
Financial Statements
Item 18.
Financial Statements
Item 19.
Exhibits
EX-4.5 EMPLOYMENT TERMINATION AGREEMENT - RAYMOND YANG LEI
EX-4.7 EMPLOYMENT TERMINATION AGREEMENT - MICHAEL GUANGXIN LI
EX-4.8 EMPLOYMENT AGREEMENT - MICHAEL GUANGXIN LI
EX-4.10 EMPLOYMENT TERMINATION AGREEMENT - YE XIN
EX-4.16 COPYRIGHT LICENSE AGREEMENT
EX-4.49 LEASE AGREEMENT
EX-4.59 SOFTWARE LICENSE AGREEMENT
EX-4.60 SOFTWARE LICENSE AGREEMENT
EX-4.62 SUPPLEMENTAL AGREEMENT
EX-4.64 SUPPLEMENTAL AGREEMENT
EX-4.65 SOFTWARE LICENSE AGREEMENT
EX-4.66 SUPPLEMENTAL AGREEMENT
EX-4.67 SOFTWARE LICENSE AGREEMENT
EX-4.68 SUPPLEMENTAL AGREEMENT
EX-4.69 SOFTWARE LICENSE AGREEMENT
EX-4.70 SUPPLEMENTAL AGREEMENT
EX-4.71 EXCLUSIVE CONSULTING AND SERVICE AGREEMENT
EX-4.72 EXCLUSIVE CONSULTING AND SERVICE AGREEMENT
EX-4.73 BUSINESS COOPERATION AGREEMENT
EX-4.74 LOAN AGREEMENT
EX-4.75 LOAN AGREEMENT
EX-4.76 EQUITY INTERESTS PLEDGE AGREEMENT
EX-4.77 EQUITY INTERESTS PLEDGE AGREEMENT
EX-4.78 CONTRACT RELATING TO EXCLUSIVE PURCHASE RIGHT
EX-4.79 CONTRACT RELATING TO EXCLUSIVE PURCHASE RIGHT
EX-4.80 EXCLUSIVE CONSULTING AND SERVICE AGREEMENT
EX-4.81 EQUITY TRANSFER AGREEMENT
EX-4.82 OPERATING AGREEMENT
EX-8.1 SIGNIFICANT SUBSIDIARIES
EX-12.1 CERTIFICATION OF CEO REQUIRED BY RULE 13A-14(A)
EX-12.2 CERTIFICATION OF CFO REQUIRED BY RULE 13A-14(A)
EX-13.1 CERTIFICATION OF CEO REQUIRED BY RULE 13A-14(B)
EX-13.2 CERTIFICATION OF CFO REQUIRED BY RULE 13A-14(B)
EX-15.1 CONSENT OF PRICEWATERHOUSECOOPERS ZHONG TIAN CPAS LIMITED COMPANY
EX-15.2 CONSENT OF MAPLES AND CALDER
EX-15.3 CONSENT OF FANGDA PARTNERS
3
Table of Contents
INTRODUCTION
This annual report on Form 20-F includes our audited consolidated financial statements as of
December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005.
Forward-Looking Information
This annual report on Form 20-F contains statements of a forward-looking nature. These
statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation
Reform Act of 1995. You can identify these forward-looking statements by terminology such as
"will," "expects," "anticipates," "future," "intends," "plans," "believes," "seeks," "estimates"
and similar statements. The accuracy of these statements may be impacted by a number of business
risks and uncertainties that could cause actual results to differ materially from those projected
or anticipated, including but not limited to those risks and uncertainties identified under the
section heading "Risk Factors" below.
All forward-looking statements in this Form 20-F are made as of the date of filing hereof,
based on information available to us as of that date, and we assume no obligation to update or
revise any of these forward-looking statements even if experience or future changes show that the
indicated results or events will not be realized.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected Financial Data
The following table presents the selected consolidated financial information for our business.
You should read the following information in conjunction with Item 5 "Operating and Financial
Review and Prospects" below. The following data as of December 31, 2004 and 2005 and for the years
ended December 31, 2003, 2004 and 2005 has been derived from our audited consolidated financial
statements for those years and should be read in conjunction with those statements, which are
included in this annual report beginning on page F-1. The following data as of December 31, 2001,
2002 and 2003 and for the years ended December 31, 2001 and 2002 has also been derived from our
audited consolidated financial statements for those years, which are not included in this annual
report. Our audited financial statements for the foregoing periods were prepared in accordance
with United States generally accepted accounting principles, or U.S. GAAP.
In November 1999, we commenced operations as a business division of Intrinsic China Technology
Ltd. In April 2001, our affiliated business division which focused on wireless data software was
spun off to a newly established holding company, Intrinsic Technology (Holdings) Ltd., or Intrinsic
Technology, and our company was renamed Linktone Ltd. Due to the significance of the spun-off
division relative to
1
Table of Contents
that of our company, the transaction was accounted for as a reverse spin-off, with our company
as the spinnee for accounting purposes. As a result, our combined financial data for the periods
prior to the spin-off was determined by treating Linktone as a separate independent entity.
All amounts below are in U.S. dollars, except for share number data.
As of December 31,
2001
2002
2003
2004
2005
(audited)
(audited)
(audited)
(restated and
(audited)
audited) #
Statements of Operations Data:
Gross revenues
$
1,086,587
$
4,309,036
$
16,601,492
$
50,318,744
$
73,608,603
Net revenues
1,011,910
4,068,767
15,485,670
48,083,700
70,487,256
Cost of services
(325,258
)
(1,525,146
)
(5,819,391
)
(15,305,416
)
(26,483,694
)
Gross profit
686,652
2,543,621
9,666,279
32,778,284
44,003,562
Operating expenses:
Product development
(368,445
)
(426,872
)
(748,209
)
(2,807,720
)
(6,229,976
)
Selling and marketing
(745,312
)
(1,171,988
)
(2,144,540
)
(8,794,568
)
(14,719,763
)
Stock-based compensation*
—
—
(1,119,529
)
(3,464,807
)
(2,012,425
)
Other general and administrative
(1,400,142
)
(1,526,724
)
(2,070,141
)
(6,809,947
)
(9,774,570
)
Total operating expenses
(2,513,899
)
(3,125,584
)
(6,082,419
)
(21,877,042
)
(32,736,734
)
Income/(loss) from operations
(1,827,247
)
(581,963
)
3,583,860
10,901,242
11,266,828
Interest income
22,000
46,010
32,223
815,447
1,965,801
Other income
—
—
—
346,652
720,763
Income tax expense
—
—
—
(997,307
)
(1,504,329
)
Net income/(loss)
$
(1,805,247
)
$
(535,953
)
$
3,616,083
$
11,066,034
$
12,449,063
Foreign currency translation
9,016
(84
)
457
264
549,586
Unrealized gain/(loss) on
investments in marketable
securities
—
—
—
(64,678
)
242,076
Comprehensive income/(loss)
$
(1,796,231
)
$
(536,037
)
$
3,616,540
$
11,001,620
$
13,240,725
Earning/(loss) per share:
Basic
$
(0.03
)
$
(0.01
)
$
0.02
$
0.05
$
0.05
Diluted
$
(0.03
)
$
(0.01
)
$
0.02
$
0.04
$
0.05
Weighted average ordinary shares:
Basic
97,390,000
97,390,000
97,390,000
224,569,476
257,020,040
Diluted
97,390,000
97,390,000
109,556,852
248,081,126
275,385,579
Statements of Cash Flows Data:
Cash flows from:
Operating activities
$
(987,021
)
$
(289,525
)
$
2,880,751
$
9,654,127
$
9,561,944
Investing activities
(287,906
)
(85,081
)
(304,380
)
(17,266,029
)
(34,440,154
)
Financing activities
3,345,650
1,034,979
—
65,412,374
(2,832,327
)
*
Stock-based compensation is a component of general and administrative expenses.
#
We restated our consolidated financial statements for the year ended December 31, 2004. For
details, see Item 5 under the heading "Operating and Financial Review and Prospects —
Operating Results — Restatement of 2004 Consolidated Financial Statements."
2
Table of Contents
As of December 31,
2001
2002
2003
2004
2005
(audited)
(audited)
(audited)
(restated and
(audited)
audited)
Balance Sheet Data:
Cash and cash equivalents
$
2,375,776
$
3,036,065
$
5,612,893
$
63,413,629
$
36,252,678
Short term investments
—
—
—
14,860,365
41,580,530
Accounts receivable, net
443,860
563,787
3,092,619
10,445,535
15,945,662
Property and equipment, net
236,868
236,714
450,238
2,527,813
3,565,446
Tax refund and other receivables
119,275
125,213
554,300
5,497,600
7,268,077
Total assets
$
3,175,779
$
3,961,779
$
9,710,050
$
98,207,955
$
118,880,280
Total liabilities
620,502
907,560
1,919,762
10,538,867
18,790,369
Total shareholders' equity/(deficit)
223,982
(385,514
)
4,206,619
87,669,088
100,089,911
Total liabilities and shareholders'
equity/(deficit)
$
3,175,779
$
3,961,779
$
9,710,050
$
98,207,955
$
118,880,280
Exchange Rate Information
Our business is currently conducted in and from China in Renminbi. In this annual report, all
references to "Renminbi" and "RMB" are to the legal currency of China and all references to U.S.
dollars, dollars, $ and US$ are to the legal currency of the United States. The conversion of
Renminbi into U.S. dollars in this annual report is based on the noon buying rate in The City of
New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve
Bank of New York. For reader convenience, this annual report contains translations of some Renminbi
or U.S. dollar amounts for 2005 at US$1.00: RMB8.0702, which was the prevailing rate on December
31, 2005. The prevailing rate at June 21, 2006 was US$1.00: RMB7.9969. We make no representation
that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars
or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The
Chinese government imposes control over its foreign currency reserves in part through direct
regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign
trade.
The following table sets forth the average buying rate for Renminbi expressed as per one U.S.
dollar for the years 2001, 2002, 2003, 2004 and 2005.
Year
Renminbi Average
(1)
2001
8.2772
2002
8.2772
2003
8.2771
2004
8.2768
2005
8.1826
(1)
Determined by averaging the rates on the last business day of each month during the relevant period.
The following table sets forth the high and low exchange rates for Renminbi expressed as per
one U.S. dollar during the past six months.
Renminbi Average
Month Ended
High
Low
December 31, 2005
8.0808
8.0702
January 31, 2006
8.0702
8.0596
February 28, 2006
8.0616
8.0415
March 31, 2006
8.0505
8.0167
April 30, 2006
8.0248
8.0040
May 31, 2006
8.0300
8.0005
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B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
RISKS RELATED TO OUR COMPANY
Risks Related to Our Contractual Relationships with the Mobile Operators in China
We depend on the two principal mobile phone operators in China for delivery of almost all of our
services, and the termination or alteration of our various contracts with either of them or their
provincial or local affiliates could materially and adversely impact our business.
We offer most of our wireless value-added services to consumers through the two principal
mobile phone operators in China, China Mobile Communications Corporation, or China Mobile, and
China United Telecommunications Corporation, or China Unicom, which service substantially all of
China's approximately 393.4 million mobile phone subscribers. As of April 2006, China Mobile had
approximately 263.4 million subscribers, or 67% of the mobile phone service market in China, while
China Unicom had approximately 130 million subscribers, or 33% of the mobile phone service market
in China. Given their dominant market position, our negotiating leverage with these operators is
limited. If our various contracts with either operator are terminated or adversely altered, it may
be impossible to find appropriate replacement operators with the requisite licenses and permits,
infrastructure and customer base to offer our services, and our business would be significantly
impaired. For 2003, 2004 and 2005, we derived approximately 88.3%, 88.1% and 85.0%, respectively,
of our total revenues, including all of our revenues for advanced second generation, or 2.5G, and
audio-related services, from China Mobile and are, therefore, particularly dependent on that
operator.
Our services are provided pursuant to contracts that we have with the national offices of the
mobile operators, as well as several of their provincial and local affiliates. Each of these
contracts is non-exclusive, and has a limited term (generally one or two years). We usually renew
these contracts or enter into new ones when the prior contracts expire, but on occasion the renewal
or new contract can be delayed by periods of one month or more. The terms of these contracts vary,
but the operators are generally entitled to terminate them in advance for a variety of reasons or,
in some cases, for no reason in their discretion. For example, several of our contracts with the
mobile operators can be terminated if:
•
we fail to achieve performance standards which are established by the
applicable operator from time to time,
•
we breach our obligations under the contracts, which include, in many cases,
the obligation not to deliver content that violates the operator's policies and
applicable law, and exclusivity provisions prohibiting us from offering services which
are the same as the services we provide to any other telecommunications service
providers,
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•
the operator receives high levels of customer complaints about our services, or
•
the operator sends us written notice that it wishes to terminate the contract
at the end of the applicable notice period.
Changes in the policies of the mobile operators and in their enforcement of their policies have
resulted in our having to pay additional charges to the mobile operators, and further changes could
materially and adversely impact our revenue, profitability and financial condition in the future.
The mobile operators in China have a wide range of policies and procedures regarding customer
service, quality control and other aspects of the wireless value-added services industry. As the
industry has evolved over the last several years, the mobile operators have refined these policies
to improve overall service quality. In addition, the mobile operators have unilaterally changed the
way such policies have been enforced as applied to third party service providers such as ourselves,
and may do so again in the future. We often only become aware of such policy changes when the
mobile operators inform us orally or provide us with a monthly statement indicating an additional
charge, which in either case can happen months after the operating problem in question arose.
Because of this time delay, we cannot always confirm the existence of such problems or correct
errors in our systems in a timely manner.
Beginning in April 2004, acting under the guidance of China's Ministry of Information
Industry, the mobile operators began enforcing their customer service policies more rigorously than
in the past and initiated steps to improve customer service. For example, the mobile operators
have been less willing to permit service providers to engage in broad distributions of short
messages (known as SMS) to promote their services, known as "SMS pushes," which have been used to
cross-sell higher-margin services, because of the concern that users may find such messages a
nuisance. While we intend to seek approval from the mobile operators to engage in future SMS
pushes, we cannot be certain that we will be granted permission to the extent we request, or at
all. This rigorous enforcement, including the restrictions on SMS pushes, has resulted in a number
of penalties being imposed on participants in the market. These penalties have included precluding
such participants from offering certain services over the mobile operators' networks or from
offering new services for a fixed period.
While we believe the mobile operators' recent focus on compliance and service initiatives will
result in a stronger, more orderly market in the long-term, it has also resulted in service and
billing suspensions and in our having to pay certain charges due to the occasional contravention of
certain of these policies by us. Specifically, we received a notice of sanction from China Mobile
in December 2004 for violating its rules relating to the acquisition of users for our wireless
application protocol, or WAP, services. As a result, we were not allowed to bill WAP users from
January 1, 2005 until October 10, 2005. In addition, China Mobile suspended approval of any new
product applications by us for its wireless platforms, including SMS, MMS, WAP, JAVA™, IVR and
ringback, between January 1, 2005 and June 30, 2005. For 2005, the amount of fines was negligible,
compared to $0.7 million for 2004. Because the mobile operators' policies are in a state of flux
at this time and they are highly sensitive to customer complaints (even if the complaints may not
have a bona fide basis), we cannot be certain that our business activities will always be deemed in
compliance with those policies despite our efforts to so comply. Accordingly, we may be subject to
additional monetary penalties or service suspensions or both, even for conduct which we believed to
be permissible. Our relationships with the mobile operators could be adversely affected in the
long-term if we are perceived to be providing consistently poor quality services or weak customer
service. Any non-compliance with the mobile operators' policies by us, whether inadvertent or not,
could result in a material and adverse effect on our revenue, profitability and financial
condition.
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Our business could be adversely affected if any of the mobile operators in China begin providing
their own portfolio of wireless value-added services that compete with our services.
The principal mobile operators in China currently offer a limited number of specific wireless
value-added services, such as personal information management and instant messaging. However, they
have not yet developed their own comprehensive portfolio of services. Our business may be
adversely affected if any of the mobile operators in China decides to begin providing its own
wireless value-added services to mobile phone users which compete with our services. In that case,
we would not only face enhanced competition, but could be partially or fully denied access to their
networks.
Our revenue and profitability could be materially and adversely affected if we are required to pay
the mobile operators for their share of service fees not paid by customers due to service quality
or other problems.
If a customer refuses to pay for a wireless value-added service due to quality or other
problems attributable to the service provider, the mobile operators have generally not required the
service provider to pay them for their portion of the service fees that were lost as a result of
the customer's refusal to pay. However, China Unicom's affiliate in Fujian province requires us
and other service providers to reimburse it for these amounts in connection with our SMS services
provided in that province. If any of the mobile operators in China adopts such a policy in other
provinces and we cannot maintain high levels of service quality and customer service, we may have
to pay significant amounts of service fees for which we receive no corresponding revenue, which
could materially and adversely affect our revenue and profitability.
We depend on the mobile operators to maintain accurate records and to pay us for services we
provide.
We depend on the mobile operators to maintain accurate records of the fees paid by users and
to pay us for services we provide. Specifically, the mobile operators provide us with monthly
statements that do not provide itemized information regarding which of our services are being paid
for. As a result, monthly statements that we have received from the mobile operators cannot be
reconciled to our own internal records for the reasons discussed below under the heading "— Because
the mobile operators do not supply us with revenue and transmission information on a
service-by-service basis, we can only estimate our actual gross revenue and our cost of services by
service type, and as a result, which of our services are or may be profitable, all of which make it
difficult to analyze the factors affecting our financial performance." In addition, we have only
limited means to independently verify the information provided to us in this regard because we do
not have access to the mobile operators' internal records. Our business and results of operations
could be adversely affected if these mobile phone operators miscalculate the revenue generated from
our services and our portion of that revenue.
Our revenues and cost of services are affected by billing and transmission failures which are often
beyond our control.
We do not collect fees for our services from the mobile operators in a number of
circumstances, including if:
•
the delivery of our service to a customer is prevented because his or her phone
is turned off for an extended period of time, the customer's prepaid phone card has run
out of value or the customer has ceased to be a customer of the applicable operator,
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•
the mobile operator experiences technical problems with its network which
prevent the delivery of our services to the customer,
•
we experience technical problems with our technology platform that prevents
delivery of our services, or
•
the customer refuses to pay for our service due to quality or other problems.
These situations are known in the industry as billing and transmission failures, and we do not
recognize any revenue for services which are characterized as billing and transmission failures.
The failure rate can vary among the operators, and by province, and also has fluctuated
significantly in the past, ranging on a monthly basis from 10% to 53% of the total billable
messages which are reflected in our internal records during 2005. For 2005, the rate of billing and
transmission failures for our services averaged approximately 39% of the total billable messages.
Billing and transmission failures therefore will significantly lower the revenue we record. We are
also required to pay some of our content providers a percentage of the revenue received from or
confirmed by the mobile operators with respect to services incorporating the content providers'
products. In calculating the fees payable to these providers, we make estimates to take into
account billing and transmission failures which may have been applicable to the services
incorporating the providers' products, and reduce the fees payable by us accordingly. Nonetheless,
as estimates involve making assumptions which may prove inaccurate, we have in the past paid, and
may continue to pay, such providers fees which are disproportionate to what we have been paid for
the relevant service.
Because the mobile operators do not supply us with revenue and transmission information on a
service-by-service basis, we can only estimate our actual gross revenue and our cost of services by
service type, and as a result, which of our services are or may be profitable, all of which make it
difficult to analyze the factors affecting our financial performance.
China Mobile and China Unicom provide us with separate monthly statements for our SMS, 2.5G
and audio-related services. However, the monthly statements of the operators with respect to each
such service category do not contain revenue and billing and transmission failure information on a
specific service-by-service basis. Although we maintain our own records reporting the services
provided, we can only estimate our actual gross revenue and cost of services by service type
because we are unable to confirm which services were transmitted but resulted in billing and
transmission failures. As a result, we are not able to definitively calculate and monitor
service-by-service revenue, margins and other financial information, such as average revenue per
user by service and total revenue per user by service, and also cannot definitively determine which
of our services are or may be profitable.
The mobile operators may impose higher service or network fees on us if we are unable to satisfy
customer usage and other performance criteria.
Fees for our wireless value-added services are charged on a monthly subscription or per use
basis. Based on our contractual arrangements, we rely on the mobile operators for both billing of,
and collection from, mobile phone users of fees for our services.
China Mobile generally charges us service fees of 15% to 30% of the revenues generated by our
services. China Unicom has implemented a sliding scale system whereby the percentage of gross
revenue received by the service provider can range from 40% to 88% depending on customer usage,
revenue and other performance criteria. In 2005, we received on average 71% of the gross revenue
from China Unicom. Moreover, to the extent that the number of messages sent by us over China
Mobile's network, and over China Unicom's network in most provinces, exceeds the number of messages
our customers
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send to us, we must pay per message network fees, which decrease in several provinces as the
volume of customer usage of our services increases. The number of messages sent by us will exceed
those sent by our users, for example, if a user sends us a single message to order a game but we in
turn must send that user several messages to confirm his or her order and deliver the game itself.
We cannot be certain that we will be able to satisfy these criteria in the future or that the
mobile operators will keep the criteria at their current levels. Any future increase in the mobile
operators' network fees and service charges could reduce our gross margins.
The mobile operators may not authorize our services to be offered on their networks if we fail to
achieve minimum customer usage, revenue and other criteria.
Our business could be adversely affected if we fail to achieve minimum customer usage, revenue
and other criteria imposed or revised by the mobile operators at their discretion from time to
time. The mobile operators, through their provincial and local offices, have historically preferred
to work only with a small group of the best performing wireless value-added service providers,
based upon the uniqueness of the service offered by each provider, total number of users, usage and
revenue generated in the applicable province or municipality, the rate of customer complaints, and
marketing expenditures in the applicable province or municipality. In the future, we may fail to
meet the then current performance criteria that the mobile operators set from time to time. In any
such case, our services could be excluded from their networks at a provincial, municipal or
national level, or we could be precluded from introducing new services, which would adversely
affect our revenues and growth prospects.
If China Mobile and China Unicom do not change their policies regarding how service selections
appear on their WAP portals, we may have difficulty increasing the popularity of our WAP services,
which could adversely affect our future revenue growth and profitability.
The WAP portals of both China Mobile and China Unicom are organized much like the pages of an
Internet Web site, with the services of third party service providers such as our company listed by
category on various segregated WAP pages within each operator's WAP portal. China Mobile and China
Unicom currently place the most popular WAP services at the top of the menu on the first page of
the list of services available in each service category on their WAP portals. As users tend to
pick from the first services they see on a WAP page, rather than scrolling through page after page,
prominent positioning tends to reinforce the position of the most popular services. Because other
service providers who entered the market for WAP services before we did have already established
strong positions on the WAP menus of the mobile operators, in particular, KongZhong Corporation
with respect to China Mobile's WAP portal, and Hurray! Holding Co., Ltd. with respect to China
Unicom's WAP portal, we may have difficulty building up the popularity of our various WAP services
and thereby enhancing their positioning on the WAP menus, unless the mobile operators change their
WAP placement policies. Our failure to increase the popularity of our WAP services could adversely
affect our future revenue growth and profitability.
The services we offer and the prices we charge are subject to approval by the mobile operators, and
if requested approvals are not granted in a timely manner, our business could be adversely
affected.
We must obtain approval from the mobile operators with respect to each service that we propose
to offer to their customers and the pricing for such service. In addition, any changes in the
pricing of our existing services must be approved in advance by these operators. There can be no
assurance that such approvals will be granted in a timely manner or at all. Moreover, under all of
our contracts with China Mobile and most of our contracts with China Unicom, we cannot change
prices more than once every six months or charge prices outside of a fixed range. Failure to
obtain, or a delay in, obtaining such approvals could place us at a competitive disadvantage in the
market and adversely affect our business. In addition,
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the mobile operators' recent more rigorous enforcement of their customer service policies may
result in stricter scrutiny of our proposed services and pricing by the mobile operators, which may
in turn delay the approval process or result in disapproval of such proposed services or pricing.
Additional Risks Related to Our Company
We operate in a rapidly evolving industry, which may make it difficult for investors to evaluate
our business.
We began commercially offering wireless value-added services in China in August 2000, and
since that time, the technologies and services used in the wireless value-added services industry
in China have developed rapidly. As a result of this rapid and continual change in the industry,
you should consider our prospects in light of the risks and difficulties frequently encountered by
companies in an early stage of development. These risks include our ability to:
•
attract and retain users for our wireless value-added services, especially for
our 2.5G and audio-related services,
•
our ability to expand the content and services that we offer and, in
particular, develop and aggregate innovative new content and service offerings, and
sources of revenues which are not dependent on the mobile operators,
•
respond effectively to rapidly evolving competitive and market dynamics and
address the effects of mergers and acquisitions among our competitors,
•
migrate existing users to subscription-based offerings, including our 2.5G and
audio-related services, in order to build a large and stable user base and generate
recurring revenue,
•
maintain, expand and enhance our relationships with international media
companies and other strategic partners, and
•
increase awareness of our brand and user loyalty.
Due to these factors, there can be no certainty that we will maintain or increase our current
share of the highly competitive market in which we operate.
Several of our senior managers have worked together for a relatively short period of time, and they
may not prove as effective as anticipated.
Our chief executive officer and chief financial officer joined our company in 2003 and 2005,
respectively. Accordingly, they have worked together at our company for a relatively short period
of time. Due to the fact that our senior managers joined our company only recently and have
relatively limited experience working with each other, it is difficult to predict how successful
they will be, and our management team may not be as effective as anticipated. Our business strategy
may not be realized to its full extent and our business may suffer if these senior managers cannot
work together as a team.
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The success of some of our services is significantly dependent on our ability to obtain, customize
and localize desirable content and technology from third parties.
We are increasingly obtaining much of our content, including wireless games, logos, music,
news and other information, from third parties. Furthermore, we expect that we will license
technology in connection with our development of next generation services such as MMS and
Java
TM
. As the market for wireless value-added services develops, content and technology
providers may attempt to increase their profits from these distribution and localization
arrangements by demanding a greater share of revenue or other fees, which would adversely affect
our financial performance. Many of our arrangements with content and technology providers are
non-exclusive, short-term and subject to renewal. If our competitors are able to provide such
content in a similar or superior manner or to license the same technologies, it could adversely
affect the popularity of our services and our negotiating leverage with third party providers.
In addition, we must often invest significant resources in customizing and localizing the
content and applications we license or purchase for the Chinese wireless market. This may include
work ranging from translating the content or application interface into Chinese to performing
significant development work to utilize the particular content or application.
If we fail to establish and maintain economically attractive relationships with content and
technology providers and to thereafter successfully customize and localize their products, we may
not be able to attract and retain users or maintain or improve our financial performance.
We began to recognize revenue for our services on an accrual basis beginning in the quarter ended
December 31, 2003, which involves the use of estimates of monthly revenue to the extent we are
unable to obtain actual figures from the mobile operators before we finalize our financial
statements. This could in turn require us to make adjustments to our financial statements.
Our financial statements through September 30, 2003 reflect our actual revenues as they appear
on the operators' statements. However, for subsequent quarters, we recognized revenue earned on an
accrual basis and plan to do so in future quarters if necessary in order to report our earnings on
a timely basis. This involves the use of estimates of monthly revenue based on our internal records
for the month and prior monthly confirmation rates with the operators in prior months if we are
unable to obtain actual figures from the operators before we finalize our financial statements.
Actual revenue may differ from prior estimates when unexpected variations in billing and
transmission failures occur. Recognizing revenue on an accrual basis could potentially require us
to later make adjustments to our financial statements if the operators' billing statements and cash
payments are different from our estimates, which could adversely affect our reputation and the
price of our ADSs.
For the years ended December 31, 2003, 2004 and 2005, approximately 6.2%, 3.0% and 2.0%,
respectively, of our gross revenues were based on such estimates. However, we are focusing on
increasing sales of our wireless value-added services through the Personal Handyphone System, or
PHS, and Personal Access System, or PAS, networks of China Telecom Group, or China Telecom, and
China Netcom Corporation Ltd., or China Netcom, and sales of our audio related services to fixed
line customers of China Telecom and China Netcom, which have recently begun to offer value-added
services and have not implemented comprehensive billing systems. We are also focused on increasing
sales in less economically developed provinces in the central and western parts of China where the
provincial offices of the mobile operators often have not implemented comprehensive billing systems
for wireless value-added services. As a result, we have on occasion received monthly statements
from China Telecom and China Netcom and certain provincial operators of China Mobile and China
Unicom in less economically developed provinces significantly later than China Mobile and China
Unicom provincial
10
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operators in more economically developed provinces. This in turn tends to increase the portion
of our revenue that we must estimate for a given quarter. At the same time, China Mobile has
completed the implementation of new billing systems in all provinces in China while China Unicom
has implemented similar systems in substantially all provinces. The information provided to third
party service providers such as our company under these new systems is less detailed in certain
respects than before, making revenue estimations somewhat more difficult.
Our management and board of directors have evaluated the effect of these trends on our
methodology for making revenue estimates. Although we have no plans to do so currently, it is
possible that it may be necessary in the future for us to extend the time between the end of a
fiscal quarter and the announcement of our earnings for that quarter to obtain additional monthly
confirmation statements. Such an extension could result in our having to announce earnings after
our normally scheduled earnings release date, which could potentially adversely affect the trading
price of our ADSs. Moreover, we may have to make additional adjustments to our estimation
methodology in the future, which could result in unexpected discrepancies in estimates, or to stop
making estimations.
We face intense competition.
The Chinese market for wireless value-added services is intensely competitive, and is changing
rapidly. We compete principally with three groups of wireless value-added service providers in
China:
•
dedicated service providers such as Linktone, whose business focus is to offer
a variety of wireless content directly to mobile users,
•
the national Internet portal operators in China, which offer Internet access
and content aggregation services on a nationwide basis in addition to wireless
services, and
•
niche service providers, which focus primarily on a particular market segment
or application that often builds on a pre-existing sector competency.
We have faced competition from service providers in the three groups described above since our
entry into this market. We may also face significant competition from other parties, including
companies which offer online services and are expanding to various degrees into wireless
value-added services, such as Shanda Interactive Entertainment Limited, which primarily focuses on
Internet-based games but has also begun to offer wireless games. Moreover, there are low barriers
to entry for new competitors in the wireless value-added services market, particularly for 2G
services. Several of our competitors have longer operating histories in China, greater name and
brand recognition, larger customer bases and databases, significantly greater financial,
technological and marketing resources and superior access to original content than we have. As a
result, our existing or potential competitors may in the future achieve greater market acceptance
and gain additional market share, which in turn could reduce our revenues.
A substantial portion of our revenues are derived from the relatively wealthier coastal and
southern provinces in China, and the termination or alteration of our contracts with the mobile
operators or a general economic downturn in those areas could have a particularly adverse effect on
our business.
Per capita income levels and mobile phone penetration rates (i.e., the number of mobile
subscribers divided by the population of China) in China are generally higher in the coastal and
southern provinces, such as Guangdong, Jiangsu, Liaoning, and Zhejiang provinces, as well as the
municipalities of Shanghai and Beijing, which are among our top revenue generating locales.
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As noted above, there are numerous, often highly-subjective bases on which the mobile
operators have the right to terminate our contracts with them. Moreover, our contracts with China
Mobile for Guangdong, Jiangsu, Liaoning and Zhejiang provinces and the municipalities of Shanghai
and Beijing can be terminated in the discretion of either contracting party upon 15 to 30 days
notice, depending on the contract. If these contracts are terminated or adversely altered or there
is a general economic downturn in those areas, our business could be adversely affected. We cannot
predict whether there will be a termination of our contracts with affiliates of the mobile
operators in significant provinces in the future.
We have incurred net losses for a significant portion of our history which could occur again.
We incurred significant net losses until the first quarter of 2003. We could incur significant
net losses in the future due to changes in the market, operating environment and competitive
dynamics and our ability to respond to those changes. If we do not sustain profitability, the
market price of our ADSs may decline.
We depend on key personnel for the success of our business. Our business may be severely disrupted
if we lose the services of our key executives and employees or fail to add new senior and middle
managers to our management.
Our future success is heavily dependent upon the continued service of our key executives,
particularly Michael Guangxin Li, our chief executive officer, and Colin Sung, our chief financial
officer. Our future success is also dependent upon our ability to attract and retain qualified
senior and middle managers to our management team. If one or more of our current or future key
executives and employees are unable or unwilling to continue in their present positions, we may not
be able to easily replace them, and our business may be severely disrupted. In addition, if any of
these key executives or employees joins a competitor or forms a competing company, we could lose
customers and suppliers and incur additional expenses to recruit and train personnel. Each of our
executive officers has entered into an employment agreement and a confidentiality, non-competition
and non-solicitation agreement with us. We do not maintain key-man life insurance for any of our
executive officers.
We also rely on a number of key technology staff for the operation of our company. Given the
competitive nature of our industry, the risk of key technology staff leaving our company is high
and could disrupt our operations.
Rapid growth and a rapidly changing operating environment strain our limited resources.
We have limited operational, administrative and financial resources, which may be inadequate
to sustain the growth we want to achieve. As our user base increases, we will need to increase our
investment in our technology infrastructure, facilities and other areas of operations, in
particular our product development, customer service and sales and marketing which are important to
our future success. If we are unable to manage our growth and expansion effectively, the quality of
our services and our customer support could deteriorate and our business may suffer. For example,
any such performance issue could prompt the mobile operators to cease offering our services over
their networks. Our future success will depend on, among other things, our ability to:
•
develop and quickly introduce new services, adapt our existing services and
maintain and improve the quality of all of our services, particularly as new mobile
technologies such as 2.5G and 3G are introduced,
•
effectively maintain our relationships with the mobile operators,
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•
expand the percentage of our revenues which are recurring and are derived from
monthly subscription based services,
•
develop sources of revenue which are not dependent on the mobile operators,
•
enter into and maintain relationships with desirable content providers,
•
continue training, motivating and retaining our existing employees and attract
and integrate new employees, including our senior management, some of whom have been
with our company for less than one year,
•
develop and improve our operational, financial, accounting and other internal
systems and controls, and
•
maintain adequate controls and procedures to ensure that our periodic public
disclosure under applicable laws, including U.S. securities laws, is complete and
accurate.
Any failures of the mobile telecommunications network, the Internet or our technology platform may
reduce use of our services.
Both the continual accessibility of the networks of the mobile operators in China and the
performance and reliability of China's Internet infrastructure are critical to our ability to
attract and retain users. Moreover, our business depends on our ability to maintain the
satisfactory performance, reliability and availability of our technology platform. The servers
which constitute the principal system hardware for our operations are located in three locations in
Shanghai, three locations in Beijing and one location in Jiangsu and one location each in Zhejiang,
Guizhou, Hebei and Hunan. We maintain backup system hardware in our offices in Shanghai and
Beijing, but cannot be certain such backup will be adequate if there are problems with our primary
system hardware. Any server interruptions, break-downs or system failures, including failures
caused by sustained power shutdowns, floods or fire causing loss or corruption of data or
malfunctions of software or hardware equipment, or other events outside our control that could
result in a sustained shutdown of all or a material portion of the mobile networks, the Internet or
our technology platform, could adversely impact our ability to provide our services to users and
decrease our revenues.
If our exclusive providers of bandwidth and server custody service fail to provide these services
or increase their prices, our business could be adversely affected.
We rely on affiliates of China Telecom and China Netcom to provide us with bandwidth and
server custody service for our services pursuant to contracts which have one-year terms, in the
case of China Telecom, or are terminable at the discretion of either party, in the case of China
Netcom, and are usually in the standard forms of the respective service provider. If China Telecom,
China Netcom or their respective affiliates fail to provide such services, it may be difficult, if
not impossible, to find a substitute provider on a timely basis or at all. In addition, we have no
control over the costs of the services provided by China Telecom, China Netcom or their respective
affiliates. If China Telecom, China Netcom or their respective affiliates fail to provide these
services or raise their prices, our business could be adversely affected.
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Our corporate structure could be deemed to be in violation of current or future Chinese laws and
regulations which could adversely affect our ability to operate our business effectively or at all.
In connection with China's entry into the World Trade Organization, or WTO, foreign investment
in telecommunications and Internet services in China was liberalized to allow for up to 30.0%
foreign ownership in value-added telecommunication and Internet services in 2002, 49.0% in 2003 and
50.0% thereafter. In order to meet these ownership requirements, as of December 31, 2005, we
maintained control over the following PRC affiliated companies: (i) Shanghai Weilan Computer Co.,
Ltd. ("Shanghai Weilan"), which is 50% owned by each of two of our shareholders, Ankai Hu and Dong
Li; (ii) Shanghai Unilink Company Ltd. ("Shanghai Unilink"), which is 50% owned by our Vice
President of Product Development, Jing Wang, and 50% owned by our former Vice President of Business
Development, Wei Long, each of whose equity interests in Shanghai Unilink are in the process of
being transferred to our Financial Controller, Jinhua Yuan, and our Human Resource Manager, Rong
Zhang, respectively; (iii) Shenzhen Yuan Hang Technology Co., Ltd. ("Shenzhen Yuanhang"), which is
50% owned by our Vice President of Business Development, Yan Ma, and 50% owned by our Financial
Controller, Jinhua Yuan; (iv) Beijing Cosmos Digital Technology Co., Ltd. ("Beijing Comos"), which
is 50% owned by our Human Resource Manager, Rong Zhang, and 50% owned by our Product Development
Manager, Teng Zhao; (v) Hainan Zhong Tong Computer Network Co., Ltd. ("Hainan Zhong Tong"), which
is 50% owned by our Financial Controller, Jinhua Yuan, and 50% owned our Product Development
Manager, Teng Zhao; (vi) Beijing Lian Fei Wireless Communications Technology Co., Ltd.
("Beijing Lian Fei"), which is 50% owned by our Vice President of Business Development, Yan Ma, and
50% owned by our Human Resource Manager, Rong Zhang; and (vii) Shanghai Qimingxing E-commerce Co.,
Ltd. ("Shanghai Qimingxing"), which is 50% owned by our Financial Controller, Jinhua Yuan, and 50%
owned by our Technical Senior Manager, Xingyong Ding. We hold no ownership interest in those
companies. It is possible that the relevant Chinese authorities could, at any time, assert that any
portion of or all of the existing or future ownership structure and businesses of us, any of our
wholly owned subsidiaries, or any of our PRC affiliated companies, violate existing or future
Chinese laws, regulations or policies. It is also possible that the new laws or regulations
governing the telecommunication or Internet sectors in China that have been adopted or may be
adopted in the future will prohibit or restrict foreign investment in, or other aspects of, any of
our, our wholly owned subsidiaries' or our PRC affiliated companies' current or proposed businesses
and operations. In addition, these new laws and regulations may be retroactively applied. In any
such case, we could be required to restructure our operations which could adversely affect our
ability to operate our business effectively or at all.
We may be unable to collect long-term loans to shareholders of our affiliated Chinese entities.
At December 31, 2005, we had provided long-term interest free loans with an aggregate
outstanding balance of approximately RMB69.7 million ($8.4 million) to shareholders of our
affiliated Chinese entities for the purpose of investing in our affiliated Chinese entities as
registered capital and to make payments to the selling shareholders from whom we acquired certain
of our affiliated Chinese entities for settlement of purchase price consideration pursuant to
applicable acquisition agreements. The term of these loans in each case is 10 years. The
shareholders of our affiliated Chinese entities can only repay the loans by transferring to us or
our designees all of their equity interest in the respective affiliated Chinese entity. Please
refer to the table under Item 5 of this annual report under the heading "Arrangements with
Consolidated Affiliates — Loan Agreements." We expect that we will continue to be involved in and
provide additional financial support in the future to the extent allowed by the Sarbanes-Oxley Act
of 2002 and other applicable laws. Because of uncertainty associated with Chinese law, ultimate
enforcement of the loan agreements is uncertain.
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We depend upon contractual arrangements with our affiliated Chinese entities for the success of our
business. These arrangements may not be as effective in providing operational control as direct
ownership of these businesses and may be difficult to enforce.
Because we conduct our business only in China, and because we are restricted by the Chinese
government from owning telecommunications or Internet operations in China, we depend on our
affiliated Chinese entities, Shanghai Weilan, Shanghai Unilink, Shenzhen Yuanhang, Beijing Cosmos,
Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, in which we have no direct ownership
interest, to provide those services through contractual agreements with the mobile operators. These
arrangements may not be as effective in providing control over our telecommunications or Internet
operations as direct ownership of these businesses. For example, Shanghai Weilan or Shanghai
Unilink could fail to take actions required to operate our business, such as entering into content
development contracts with potential content suppliers or service contracts with the mobile
operators in China. Moreover, the fees for our services are paid by the mobile operators directly
to Shanghai Weilan and Shanghai Unilink, which are then obligated at our request to transfer
substantially all of such fees to our wholly owned subsidiaries, Shanghai Linktone Consulting Co.,
Ltd. ("Linktone Consulting"), Shanghai Huitong Information Co., Ltd. ("Shanghai Huitong") and
Shanghai Linktone Internet Technology Co., Ltd. ("Linktone Internet"). If Shanghai Weilan or
Shanghai Unilink fail to perform their obligations under these agreements, we may have to rely on
legal remedies under Chinese law, which we cannot assure you would be effective or sufficient.
We generate our internal funds almost exclusively from our subsidiaries. If those entities are
restricted from paying dividends to us, we may lose almost all of our internal source of funds.
We are a holding company with assets consisting primarily of cash generated from our initial
public offering in March 2004 and our equity interests in Linktone Consulting, Shanghai Huitong,
Linktone Internet, Brilliant Concept Investments Ltd. ("Brilliant"), Wang You Digital Technology
Co., Ltd. ("Wang You"), and Linktone Software Co., Ltd. ("Linktone Software"). Our internal source
of funds has been derived almost exclusively from dividend payments from those entities after they
receive payments from our PRC affiliated companies. We are likely to lose all of our source of
funds if those entities are restricted from paying dividends to us, except for interest and
dividend we earned on our fixed deposits and short term investments which totaled $23,000 in 2003,
$752,000 in 2004 and $1,880,000 in 2005. Under current Chinese tax regulations, dividends paid to
us are not subject to Chinese withholding tax. However, Chinese legal restrictions permit payment
of dividends only out of net income as determined in accordance with Chinese accounting standards
and regulations, which in turn restricts our ability to receive these revenues.
The principal differences between net income under Chinese accounting standards and U.S. GAAP
relate to stock-based compensation and deferred taxes. Stock-based compensation and deferred taxes
are not recognized under Chinese accounting standards. Under Chinese law, Linktone Consulting,
Shanghai Huitong, Linktone Internet, Wang You and Linktone Software are also required to set aside
a portion of their net income each year to fund certain reserve funds. These reserves are
established to offset losses and for other general purposes under Chinese law and they are not
distributable as cash dividends. If further restrictions on payments of dividends by our
subsidiaries are implemented under Chinese law, our revenues could decrease significantly.
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If any of our subsidiaries incurs any debt, it could impact our ability to pay dividends on our
ordinary shares or ADSs.
If any of our subsidiaries incurs debt on its own behalf in the future, the instruments
governing the debt may restrict their ability to pay dividends or make other distributions to us,
which in turn would limit our ability to pay dividends on our ordinary shares or ADSs.
Computer viruses and hacking may cause delays or interruptions on our systems and may reduce use of
our services and harm our reputation.
Computer viruses and hacking may cause delays or other service interruptions on our systems.
"Hacking" involves efforts to gain unauthorized access to information or systems or to cause
intentional malfunctions or loss or corruption of data, software, hardware or other computer
equipment. In addition, the inadvertent transmission of computer viruses could expose us to a
material risk of loss or litigation and possible liability. We may be required to expend
significant capital and other resources to protect our systems against the threat of such computer
viruses and hacking and to rectify any damage to our systems. Moreover, if a computer virus or
hacking which affects our systems is highly publicized, our reputation could be materially damaged
and usage of our services may decrease.
Our revenues fluctuate significantly and may adversely impact the trading price of our ADSs or any
other securities which become publicly traded.
Our revenues and results of operations have varied in the past and may continue to fluctuate
in the future. Many of the factors that cause such fluctuation are outside our control. Steady
revenues and results of operations will depend largely on our ability to:
•
attract and retain users in the increasingly competitive wireless value-added
services market in China,
•
expand the percentage of our revenues which are recurring and are derived from
monthly subscription based services,
•
successfully implement our business strategies, and
•
update and develop our services, technologies and content, including
aggregating, customizing and localizing third party technologies and content for the
China market.
Because the wireless value-added services industry in China is relatively new and rapidly
evolving and our business is also relatively new and has experienced significant volatility in
terms of financial results as a result of the factors stated above, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of our future
performance. It is possible that future fluctuations may cause our results of operations to be
below the expectations of market analysts and investors. This could cause the trading price of our
ADSs to decline.
We may be held liable for information displayed on or retrieved from our service offerings.
We may face liability for defamation, negligence, copyright, patent or trademark infringement
and other claims based on the nature and content of the materials that are provided via our
wireless value-added services. For example, we could be subject to defamation claims for messages
posted on our services that allow chatting, or SMS news updates sent to users by us could possibly
be deemed to contain state secrets in violation of applicable Chinese law. In addition, third
parties could assert claims against us
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for losses incurred in reliance on information distributed by us. We may incur significant
costs in investigating and defending these claims, even if they do not result in liability.
We may not be able to adequately protect our intellectual property, and we may be exposed to
infringement claims by third parties.
We rely on a combination of copyright, trademark and trade secrecy laws and contractual
restrictions on disclosure to protect our intellectual property rights. We have registered 90
trademarks with China's Trademark Office and one trademark in each of Hong Kong, Singapore and
Taiwan. We are in the process of applying for 36 additional trademarks in China and two trademarks
in the United States. We have also obtained 21 copyright certificates in China for certain
cartoons and images and 26 copyright certificates for computer software. Our efforts to protect our
proprietary rights may not be effective to prevent unauthorized parties from copying or otherwise
obtaining and using our technology and content, particularly in China where the laws may not
protect our proprietary rights as fully as in the United States. Monitoring unauthorized use of our
services is difficult and costly, and we cannot be certain that the steps we take will effectively
prevent misappropriation of our technology and content. For example, competitors could copy one or
more of our downloadable icons, and we may not become aware of the infringement in a timely manner
or at all or be able to take effective action to enforce our rights.
From time to time, we may have to resort to litigation to enforce our intellectual property
rights, which could result in substantial costs and diversion of our resources. In addition, third
parties may initiate litigation against us for alleged infringement of their proprietary rights. In
the event of a successful claim of infringement and our failure or inability to develop
non-infringing technology or content or license the infringed or similar technology or content on a
timely basis, our business could suffer. Moreover, even if we are able to license the infringed or
similar technology or content, license fees that we pay to licensors could be substantial or
uneconomical.
We have limited business insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance companies
in China offer limited business insurance products, and do not, to our knowledge, offer business
liability insurance. As a result, we do not have any business liability insurance coverage for our
operations. Moreover, while business disruption insurance is available, we have determined that the
risks of disruption and cost of the insurance are such that we do not require it at this time. Any
business disruption, litigation or natural disaster might result in substantial costs and diversion
of resources.
Our recent acquisitions and any future acquisitions may have an adverse effect on our ability to
manage our business.
Selective acquisitions, such as our recent acquisitions of Beijing Cosmos, Brilliant, Hainan
Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, form part of our strategy to further expand
our business. If we are presented with appropriate opportunities, we may acquire additional
businesses, technologies, services or products which are complementary to our core wireless
value-added services business. The companies we recently acquired may not perform as well as we
expect, and have required significant attention from our management, in particular to ensure that
the acquisitions do not disrupt our relationships with the mobile operators in China, or affect our
users' opinion of our services and customer support and are effectively integrated with our
existing operations and wireless value-added services. Future acquisitions will also likely
present similar challenges.
The diversion of our management's attention and any difficulties encountered in any
integration process could have an adverse effect on our ability to manage our business.
Acquisitions expose us to
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potential risks, including risks associated with the integration of new operations, services
and personnel, ensuring effective internal controls with respect to acquired businesses, the extent
to which acquired businesses give rise to unforeseen or hidden liabilities, the diversion of
resources from our existing businesses and technologies, the inability to generate sufficient
revenue to offset the costs and expenses of acquisitions and potential loss of, or harm to,
relationships with employees and content providers as a result of integration of new businesses.
Given the sophisticated technologies used in the wireless value-added services industry, the
successful, cost-effective integration of other businesses' technology platforms and services into
our own is also a critical, and highly complex, aspect of any acquisition.
We may become a passive foreign investment company, which could result in adverse U.S. tax
consequences to U.S. investors.
We may be classified as a passive foreign investment company by the United States Internal
Revenue Service for U.S. federal income tax purposes. Such characterization could result in adverse
U.S. tax consequences to you if you are a U.S. investor. For example, if we are a passive foreign
investment company, our U.S. investors will become subject to increased tax liabilities under U.S.
tax laws and regulations and will become subject to burdensome reporting requirements. The
determination of whether or not we are a passive foreign investment company is made on an annual
basis and depends on the composition of our income and assets, including goodwill, from time to
time. Specifically, we will be classified as a passive foreign investment company for U.S. tax
purposes if 50.0% or more of our assets, based on an annual quarterly average, are passive assets,
or 75.0% or more of our annual gross income is derived from passive assets. We have determined that
virtually all of our income for 2003, 2004 and 2005 was active income under the gross income test.
However, as cash and cash equivalents (which constitute passive assets for passive foreign
investment company testing purposes) have comprised a significant percentage of our assets (based
on U.S. GAAP) in the past, the determination whether we were a passive foreign investment company
in prior years or will be a passive foreign investment company in the future will depend on the
valuation of our intangible assets (including goodwill and going concern value) which are not
reflected in our financial statements. We did not obtain an appraisal of our intangible assets for
passive foreign investment company testing purposes for prior periods, but we believe that the
value of these intangibles exceeds the amount of our cash and cash equivalents. Our judgment is not
binding on the Internal Revenue Service. Following the completion of our initial public offering in
March 2004, the valuation of our intangible assets has been based, in part, on the market value of
our ADSs, which is subject to change. In addition, the composition of our income and assets will be
affected by the cash we raised in our initial public offering and how such cash has been spent. We
cannot assure you that we will not be a passive foreign investment company for the current or any
future taxable year. See Item 5. "Taxation — United States Federal Income Taxation — U.S. Holders —
Passive Foreign Investment Company."
Anti-takeover provisions in our charter documents could make an acquisition of us, which may be
beneficial to our shareholders, more difficult and may prevent attempts by our shareholders to
replace or remove our current management.
Our amended and restated articles of association, include provisions which could make an
acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove
our current management. These provisions include a classified board of directors. In addition, our
board of directors has the right to issue preferred shares without shareholder approval, which
could be used to institute a "poison pill" that would work to dilute a potential hostile acquirer's
ownership interest in our company, effectively preventing acquisitions that have not been approved
by our board of directors.
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Failure to achieve and maintain effective internal controls could have a material adverse effect on
the trading price of our ADSs.
We are subject to the reporting obligations under the U.S. securities laws. The Securities and
Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, has
adopted rules requiring public companies to include a report of management on such companies'
internal control over financial reporting in its annual report on Form 10-K or Form 20-F, as
applicable, that contains an assessment by management of the effectiveness of such company's
internal control over financial reporting. In addition, an independent registered public accounting
firm for a public company must attest to and report on management's assessment of the effectiveness
of our company's internal control over financial reporting. These requirements will first apply to
our annual report on Form 20-F for the fiscal year ending December 31, 2006.
Management may not conclude that our internal control over our financial reporting is
effective. For example, in February 2006, after consulting with the Audit Committee, we decided to
restate our financial statements for the year ended December 31, 2004 as a result of an error
related to the accounting for stock options. Also, in connection with the audit of our 2005
financial statements, we identified several areas of our internal controls over financial reporting
that are classified as material weaknesses, significant deficiencies or control deficiencies in
accordance with AU 325, Communication About Control Deficiencies in An Audit of Financial
Statements, of PCAOB Standards and Related Rules, see "Item 15 – Controls and Procedures." Even if
these and any other issues that may arise in the future are addressed and our management concludes
that our internal control over financial reporting is effective, our independent registered public
accounting firm may still decline to attest to our management's assessment or may issue a report
that is qualified if such firm is not satisfied with our internal control over our financial
reporting or the level at which our controls are documented, designed, operated or reviewed, or if
such firm interprets the relevant requirements differently from us. If we fail to achieve and
maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude
on an ongoing basis that we have effective internal controls over financial reporting in accordance
with the Sarbanes-Oxley Act. As a result, any failure to achieve and maintain effective internal
control over financial reporting could result in the loss of investor confidence in the reliability
of our financial statements, which in turn could negatively impact the trading price of our ADSs.
Furthermore, we have incurred, and expect to continue to incur, significant costs and use
significant management and other resources in an effort to comply with Section 404 of the
Sarbanes-Oxley Act and other requirements.
RISKS RELATED TO OUR INDUSTRY
Our ability to generate revenues could suffer if the Chinese market for wireless value-added
services does not develop as anticipated.
The wireless value-added services market in China has evolved rapidly over the last four
years, with the introduction of new services, development of consumer preferences, market entry by
new competitors and adaptation of strategies by existing competitors. We expect each of these
trends to continue, and we must continue to adapt our strategy to successfully compete in our
market.
In particular, we are currently focused on establishing a wide range of wireless value-added
services for mobile phone handsets using 2.5G technologies. There can be no assurance, however,
that these 2.5G technologies and any services compatible with them will continue to be accepted by
consumers or promoted by the mobile operators. Moreover, there are numerous other technologies in
varying stages of development, such as 3G mobile technologies, which could radically alter or even
eliminate the market for SMS or 2.5G services.
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Accordingly, it is extremely difficult to accurately predict consumer acceptance and demand
for various existing and potential new offerings and services, and the future size, composition and
growth of this market. Furthermore, given the limited history and rapidly evolving nature of our
market, we cannot predict the price that wireless subscribers will be willing to pay for our
services or whether subscribers will have concerns about security, reliability, cost and quality of
service associated with wireless services. If acceptance of our wireless value-added services is
different than anticipated, our ability to maintain or increase our revenue and profits could be
materially and adversely affected.
The Chinese government or one or more of the mobile operators may prevent us from distributing, and
we may be subject to liability for, content that any of them believe is inappropriate.
China has enacted regulations governing telecommunication service providers, Internet access
and the distribution of news and other information. In the past, the Chinese government has stopped
the distribution of information over the Internet that it believes to violate Chinese law,
including content that is obscene, incites violence, endangers national security, is contrary to
the national interest or is defamatory. In addition, we may not publish certain news items, such as
news relating to national security, without permission from the Chinese government. Furthermore,
the Ministry of Public Security has the authority to cause any local Internet service provider to
block any Web site maintained outside China at its sole discretion.
The mobile operators in China also have their own policies regarding the distribution of
inappropriate content by wireless value-added service providers and have punished certain providers
for distributing content deemed by them to be obscene. Such punishments have included censoring of
content, delays in payments of fees by the mobile operators to the offending service provider,
restrictions on the ability of the service provider to bill for its services and suspension of the
service on the mobile operators' networks. Accordingly, even if we comply with Chinese governmental
regulations relating to licensing and foreign investment prohibitions, if the Chinese government or
one or more of the mobile operators were to take any action to limit or prohibit the distribution
of information or to limit or regulate any current or future content or services available to
users, our revenues could be reduced and our reputation harmed.
Telecommunication laws and regulations in China are evolving and subject to interpretation and may
change in the future. If we are found to be in violation of current or future Chinese laws or
regulations, we could be subject to severe penalties.
Although wireless value-added services are subject to general regulations regarding
telecommunication services, we believe that currently, there are few Chinese laws at the national
level specifically explicitly governing wireless value-added services, such as our services related
to SMS, MMS and WAP. Many providers of wireless value-added services have obtained various
value-added telecommunication services licenses. Although Shanghai Weilan, Shanghai Unilink,
Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing have obtained
value-added telecommunication services licenses issued by the Shanghai Municipal Telecommunications
Administration Bureau, or Shanghai Communication Administration, and national inter-provincial
value-added telecommunication licenses in accordance with the Ministry of Information Industry's
general regulations regarding telecommunication services, we cannot be certain that other local or
national value-added telecommunication services license requirements will be required or will
conflict with each other or that any given license will be deemed sufficient by the relevant
governmental authorities for the provision of this category of service. It is also possible that
new national legislation might be adopted to regulate such services.
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If we or our subsidiaries or affiliates are found to be in violation of any existing or future
Chinese laws or regulations regarding wireless value-added services or Internet access which is
discussed in the following risk factor, the relevant Chinese authorities have the power to, among
other things:
•
levy fines and prohibit new product and service offerings;
•
confiscate our income or the income of our subsidiaries and affiliates;
•
revoke our business license or the business license of our subsidiaries and affiliates;
•
shut down our servers or the servers of our subsidiaries and affiliates and/or
blocking any Web sites that we operate; and
•
require us to discontinue any portion or all of our wireless value-added
services business.
The regulation of Internet Web site operators is also unclear in China, and our business could be
adversely affected if we are deemed to have violated applicable laws and regulations.
Our affiliate, Shanghai Weilan, operates Internet Web sites in China, which are one of the
channels through which our services are offered. The interpretation and application of existing
Chinese laws and regulations, the stated positions of the main governing authority, the Ministry of
Information Industry, and the possibility of new laws, regulations or policy positions being
adopted have created significant uncertainty regarding the legality of existing and future foreign
investments in, and the businesses and activities of, Chinese companies with Internet operations
including those of our company. In particular, the Ministry of Information Industry has stated that
the activities of Internet content providers are subject to regulation by various Chinese
government authorities, depending on the specific activities conducted by the Internet content
provider. We cannot be certain that the commercial Internet content provider license issued by the
local Shanghai Municipal Telecommunications Administration Bureau and held by Shanghai Weilan or
any value-added telecommunication license held by Shanghai Weilan, Shanghai Unilink, Beijng Cosmos,
Hainan Zhong Tong, Beijing Lian Fei or Shanghai Qimingxing will satisfy these requirements. Our
failure to comply with applicable Chinese Internet regulations could subject us to severe penalties
as noted in the prior risk factor.
The Chinese government is expected to grant regional or national licenses to offer full mobility
wireless services in China to China Telecom, China Netcom and possibly other parties with which we
have not yet developed close relationships. If those parties receive licenses and are successful in
the market but we are unable to develop cooperative relationships with them, our business could be
adversely affected.
It is anticipated that the Chinese government will grant regional or national licenses to
offer full mobility wireless services in China to China Telecom, China Netcom and possibly other
parties, although the timing of such grants is unclear. We began providing SMS services over the
fixed line networks of China Telecom and China Netcom in September 2004, and have launched audio
related services over the fixed line networks and the limited mobility PHS and PAS networks
operated by those operators. Limited mobility networks provide a limited range of mobile phone
services to a group of users within a designated geographic area such as a single city. Our
relationships with these mobile operators are not, however, as developed as our relationships with
China Mobile and China Unicom. As a result, if those parties receive regional or national wireless
licenses and are successful in the market but we are unable to develop cooperative relationships
with them, our business could be adversely affected if they take market share for wireless
value-added services from China Mobile and China Unicom. It is also possible that China Telecom,
China Netcom and any other parties receiving wireless licenses may decide to offer
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wireless value-added services created by them, rather than by third party service providers
such as our company. In that case, we would be in direct competition with those operators, and our
business could be adversely affected if we are not able to compete effectively against them.
RISKS RELATED TO DOING BUSINESS IN CHINA
A slow-down in the Chinese economy may slow down our growth and profitability.
The growth of the Chinese economy has been uneven across geographic regions and economic
sectors. There can be no assurance that growth of the Chinese economy will be steady or that any
slow down will not have a negative effect on our business. Several years ago, the Chinese economy
experienced deflation, which may reoccur in the foreseeable future. In addition, the Chinese
government recently began using macroeconomic tools to slow the rate of Chinese economic growth,
the results of which are difficult to predict. The Chinese economy overall affects our
profitability as expenditures for wireless value-added services may decrease due to slowing
domestic demand. More specifically, increased penetration of wireless value-added services in the
less economically developed central and western provinces of China will depend on potential
customers in those provinces achieving certain income levels so that mobile handsets and related
services become affordable to a significant portion of the population.
Government regulation of the telecommunications and Internet industries may become more burdensome.
Government regulation of the telecommunications and Internet industries is burdensome and may
become more burdensome. New regulations could increase our costs of doing business and prevent us
from efficiently delivering our services. These regulations may stop or slow down the expansion of
our user base and limit the access to our services. In addition to new laws and regulations,
existing laws not currently applicable to the wireless value-added services may be applied to those
services in the future.
The uncertain legal environment in China could limit the legal protections available to our
investors.
The Chinese legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential value. In the late
1970s, the Chinese government began to promulgate a comprehensive system of laws and regulations
governing economic matters. The overall effect of legislation enacted over the past 20 years has
significantly enhanced the protections afforded to foreign invested enterprises in China. However,
these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and
their interpretation and enforcement involve uncertainties. These uncertainties could limit the
legal protections available to foreign investors such as the right of foreign invested enterprises
to hold licenses and permits such as a value-added telecommunication license and requisite business
licenses.
Any recurrence of severe acute respiratory syndrome, or SARS, an outbreak of the H5N1 strain of
bird flu (avian influenza) or another widespread public health problem, could adversely affect our
business and results of operations.
A renewed outbreak of SARS or another widespread public health problem in China, where all of
our revenue is derived, and in Shanghai, where our operations are headquartered, could have a
negative effect on our operations. In addition, there has been confirmed human cases of avian
influenza in PRC, Vietnam, Iraq, Thailand, Indonesia, Turkey, Cambodia and other countries which
have proven fatal in
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some instances. If such an outbreak or any other similar epidemic were to spread in the PRC,
where our operations are located, it may adversely affect our business and operating results.
Our operations may be impacted by a number of health-related factors, including the following:
•
quarantines or closures of some of our offices which would severely disrupt our
operations,
•
the sickness or death of our key officers and employees, and
•
a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public health problems could
adversely affect our business and results of operations.
Changes in China's political and economic policies could harm our business.
The economy of China has historically been a planned economy subject to governmental plans and
quotas and has, in certain aspects, been transitioning in recent years to a more market-oriented
economy. Although we believe that the economic reform and the macroeconomic measures adopted by the
Chinese government have had a positive effect on the economic development of China, we cannot
predict the future direction of these economic reforms or the effects these measures may have on
our business, financial position or results of operations. In addition, the Chinese economy differs
from the economies of most countries belonging to the Organization for Economic Cooperation and
Development, or OECD. These differences include:
•
economic structure;
•
level of government involvement in the economy;
•
level of development;
•
level of capital reinvestment;
•
control of foreign exchange;
•
methods of allocating resources; and
•
balance of payments position.
As a result of these differences, our business may not develop in the same way or at the same
rate as might be expected if the Chinese economy were similar to those of the OECD member
countries.
Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
Because almost all of our future revenues may be in the form of Renminbi, any future
restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to
fund our business activities outside China or to make dividend or other payments in U.S. dollars.
Although the Chinese government introduced regulations in 1996 to allow greater convertibility of
the Renminbi for current account transactions and paying dividends, significant restrictions still
remain, including primarily the restriction that foreign invested enterprises may only buy, sell
and/or remit foreign currencies at those
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banks authorized to conduct foreign exchange business after providing valid commercial
documents. In addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to governmental approval in China, and companies are required to
open and maintain separate foreign exchange accounts for capital account items. We cannot be
certain that the Chinese regulatory authorities will not impose more stringent restrictions on the
convertibility of the Renminbi, especially with respect to foreign exchange transactions.
Recent Chinese regulations relating to acquisitions of Chinese companies by foreign entities may
limit our ability to acquire Chinese companies and adversely affect the implementation of our
acquisition strategy as well as our business and prospects.
On October 21, 2005, the State Administration for Foreign Exchange, or SAFE, issued the
Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose Companies
, or Notice 75,
which became effective as of November 1, 2005. Notice 75 replaced the previous SAFE regulations
relating to acquiring of Chinese companies by foreign entities. Notice 75 requires each PRC
resident, whether a natural or legal person, to complete the overseas investment foreign exchange
registration procedures with the relevant local SAFE branch, prior to establishing or assuming
control of an offshore company for the purpose of financing that offshore company with assets or
equity interests in an onshore enterprise in the PRC. In addition, an amendment to the
registration with the local SAFE branch is required to be filed by any PRC resident that directly
or indirectly holds interests in that offshore company upon either (1) the injection of equity
interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any
overseas fund raising by such offshore company. An amendment to the registration is also required
to be filed by such PRC resident when there is any material change involving a change in the
capital of the offshore company.
Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or
acquired control of offshore companies that have made onshore investments in the PRC in the past
are required to complete the relevant overseas investment foreign exchange registration procedures
by March 31, 2006. Under the relevant rules, failure to comply with the registration procedures
set forth in Notice 75 may result in restrictions on the relevant onshore company, including the
payment of dividends and other distributions to its offshore parent or affiliate and the capital
inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC
foreign exchange administration regulations.
As it is presently uncertain how the SAFE regulations, and any future legislation
concerning offshore or cross-border transactions, will be interpreted or implemented by the
relevant government authorities in connection with our future offshore financings or acquisitions,
we cannot predict how they will affect our business operations or future acquisition strategy. For
example, our present and prospective Chinese subsidiaries' ability to conduct foreign exchange
activities, such as remittance of dividends and foreign-currency-denominated borrowings, may be
conditioned upon compliance with the SAFE registration requirements by such Chinese residents, over
whom we have no control. In addition, we cannot assure you that such Chinese residents will be able
to complete the necessary approval and registration procedures required by the SAFE regulations
because we have no control over the outcome of the registration procedures. With respect to our
recent acquisitions of Brilliant and Beijing Cosmos or any future acquisitions of Chinese
companies, we cannot assure you that we or the owners of such Chinese companies, each as the case
may be, will be able to complete the necessary approvals, filings and registrations required by the
regulations or other legislation. Such uncertainties may restrict our ability to implement our
acquisition strategy and adversely affect our business and prospects.
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The value of our ordinary shares and ADSs will be affected by the foreign exchange rate between
U.S. dollars and Renminbi.
The value of our ordinary shares and ADSs will be affected by the foreign exchange rate
between U.S. dollars and Renminbi. From 1994 to July 21, 2005, the conversion of Renminbi into
foreign currencies, including U.S. dollars, was based on exchange rates published by the People's
Bank of China, which was set daily based on the previous day's interbank foreign exchange market
rates in China and current exchange rates on the world financial markets. During that period, the
official exchange rate for the conversion of Renminbi to U.S dollars was generally stable.
However, on July 21, 2005, as a result of the Renminbi being re-pegged to a basket of currencies,
the Renminbi was revalued and appreciated against the U.S dollar. There can be no assurance that
such exchange rate will continue to remain stable in the future. Our business and the price of our
ordinary shares and ADSs could be negatively affected by a revaluation of the Renminbi against the
U.S. dollar or by other fluctuations in prevailing Renminbi-U.S. dollar exchange rates. For
example, to the extent that we need to convert U.S. dollars into Renminbi for our operational needs
and should the Renminbi appreciate against the U.S. dollar at that time, our financial position and
the price of our ordinary shares and ADSs may be adversely affected. Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of declaring dividends on our ordinary
shares or for other business purposes and the U.S. dollar appreciates against the Renminbi, the
U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
Item 4. Information on the Company
A. History and Development of the Company
We commenced operations as a business division of Intrinsic China Technology Ltd., which was
incorporated in the Cayman Islands in November 1999. Intrinsic China Technology Ltd. focused
primarily on developing wireless data software and wireless value-added services. In April 2001,
our affiliated business division which focused on wireless data software was spun-off to form a
newly established holding company in the Cayman Islands, Intrinsic Technology (Holdings) Ltd., and
our company was renamed Linktone Ltd. Due to the significance of the spun-off division relative to
that of our company, the transaction was accounted for as a reverse spin-off, with our company as
the spinnee for accounting purposes. We are incorporated in Cayman Islands. Our registered office
is located at M&C Corporate Services Limited, P.O. Box 309GT, Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands. Our principal executive offices are located at 5/F,
Eastern Tower, No. 689, Beijing Dong Road, Shanghai 200001, People's Republic of China. Our
telephone number is (86-21) 3318-4900. Our agent for service of process in the U.S. for the
purpose of our securities filings is CT Corporation System, 111 Eighth Avenue, New York, NY 10011.
For more information on the history and development of our company, see Item 5 of this annual
report under the headings "Our Corporate Structure" and "Arrangements with Consolidated Affiliates"
and Item 4 of this annual report under the heading "Recent Developments."
The following diagram shows the current organizational structure of our subsidiaries and
affiliated companies as of May 31, 2006:
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In March 2004, we completed the initial public offering of our American Depositary
Shares, representing our ordinary shares, and listed those securities on the Nasdaq National
Market.
Our capital expenditures for 2003, 2004 and 2005 were approximately $0.3 million, $2.4 million
and $2.0 million, respectively, consisting of the purchase of computer and office equipment and
leasehold improvements. Substantially all of our capital expenditures for 2005 were incurred in
connection with the expansion of our business, as well as furniture and computer equipment
purchased in connection with the relocation of our Beijing office in December 2005. We anticipate
that we will have capital expenditures in the next 12 months of approximately $1 million for
software and technology infrastructure products which we expect to finance with internal funds.
Recent Developments
In January 2005, we established a new subsidiary, Linktone Internet in China, which develops
software internally for our 2.5G and audio-related products.
In May 2005, we acquired all outstanding shares of Brilliant, a British Virgin Islands limited
liability corporation. Brilliant, through its subsidiary and exclusive contractual arrangements
with a domestic Chinese entity, is engaged in providing online gaming services. Brilliant, its
subsidiary and affiliated company are collectively referred to as the Brilliant Group. The initial
consideration was $3.1 million in cash. An additional payment of $5.7 million was made in March
2006 pursuant to an earn-out provision, based on eight times of the Brilliant Group's net profit for
2005.
In June 2005, we acquired all of the outstanding shares of Beijing Cosmos, a limited liability
company incorporated in China. Beijing Cosmos is a provider of WAP services to China Unicom. As
part of the consideration for this acquisition, we made an initial payment of $0.6 million in cash
to Beijing Cosmos's shareholders, and paid $0.8 million in cash to Beijing Cosmos to settle a loan
owed by the shareholders to Beijing Cosmos and $0.2 million in cash to selling shareholders for the
net working capital of Beijing Cosmos as of May 31, 2005. An additional payment of $2.5 million
was made in May 2006 pursuant to an earn-out provision, based on approximately 3.8 times of Beijing
Cosmos's net profit for the eleven month period from May 1, 2005 to March 31, 2006.
In June 2005, we completed the acquisition of Hainan Zhong Tong, a provider of SMS services to
China Mobile. The aggregate purchase price was $1.7 million, comprised of $0.7 million in cash to
selling shareholders and $1 million in cash paid to Hainan Zhong Tong for settling a loan owed by
the selling shareholders to Hainan Zhong Tong.
In June 2005, we completed the acquisition of Beijing Lian Fei, a provider of wireless value
added ("WVAS") services to China Mobile. The aggregate purchase price was $2 million, comprised of
$1.5 million in cash to selling shareholders and $0.5 million in cash paid to Beijing Lian Fei for
settling a loan owed by the selling shareholders to Beijing Lian Fei.
In June 2005, we established a new subsidiary, Linktone Software, in China, which utilizes to
develop software internally for our 3G products.
In August 2005, we completed the acquisition of Shanghai Qimingxing, a provider WVAS services
to China Mobile. The aggregate purchase price was $1.9 million, comprised of $0.8 million in cash
to selling shareholders and $1.1 million in cash payable to Shanghai Qimingxing for settling a loan
owed by the selling shareholders to Shanghai Qimingxing.
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In October 2005, we made a strategic investment in 9Sky International Limited and its related
parties (collectively known as "9Sky entities") by entering into senior secured convertible loan
agreements in the total principal amount of $2,555,000. These loans are convertible into a certain
percentage of shares of the 9Sky entities upon the occurrence of certain conditions by April 12,
2006 which date was subsequently extended to July 12, 2006.
In January 2006, we acquired 51% of the outstanding shares of Ojava Overseas Ltd., a British
Virgin Islands limited liability corporation ("Ojava Overseas"), and 80% of the outstanding equity
interest in Beijing Ojava Wuxian Co., Ltd. ("Ojava Wuxian"), a domestic entity in the PRC. Ojava
Overseas and Ojava Wuxian are collectively referred to as the Ojava Group. The Ojava Group is a
leading mobile game developer and game publisher in the PRC. The initial payments for this
acquisition were (a) $1.8 million in cash to shareholders of Ojava Overseas; (b) $1.6 million in
cash to Ojava Overseas for subscription of additional shares issued by Ojava Overseas and (c) $1
million paid to Ojava Wuxian to settle a loan owed by shareholders to Ojava Wuxian. We also have an
option to purchase the remaining 49% interest in Ojava Overseas and 20% interest in Ojava Wuxian
based on the Ojava Group's achievement of certain performance objectives in 2007 and 2008. The
further payment is capped at $7.84 million.
On February 24, 2006, our board of directors accepted Raymond Yang's resignation as our Chief
Executive Officer and Executive Director, and appointed Michael Guangxin Li, who resigned as our
Chief Operating Officer on January 3, 2006, as a director. On March 1, 2006, our Chief Technology
Officer, Xin Ye, resigned. On April 3, 2006, our board of directors appointed Michael Guangxin Li
as our Chief Executive Officer.
B. Business Overview
OUR SERVICES
We provide entertainment-oriented wireless value-added services to mobile phone users over the
2G and 2.5G mobile telecommunications networks in China. We specialize in the development,
aggregation, marketing and distribution of consumer wireless content and applications for access by
China's estimated 393.4 million mobile phone users, primarily through the two principal mobile
network operators in China, China Mobile and China Unicom.
Our 2G SMS-based services include ringtones, icons and screen savers, interactive SMS
messaging in certain television programs, adventure, action, trivia and fortune-telling games,
lunar and Western horoscopes, POP Messaging, jokes, fan clubs, event-driven or entertainment news
updates, and a virtual mobile amusement park called WonderWorld.
We are also focused on offering 2.5G services, which include MMS services, such as animated
cartoons and screensavers, comic strips, magazine-style "mobile articles" on a variety of topics
and event-driven news updates. In addition, our 2.5G offerings include WAP services, such as
WAP-based ringtones, screensavers, games and dating services, and advanced Java
TM
games.
In addition, we offer audio-related services such as "ringback," which replaces the common
"ring-ring" sound heard by callers with high quality music and sound effects, and IVR services,
which allow users to listen to songs, jokes, stories and coverage of major events, such as the 2004
Summer Olympics. Users can send such audio content, along with personal messages, to the mobile
phones of their friends or others.
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Our current 2G, 2.5G and audio-related services are as follows:
Technologies
Type of Consumer Service
SMS (2G)
•
Monophonic and
Polyphonic Ringtones
•
Endless Battle
Space Game
•
Horoscopes
•
Icons and Screen
Savers
•
Mobile Pet
•
WonderWorld Mobile
Amusement Park
•
Crystal Ball
Fortune Telling Game
•
POP Messaging on
Various Topics of
Interest
•
SMS Interactive
•
Jokes
Television Messaging
•
Fan Clubs
•
Event-driven or
Entertainment News
MMS/WAP/ Java
TM
(2.5G)
•
Customizable
Monophonic and
Polyphonic Ringtones
•
Java
TM
-based Action,
Role-Playing and
Adventure Games
•
WAP-based Horoscopes, Jokes, Fan Clubs and
Event-Driven or
Entertainment News
•
Color and Animated
Icons and Screen
Savers
•
WAP-based Card
Games and Games of
Chance
•
Love Genie WAP
Dating Service
•
Animated Cartoons
and Comic Strips
•
MMS Downloads of
Event-Driven News or
Entertainment
Updates
Audio-related Services
•
Ringback
•
Music
•
Sound Effects
•
IVR Services
•
Music
•
Jokes
•
Stories
•
Chat services
•
Mobile novels
•
Mobile blogs
We have launched several of our SMS and audio related services, which are described below,
over the PHS or PAS limited mobility networks and fixed line networks operated by China Telecom and
China Netcom. These networks provide a limited range of mobile phone services to a group of users
within a designated geographic area such as a single city, without the ability to roam from area to
area. The revenue generated from these services was not a significant part of our total gross
revenues for 2004, but represented 4.3% of our total gross revenues for 2005.
Our services can be purchased on a monthly subscription or per use basis, except for ringback
audio-related services from which we derive our revenue on a per content download basis while the
operator collects a monthly network service fee.
SMS
Ringtones, Icons and Screen Savers.
Our ringtone, icon and screen saver downloads enable
mobile phone users to customize the ringtone of their phones and the image which appears on the
phone screens.
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We offer over 5,000 ringtones which have been tailor-made for the Chinese market with
monophonic, as well as polyphonic (which sounds more like real music than the traditional
electronic ringing sounds of mobile phones), capabilities. We also offer more than 10,000 icons and
screen savers which range in complexity from simple black-and-white images and monochrome color to
full color images.
Games.
We offer interactive SMS-based games that can be played on the screens of mobile
phones. These games are tailored by our product development department to play on the dial pad of a
mobile phone. Our current game offerings include
Endless Battle Space, Mobile Pet
and
Crystal Ball
.
SMS Interactive Television Messaging.
Through our contractual relationship with STAR TV, and
Hunan Patel Life TV, we also enable television viewers to interact with certain programs via SMS
messages by, for example, sending an SMS message to vote for the winner of a contest on the
program.
WonderWorld
. For a monthly admission price, this service offers users access to a mobile
amusement park where users take on a virtual identity, are able to interact with one another, and
have access to a variety of games, chat rooms, information and other entertaining services.
Information-related Services.
We offer a number of information-related services including
POP
Messaging
which allows users to receive wireless messages containing information regarding one of
several categories of topical information, such as fashion, health and beauty. Users can also
receive automatic messages from us on selected topics such as jokes, news and horoscopes.
MMS/WAP/Java
TM
Ringtones, Icons and Screen Savers
. Our next generation MMS and WAP ringtones allow users to
create their own customized ringtones. We also offer more than 8,000 MMS and WAP color images and
color animations.
Games.
We offer games based on the Java
TM
and Brew programming languages which
offer an effective way to create sophisticated 2.5G games. We have already launched 120
Java
TM
and Brew games as of December 31, 2005, such as
Tom & Jerry Cheese Chase
,
Powerpuff Girls, Star Diver
,
Magic Shooting
,
Legend of Ninja, Counter Strike, Kitty Treasure
Hunting
and
The Promise
. We also offer WAP-based card games and games of chance such as blackjack,
poker and mahjong, as well as WAP-based versions of our SMS games described above.
Animated Cartoons and Comic Strips.
With this MMS and WAP service, users can choose from a
variety of animated cartoons and comic strips which they can view on their mobile phone screens. We
currently offer several serial comic strips, including comic strips based on
Garfield
and on the
Japanese character,
Shin Chan
, as well as 29 categories of non-serial cartoons and comic strips
which relate to different themes such as holidays, romance and user hobbies and interests.
News and Entertainment Downloads.
Our users can download a variety of event-driven MMS news
and entertainment downloads.
Love Genie
. With this avatar-based WAP service, users can participate in an interactive
virtual community and post information about themselves, interact with each other, make new friends
and arrange dates with other users.
Finally, we offer WAP versions of our jokes, news, fan clubs and horoscope services.
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Audio-Related Services
Ringbacks.
Ringback allows a mobile phone user to customize the sound callers hear when the
user's phone is ringing. We supply a variety of pre-recorded messages from celebrities, sound
effects (such as sirens), and a wide range of popular music.
Voice Entertainment Services.
We provide IVR services, which allow users to send songs, jokes
and stories with personal messages to their mobile phones or to the mobile phones of their friends
or others. Our IVR services cover such topics as automobiles, jokes, sports, games and Chinese
comedies.
Revenues by Category of Activity
China is the only principal market in which we compete. As described above, our revenues are
comprised of SMS, 2.5G services including MMS, WAP and Java
TM
games, and audio related
services including ringback and IVR services. Gross revenues for the years ended December 31, 2003,
2004 and 2005 are as follows:
Year ended December 31,
2003
2004
2005
SMS
$
16,539,201
$
40,180,566
$
46,702,269
2.5G services
—
6,449,366
8,300,826
Audio related services
—
3,659,007
16,963,773
Casual games
—
—
1,374,995
Others
62,291
29,805
266,740
Total revenue
$
16,601,492
$
50,318,744
$
73,608,603
OPERATOR SERVICE AGREEMENTS WITH CHINA MOBILE AND CHINA UNICOM
General
China Mobile and China Unicom are the predominant mobile operators in China. Given their
market presence, our negotiating leverage with these operators is limited, and our business is
dependent on maintaining our relationships with them. See Item 3.D. "Risk Factors — Risks Related
to Our Company — We depend on the two principal mobile phone operators in China for delivery of
almost all of our services, and the termination or alteration of our various contracts with either
of them or their provincial or local affiliates could materially and adversely impact our
business." Our affiliates, Shanghai Weilan, Shanghai Unilink, Beijing Cosmos, Hainan Zhong Tong,
Beijing Lian Fei and Shanghai Qimingxing, have entered into service agreements with the national
and some provincial and local offices of China Mobile and China Unicom to offer our various
services through their networks. For 2003, 2004 and 2005, we derived approximately 88.3%, 88.1% and
85.0%, respectively, of our gross revenues from China Mobile.
Service Fee Arrangements and Other Payment Consideration.
The following is a summary of the material features of our contractual relationships with
China Mobile and China Unicom, and is not an exhaustive description.
Service Fee Arrangements.
China Mobile's provincial operators charge us a service fee equal
to 15.0% of the gross revenues from our content services (other than IVR services) with the
remainder paid to us, except in Shanxi province where we currently pay 9% to 14% of the gross
revenue depending on our monthly ranking among other service providers in the province. We
currently pay a service fee equal
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to 30.0% of the gross revenues from our IVR services offered through China Mobile's network.
China Unicom has implemented a sliding scale fee arrangement whereby we receive a range of 40% to
88% of the gross revenues depending on customer usage, revenue and other performance criteria. In
2005, we received on average 71% of the gross revenues, with China Unicom receiving the remaining
29%.
If a user does not pay the applicable fees for our services to China Mobile and China Unicom,
the mobile operators usually will not pay us for those services. Moreover, if any user on Fujian
Unicom's network refuses to pay because they are dissatisfied with the quality of our services,
then we have to pay Fujian Unicom the network fees in connection with the services we have provided
to such user, as well as Fujian Unicom's share of the revenue that would have been payable by such
user.
Network Fees.
To the extent that the number of messages sent by us over China Mobile's
network exceeds the number of messages our customers send to us, we must also pay a per message
network fee. For SMS, the applicable charge to us is currently RMB0.05 ($0.006) per message for
China Mobile in Gansu, Guangxi, Hainan, Inner Mongolia, Qinghai, Tibet and Shanxi provinces, but if
we were to fail to achieve certain usage thresholds in other provinces, China Mobile would apply a
higher network fee of up to RMB0.10 ($0.01) per message. Similarly, we pay China Unicom and its
provincial affiliates a per message network fee of approximately RMB0.05, to the extent the
messages we send exceed the number of messages sent to us by our customers. For MMS, China Mobile
applies a sliding scale charge arrangement at a range of RMB0.15 ($0.02) to RMB0.25 ($0.03) per
message network fee.
We do not collect fees for our services from the operators in a number of circumstances,
including if:
•
the delivery of our service to a customer is prevented because his or her
mobile phone is turned off for an extended period of time, the customer's prepaid phone
card has run out of value or the customer has ceased to be a customer of the applicable
operator,
•
either of the two operators experiences technical problems with its network
which prevent delivery of our services to the customer,
•
we experience technical problems with our technology platform that prevent
delivery of our services, or
•
the customer refuses to pay for our service due to quality or other problems.
These are known as billing and transmission failures, which may not be a result of the
operations of the mobile operators, and their rate varies among the provincial operators and also
has changed significantly over time. The operators do not charge us network fees for transmissions
by us that end in billing and transmission failures. For 2003, 2004 and 2005, the rate of the
mobile operators confirmed revenues accounted for approximately 63.1%, 66.0% and 61.0%,
respectively, of the total billable messages that are reflected in our internal records. However,
as we became more experienced in our estimation methodology and also took into account input from
our sales teams, we made adjustments to total billable messages. The rate of the mobile operators
confirmed revenue as a percentage of the expected value of delivered messages (after adjustment)
was 103% for 2005. We do not recognize revenue for our services which are deemed to be billing and
transmission failures.
Term and Termination and Other Material Provisions
The term of our contracts with China Mobile and China Unicom is generally one to two years. We
usually renew these contracts or enter into new ones when the prior contracts expire, but on
occasion, the
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renewal or new contract can be delayed by periods of one month or more. The agreements can also be
terminated in advance for a variety of reasons which vary among the individual contracts with the
operators, including, for example, where we breach our obligations under the contract, a high
number of customer complaints are made about our services or we cannot satisfy the operational or
financial performance criteria established by the applicable operator. Several of our contracts
with the operators can be terminated for no reason upon advance written notice.
Generally, our contracts with the mobile operators are silent on the arrangements relating to
payment from the operators in the event such contracts are not renewed. Payment and billing
disputes, if any, will therefore be resolved in accordance with the provision in the contracts
which generally provides that parties shall resolve disagreements through amicable negotiation
(where such provision survives the termination of the respective agreements) or through court
proceedings if amicable resolution cannot be reached.
CONTENT RELATIONSHIPS
Our content collaborators authorize the inclusion of their content in one or more of our
services in exchange for a percentage of our revenues or a royalty or a fixed fee payment which we
pay directly to the provider, and are usually non-exclusive. Our agreements with our content
collaborators have terms ranging from six months to four years. In addition, some agreements can
be renewed by the parties for additional successive terms indefinitely. Our significant content
collaborators currently include:
2G and 2.5G and Other Services
•
STAR TV
— We provide wireless interactive services for Channel [V], a regional
music video channel, and XKWS, STAR TV's entertainment channel in China, through a
revenue sharing arrangement.
We pay STAR TV a pre-determined percentage of the total net revenue generated from
our services incorporating the content provided by STAR TV. The current term of our
agreement with STAR TV terminates in June 2006.
•
ChinaNet
— ChinaNet, a leading news and information website, provides us with
news and other information for use on our wireless services in exchange for a fixed
fee. Under the agreement, we are obligated to pay ChinaNet a fixed monthly minimum
amount, as well as a pre-determined percentage of the total revenue generated from the
services incorporating the news content in excess of the minimum amount. Our agreement
with ChinaNet expires on December 31, 2006.
•
Shin Chan
— We have sublicensed the popular Japanese cartoon series, Shin Chan,
and have developed localized animated MMS messages and cartoon strips based on the
characters from that series. We pay this sublicensor a percentage of the revenues
received by the mobile operators with respect to services incorporating the Shin Chan
content. This agreement terminates in July 2006 and will be automatically renewed for
an additional year unless either party objects.
Audio-related Services
•
Sony BMG Music
— We provide Sony BMG Music's catalog via true tones, ringback tones
and our IVR services. Sony BMG Music's content includes songs by many Chinese, Japanese
and Western artists. We pay Sony Music a nonrefundable one-time
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fee as well as a percentage of the gross revenues received from the mobile operators
after we have recouped the one-time fee. The current term of this agreement will
terminate in January 2007.
•
EMI Music
—
We are the non-exclusive provider of EMI's catalog of music, which
includes more than 5,000 songs by popular artists, for ringback services. We pay EMI
Music the higher of (i) a fixed rate multiplied by sales volume (i.e., the number of
music content provided to users) and (ii) a percentage of the revenues attributable to
the services incorporating EMI's music content. These variable fees are offset against
a one-time fee also paid to EMI Music. The current term of our agreement with EMI
Music will terminate in January 2007.
•
Universal Music
—
We have a non-exclusive license from Universal Music Mobile HK
Limited to provide Universal Music's catalog via ringback tones and true tones. Under
the agreement, we are obligated to pay a (i) non-refundable advance which can be
recouped by royalities generated on or before March 2006, (ii) minimum guaranteed
amount as well as a percentage of the revenue we receive with respect to the related
services after we have recouped the minimum guaranteed amount. The current term of our
agreement with Universal Music terminates in November 2006.
•
Warner Music
—
We have a non-exclusive license from Warner Music Taiwan Limited to
provide Warner Music's Taiwan catalog via ringback tones, true tones and our IVR
services. Under the agreement, we are obligated to pay a minimum guaranteed amount as
well as a percentage of the revenue we receive with respect to the related services
after we have recouped the minimum guaranteed amount. Our agreement with Warner Music
terminates in August 2006.
SALES AND MARKETING
We sell and market our services principally to and through China Mobile and China Unicom as
described below under the heading "Operator Channels." We also sell and market through our Web
sites, promotional events, direct marketing, media advertising and other activities as described
below under the heading "Non-Operator Channels."
In both the operator and non-operator channels we cross-sell to users of our SMS-based
services to migrate them to our subscription-based, premium 2.5G services, such as MMS and WAP
services. For further information on the risks associated with our cross-selling activities, please
see Item 3.D. "Risk Factors — Risks Related to Our Company — Changes in the policies of the mobile
operators and in their enforcement of their policies have resulted in our having to pay additional
charges to the mobile operators, and further changes could materially and adversely impact our
revenue, profitability and financial condition in the future."
Operator Channels
General.
Substantially all of our services are provided through the networks of China Mobile
and China Unicom, and the mobile operators collect all fees for our services from the ultimate
users. As of December 31, 2005, we also had approximately 108 sales professionals located in 31
provinces, of whom a majority are based in the eastern and southern regions of China to work
closely with the mobile operators at the provincial and local level.
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WAP.
Our relationships with China Mobile and China Unicom allow us to promote our WAP services
to the mobile operators' provincial affiliates. Both the provincial- and national-level WAP portals
of China Mobile and China Unicom are organized much like the pages of an Internet Web site, with
the services of third party service providers such as our company listed by category on various
segregated WAP pages within each operator's WAP portal. See Item 3.D. "Risk Factors — Risks
Related to Our Company — If China Mobile and China Unicom do not change their policies regarding
how service selections appear on their WAP portals, we may have difficulty increasing the
popularity of our WAP services, which could adversely affect our future revenue growth and
profitability."
STK Cards.
A number of our services are embedded on STK cards offered by China Mobile and
China Unicom. STK cards are enhanced SIM cards that offer a variety of services embedded in the
cards which have been approved by the national office of China Mobile or China Unicom, as the case
may be, and selected by their local offices in the provinces where the cards are sold. In this way,
the selected services are pre-installed into phones which use these cards. The provincial offices
of China Mobile and China Unicom introduce new STK cards in most cases every six months which may
have new services from new service providers, or a mix of old and new services and providers,
embedded on them. STK cards can be obtained for free.
We have services embedded in STK cards offered in 13 and 7 provinces and municipalities by
China Mobile and China Unicom, respectively. Due to previously announced penalties by China
Mobile, we were not permitted for the first half of 2005 to offer services for inclusion in new STK
cards with China Mobile. Delivery of our services through previously sold STK cards that were
still in use during this time period were not affected by the sanctions. For information on the
risks associated with these services, please see Item 3.D. "Risk Factors — Risks Related to Our
Company — The mobile operators may not authorize our services to be offered on their networks if we
fail to achieve minimum customer usage, revenue and other criteria."
Coordinated Marketing Campaigns.
We also cooperate in major marketing campaigns with China
Mobile and China Unicom. For example, we are currently working with China Mobile in its M-Zone
marketing initiative, which promotes its wireless value-added services to younger mobile phone
users.
Non-Operator Channels
We also focus on non-mobile operator sales and marketing activities, such as:
•
promoting our Web sites to potential users as a fun, easy-to-access place to
request our wireless content and applications,
•
hosting promotional events around China with one of the mobile operators at
which we create brand awareness by interacting with consumers to educate them about our
services and distributing Linktone-branded souvenirs,
•
engaging in direct marketing to mobile phone users by, for example, including
advertising inserts in users' bills from China Mobile or China Unicom,
•
utilizing our database of users to create targeted marketing campaigns,
•
advertising in youth and lifestyle magazines and other traditional print and
other media channels,
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•
cooperating with retail vendors of mobile handsets to offer our services to
purchasers, and
•
conducting integrated marketing campaigns with traditional media companies and
multi-national corporations.
We have also entered into agreements with 23 Chinese mobile handset manufacturers and handset
design houses to embed certain of our wireless value-added services into their handsets for
end-users' easy access. As of December 31, 2005, approximately 12 million handsets with an average
of 20 WAP services, 50 SMS services, 15 IVR services and five MMS services embedded in them had
been sold.
INFRASTRUCTURE AND TECHNOLOGY
We have developed a flexible and scalable platform with open and adaptive technology. Our
Intelligent Application Gateway, or LT-IAG, is a unified platform supporting multiple protocols,
networks and billing solutions, with high scalability, load balancing, intelligent session
management and performance measurement. Through this platform, we are able to interconnect and
provide all major types of 2G, 2.5G and audio-related services through the networks of the mobile
operators. It also allows us to monitor our services and their delivery to China Mobile's and China
Unicom's networks on a real-time basis which allows us to optimize the efficiency of our system and
quickly address any problems. The platform is equipped with an open application interface for rapid
connectivity by third party content providers and access to multiple channels for SMS, MMS, WAP and
Web connectivity. LT-IAG is connected to the operators' network on a pan-China basis.
Our user database, which operates on our proprietary software and is an integral part of
LT-IAG, allows us to store, analyze, retrieve and compare various statistical information and to
identify relevant trends. LT-IAG also supports our customer service activities by providing our
service professionals with real-time user data and information regarding service delivery and
billing. In addition, LT-IAG can rapidly schedule, deploy and manage "SMS pushes" to promote our
products. LT-IAG is fully compatible with the 2.5G technology standard and related services.
Our websites and services are made available primarily through network servers located in the
facilities of China Telecom's Shanghai affiliate, China Unicom's affiliates in Beijing, Guizhou,
Jiangsu, Shanghai and Zhejiang, and China Mobile's affiliates in Beijing, Hebei, Hunan, Jiangsu and
Shanghai. As of December 31, 2005, there were 185 such network servers, running on a Linux-based
operating system. We lease dedicated lines with 5 megabits per second capacity from China Telecom
and shared lines with 100 megabits per second capacity from both China Mobile and China Unicom.
COMPETITION
We compete principally with three groups of wireless value-added service providers in China.
The first group is comprised of companies which, like Linktone, focus primarily or entirely on this
market and offer a wide range of services. These include participants such as KongZhong
Corporation, Hurray! Holding Co., Ltd., MTone Wireless and Newpalm (a subsidiary of Chinadotcom),
as well as smaller companies such as Any8 and 263.net. These competitors are generally
characterized by strong market knowledge and, in some cases, well-developed relationships with the
mobile operators on a local and national basis. They also tend to focus on entertainment-related
services.
The second group is comprised of the major Internet portal operators in China, including
publicly-listed companies such as SINA CORP., Sohu.com Inc. and TOM Online Inc., which is an
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affiliate of Internet portal operator TOM Group Limited. The Internet portals leverage their
existing strength in aggregating content, marketing and cross-selling among their established
Internet user base to promote wireless value-added services. Each of SINA CORP., Sohu.com Inc. and
TOM Online Inc. are significantly better capitalized than our company. However, with the exception
of SINA, these portals have traditionally lacked specific wireless product development expertise
and well-developed relationships with the mobile operators at a local level.
The third group is comprised of niche service providers, such as TENCENT Inc., Enorbus
Technologies and Solute Wireless, which focus primarily on a particular market segment or
application, such as wireless instant messaging, that often builds on a pre-existing competency in
the sector.
We may also face competition from companies in China which offer online services and are
expanding to various degrees into wireless value-added services, such as Shanda Interactive
Entertainment Limited, which primarily focuses on Internet-based games but which also offers
wireless games.
International wireless companies, such as Nokia, come2us and Cybird, and international
Internet portal operators, such as Yahoo!, Lycos and AOL, who are or may be attempting to enter the
Chinese market could also present significant competition for us. These international competitors
have had only limited success, however, in penetrating the Chinese wireless value-added services
market to date.
Several of our competitors have longer operating histories in China, greater name and brand
recognition, larger customer bases and databases, significantly greater financial, technological
and marketing resources and superior access to original content than we have. As a result, our
existing competitors may in the future achieve greater market acceptance and gain additional market
share. In addition, it is possible that China Mobile or China Unicom or both could decide to
provide their own portfolio of content and services to their users themselves and deny network
access to third party service providers such as our company. Please refer to Item 3.D. "Risk
Factors — Risks Related to Our Company — We may face intense competition" for a more detailed
discussion of the risks we face from our competitors.
GOVERNMENT REGULATION
The following is a summary of the principal governmental laws and regulations that are or may
be applicable to wireless service providers like us in China. The scope and enforcement of many of
the laws and regulations described below are uncertain. We cannot predict the effect of further
developments in the Chinese legal system, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement of laws, particularly with regard to wireless
value-added services, which is an emerging industry in China. For a description of the regulatory
risks related to our business, please see Item 3.D. "Risk Factors — Risks Related to Our Company —
Changes in the policies of the mobile operators and in their enforcement of their policies have
resulted in our having to pay additional charges to the mobile operators, and further changes could
materially and adversely impact our revenue, profitability and financial condition in the future;"
"Risk Factors — Risks Related to Our Industry — The Chinese government or one or more of the mobile
operators may prevent us from distributing and we may be subject to liability for, content that any
of them believe is inappropriate;" "Risk Factors — Risks Related to Our Industry — The
Telecommunication laws and regulations in China are evolving and subject to interpretation and may
change in the future. If we are found to be in violation of current or future Chinese laws or
regulations, we could be subject to severe penalties;" "Risk Factors — Risks Related to Our
Industry — The regulation of Internet Web site operators is also unclear in China, and our business
could be adversely affected if we are deemed to have violated applicable laws and regulations;"
"Risk Factors — Risks Related to Our Company — Our corporate structure could be deemed to be in
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violation of current or future Chinese laws and regulations which could adversely affect our
ability to operate our business effectively or at all;" and "Risk Factors — Risks Related to Doing
Business in China — Recent Chinese regulations relating to acquisitions of Chinese companies by
foreign entities may limit our ability to acquire Chinese companies and adversely affect the
implementation of our acquisition strategy as well as our business and prospects."
Regulation of Telecommunication Services
The telecommunications industry, including certain wireless value-added services, is
highly-regulated in China. Regulations issued or implemented by the State Council, the Ministry of
Information Industry, and other relevant government authorities cover many aspects of
telecommunications network operation, including entry into the telecommunications industry, the
scope of permissible business activities, interconnection and transmission line arrangements,
tariff policy and foreign investment.
The principal regulations governing the telecommunications services business in China include:
•
Telecommunications Regulations
(2000), or the Telecom Regulations. The
Telecom Regulations categorize all telecommunications businesses in China as either
infrastructure telecommunications businesses or value-added telecommunications
businesses. The latter category includes SMS and other wireless value-added services.
Under the Telecom Regulations, certain services are classified as being of a
value-added nature and require the commercial operator of such services to obtain an
operating license, including telecommunication information services, online data
processing and translation processing, call centers and Internet access. The Telecom
Regulations also set forth extensive guidelines with respect to different aspects of
telecommunications operations in China.
•
Regulations for the Administration of Foreign-Invested Telecommunications
Enterprises
(2002), or the FI Telecom Regulations. The FI Telecom Regulations set
forth detailed requirements with respect to capitalization, investor qualifications
and application procedures in connection with the establishment of a foreign-invested
telecom enterprise. Under the FI Telecom Regulations, a foreign entity is prohibited
from owning more than 50% of the total equity in any value-added telecommunications
business in China, subject to certain geographic limitations.
•
Administrative Measures for Telecommunications Business Operating License
(2001), or the Telecom License Measures. Under the Telecom License Measures, an
approved value-added telecommunications service provider must conduct its business in
accordance with the specifications recorded on its Telecom Business Operating License.
Regulation of SMS Services
. On April 15, 2004, the Ministry of Information Industry
promulgated a
Circular on Certain Issues regarding Standardization of SMS Services
, or the
Circular. The Circular requires all service providers to obtain appropriate operating licenses
before they can provide wireless value-added services through the networks of the mobile operators
in China. Pursuant to the Circular, in the promotion of SMS services, mobile operators and service
providers in China are required to prominently feature descriptions of standards and methods by
which users will be charged for the services they order and how they may cancel their orders.
Monthly subscriptions to SMS services must be specifically confirmed by users. Any message sent by
a service provider to a user to confirm an order must include a schedule of charges applicable to
the service such user has ordered. If the user does not confirm an order, the order is deemed
cancelled. Providers of SMS services must provide such services strictly according to users'
orders, and may not alter the number of such SMS messages, the
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frequency at which the messages are sent, or the methods through which users pay for the
services. The Circular also required mobile operators and service providers to implement a series
of measures before May 15, 2004 that would make it easier for users to cancel their SMS services.
If a user disputes any charges for SMS services or complains about the quality of the services, the
mobile operator is required to refund such user's payment for the services if it is unable to
assign responsibility for the problem to another party within 15 days. In addition, service
providers are required to review the content in the process of collecting, developing, processing
and sending any message. The message must not contain any content prohibited by the state.
Provisions in this Circular apply to SMS services provided by fixed line operators as well.
On March 30, 2005, the Ministry of Information Industry promulgated the
Telecommunications
Service Standards,
or the Standards
.
The Standards contain the minimum quality standards for
telecommunication services to be provided to customers, with detailed and specific standards for
each category of telecommunication services. Schedule 6 of the Standards sets forth requirements
that shall be observed in providing information services, including voice messages and SMS
services. The requirements applicable to SMS services contained in Schedule 6 have largely repeated
those contained in the Circular, with an additional requirement that an SMS service provider shall
ensure a 95% accuracy rate for the message transmission and that the SMS service provider shall set
up a publicly available hotline for customer service.
While we believe this recent focus on compliance and service initiatives will result in a
stronger, more orderly market in the long-term, it has also resulted in service and billing
suspensions and in our having to pay certain charges to the mobile operators for our inadvertent
contravention of the foregoing rules and the mobile operators' own policies. We continuously
monitor our SMS services in order to minimize the possibility of a violation of the Circular and
the Standards.
In addition to regulations promulgated at the national level by the Chinese government, local
offices of the Ministry of Information Industry, or MII, have issued provisional regulations
requiring SMS service providers to obtain licenses from or register with it before providing SMS
service within the city. Our affiliates, Shanghai Unilink, Shanghai Weilan, Beijing Cosmos, Hainan
Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, hold inter-provincial value-added
telecommunication services licenses issued by the Ministry of Information Industry
Regulation of Internet Culture Activities
. On May 10, 2003, the Ministry of Culture of the
PRC, or MOC, promulgated the Internet Culture Administration Tentative Measures, or the Internet
Culture Measures, which became effective as of July 1, 2003. The Internet Culture Measures require
Internet content providers which engage in Internet culture activities to obtain an Internet
culture operations license from the MOC in accordance with the Internet Culture Measures. The term
"Internet culture activities" includes, among other things, acts of online dissemination of
Internet cultural products, such as audio-visual products, game products, performances of plays or
programs, works of art and cartoons, and the production, reproduction, importation, sale (wholesale
or retail), leasing and broadcasting of Internet cultural products. We believe it is likely that
the MOC would interpret the phrase "Internet culture activities" to include dissemination of
culture products through SMS, MMS, WAP, Java
TM
or other wireless technologies.
Shanghai Unilink has applied for an Internet culture operation license with the MOC and the
Brilliant Group has already acquired such a license.
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Other Laws and their Application
Regulation of Information Security.
Internet content in China is also regulated and
restricted. The National People's Congress, China's national legislative body, adopted the
Decision
of Maintaining Security on the Internet
on December 28, 2000, which provides that any of the
following conduct may result in criminal punishment:
•
gaining improper entry into a computer or system of strategic importance;
•
disseminating politically disruptive information;
•
leaking state secrets;
•
spreading false commercial information;
•
infringing intellectual property rights;
•
spreading computer viruses;
•
spreading false financial news or information;
•
defaming others; or
•
spreading obscene content.
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 powers in
this regard, and we may be subject to the jurisdiction of the local security bureaus.
Regulation of Internet Content Services.
As a wireless value-added services provider, we do
not engage in the Internet portal business which typically involves the provision of extensive
Internet content services, including Chinese language web navigational and search capabilities,
content channels, web-based communications and community services and a platform for e-commerce,
such as auction houses. Shanghai Weilan registered with the Shanghai Telecommunication
Administration Bureau in November 2003 to provide commercial services, which are generally limited
to the marketing and sales of our wireless value-added services, at the Linktone websites.
As a commercial ICP provider, we are prohibited from posting or displaying any content that:
•
opposes the fundamental principles determined in China's Constitution;
•
compromises state security, divulges state secrets, subverts state power or
damages national unity;
•
harms the dignity or interests of the state;
•
incites ethnic hatred or racial discrimination or damages inter-ethnic unity;
•
sabotages China's religious policy or propagates heretical teachings or feudal
superstitions;
•
disseminates rumors, disturbs social order or disrupts social stability;
•
propagates obscenity, pornography, gambling, violence, murder or fear or
incites the commission of crimes;
•
insults or slanders a third party or infringes upon the lawful rights and
interests of a third party; or
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•
includes other content prohibited by laws or administrative regulations.
Failure to comply with these prohibitions may result in the closing of our Web sites.
Regulation of News Dissemination through SMS Services.
On November 17, 2000, the
Internet
News Measures
were promulgated by the State Council News Office and the Ministry of Information
Industry. These measures stipulate that general web sites established by non-news organizations may
publish news released by certain official news agencies if such web sites satisfy the requirements
set forth in Article 9 of the measures and have acquired the requisite approval, but may not
publish news items produced by themselves or news sources from elsewhere. All the news that we
publish and disseminate originates from official news agencies approved by the PRC government.
On September 25, 2005, the State Council News Office and the Ministry of Information Industry
jointly promulgated the
Regulations on Administration of Internet News Services,
or the "Internet
News Regulations." According to the Internet News Regulations, all companies not established by
news organizations that intend to carry on dissemination of news on major political, economic,
military and diplomatic events must obtain approval from the State Council News Office and must
satisfy the minimum requirements of a registered capital of no less than RMB10,000,000 and other
requirements relating to internal control systems and competent personnel in respect of such
company.
The State Council News Office and Ministry of Information Industry have not specified whether
the Internet News Measures and Internet News Regulations apply to dissemination of news through
SMS, MMS, WAP, Java
TM
or other wireless technologies. In addition, pursuant to a
circular issued by the Shanghai Communications Administration, distribution of news contents
through wireless applications such as SMS must be approved by relevant government agencies in
charge.
Regulation of Online Publication
. The State News and Publications Administration, or SNPA, is
the government agency responsible for regulating publishing activities in China. On June 27, 2002,
the Ministry of Information Industry and SNPA jointly promulgated the
Tentative Internet Publishing
Administrative Measures
, or the Internet Publishing Measures, which took effect on August 1, 2002.
The Internet Publishing Measures require Internet publishers to secure approval from SNPA. The term
"Internet publishing" is defined as an act of online dissemination whereby Internet information
service providers select, edit and process works created by themselves or others (including content
from books, newspapers, periodicals, audio and video products, electronic publications, and other
sources that have already been formally published or works that have been made public in other
media) and subsequently post the same on the Internet or transmit the same to users via the
Internet for browsing, use or downloading by the public.
SNPA and the Ministry of Information Industry have not specified whether the aforementioned
approval in the Internet Publishing Measures is applicable to dissemination of works through SMS,
MMS, WAP, Java
TM
or other wireless technologies. If, in the future, SNPA and the
Ministry of Information Industry clarify that the Internet Publishing Measures are applicable to
wireless value-added telecommunications services operators or issue new regulations or rules
regulating wireless publishing, we may need to apply for a license or permit from governmental
agencies in charge of publishing. We cannot assure you that such application would be approved by
the relevant governmental agencies.
SNPA and the State Administration of Copyright issued the
Circular of Implementation of the
Decision of the State Council on Authority of Approval of Publication of Electronic and Internet
Game Products
, or the Game Publication Circular, on July 27, 2004. Pursuant to the Game
Publication Circular, Internet game publication products include game software that can be used or
downloaded by mobile
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phones through the Internet. Importation of Internet game publication products must be
approved by the provincial government agencies in charge of publication and then approved by SNPA.
We submitted the game publications that are associated with "Mr. Hammer," a popular online action
game that we licensed from Neople Co., Ltd., a Korean company, to the SNPA for approval and
received such approval.
Regulations of Copyrights Relating to Online Transmissions.
On May 18, 2006, the State
Council issued the
Regulations on Protection of Information Online Transmission Rights,
or the
"Online Transmission Regulations," which come into effect on July 1, 2006. The Online Transmission
Regulations provide that a copyright owner's right to transmit intellectual property including
works, performances, and video and audio products via electronic networks which include fixed line
and mobile networks, or the "Transmission Rights," are protected, and third parties may not
transmit any of such intellectual property through electronic networks without first obtaining
consent from the relevant copyright owner, except in circumstances where the use of such
intellectual property would be considered as fair use.
Regulation of Advertisements.
The State Administration of Industry and Commerce, or the SAIC,
is the government agency responsible for regulating advertising activities in China. The SAIC has
not promulgated regulations specifically aimed at wireless advertising through a media other than
the Internet, such as through SMS services. However, one provisional regulation issued by the
Shanghai Communication Administration prohibits service providers from sending SMS advertisements
without the client's consent.
On January 26, 2005, the SAIC and the Ministry of Information Industry jointly promulgated a
Circular Regarding the Prohibition of Advertisements for Voice Messages, SMS and other Information
Services Which Contain Unhealthy Content,
or the SMS Advertising Circular
.
The SMS Advertising
Circular prohibits advertisement of information services with pornographic, obscene, superstitious
and other unhealthy content, or advertisements that are misleading in pricing and payment terms of
information services. The SMS Advertising Circular further provides that information service
providers and advertising companies involved in the dissemination of advertisements for information
services with pornographic, obscene, superstitious and other unhealthy content, or advertisements
that are misleading in pricing and payment terms of information services will be subject to
penalties by relevant authorities pursuant to PRC advertising regulations, and that information
service providers providing unhealthy contents will be subject to administrative and other measures
by telecommunications authorities, the public security authorities and national security
authorities in accordance with
Telecommunications Regulations
(2000) and other applicable laws and
regulations.
As part of our non-mobile operator marketing activities, we have developed integrated
marketing campaigns with traditional media companies and multinational corporations through certain
cross-selling efforts. If the SAIC were to treat our integrated marketing campaigns or other
activities as being advertising activities, we would need to apply to the local SAIC agencies where
such advertising activity was being conducted to expand our business scope to include the
advertising business. In addition, we also may need to set up subsidiaries or branches (with
advertising included in the business scope prescribed on such subsidiary or branch business
licenses) or hire local qualified agents in those cities where we expand our advertising
activities. We cannot assure you that such applications to expand our business scope or to set up
local subsidiaries or branches, if it becomes necessary for our integrated marketing campaigns,
would be approved by the SAIC. Conducting business beyond our approved business scope may be
subject to penalties including being banned from engaging in online advertising activities,
confiscation of illegal earnings and fines.
Regulation of Online Game Products
. The MOC regulates online game products. In July 2003,
the MOC issued a public notice regarding the implementation of the Internet Culture Measures. The
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public notice required that the importation of online game products shall be approved by the
MOC. Failure to obtain such approval would be subject to penalties, including being banned from
operating online game products and public censure.
On May 14, 2004, the MOC promulgated a
Circular on Strengthening Censorship of Content of
Online Game Products,
or the Online Game Circular, which is applicable to online game products
disseminated through either Internet or wireless (mobile) networks. The Online Game Circular
requires all entities operating imported online game products to obtain an Internet culture
operation license issued by the MOC, which will strictly examine the content of any online game
products to be imported. Any imported online game product, as well as any material upgrades or
software patches, must be reviewed by the MOC (specifically by its Content Censorship Committee for
Imported Online Game Products) before such products may begin operation. Shanghai Unilink and the
Brilliant Group each has already acquired an Internet culture operation license from the MOC.
In addition, for imported online games, the relevant license agreements for such games are
regarded as copyright import contracts and need to be registered with the MOC and the State
Copyright Bureau, otherwise we can not remit licensing fees out of China to the foreign game
licensor. We have registered the license agreement for "Mr. Hammer" with the local agency of the
MOC and the State Copyright Bureau.
Foreign Exchange Controls.
Our subsidiaries and Chinese affiliates are subject to various
foreign exchange controls which are discussed in Item 10.D. under the heading "Exchange Controls"
and Item 3.D. under the heading "Risk Factors — Risks Related to Doing Business in China — Recent
Chinese regulations relating to acquisitions of Chinese companies by foreign entities may limit our
ability to acquire Chinese companies and adversely affect the implementation of our acquisition
strategy as well as our business and prospects" of this annual report.
C. Organizational Structure
For information on our organizational structure, see Item 4.A. of this annual report under the
headings "History and Development of the Company" and "Recent Developments" and Item 5 of this
annual report under the headings "Our Corporate Structure" and "Arrangements with Consolidated
Affiliates."
D. Property, Plant and Equipment
Our principal executive offices are located in Shanghai, where we lease approximately 5,365
square meters under a lease agreement that expires in March 2007 at an effective annual rent of
approximately $509,037. Our primary branch office is located in Beijing, where we currently lease
approximately 3,504 square meters under a lease agreement that expires in February 2009 at an
effective annual rent of approximately $383,478. We believe that we will be able to obtain adequate
facilities, principally through the leasing of appropriate properties, to accommodate our future
expansion plans. We also have other branch or representative offices in Guangzhou, Hangzhou,
Chongqing, Shenyang, Nanjing, Jinan, Wuhan and Xi'an.
Item 4A. Unresolved Staff Comments
Not Applicable.
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Item 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is based upon
and should be read in conjunction with our consolidated financial statements and their related
notes included in this annual report. This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions
or future strategies that are signified by the words "expect," "anticipate," "intend," "believe,"
or similar language. All forward-looking statements included in this annual report are based on
information available to us on the date hereof, and we assume no obligation to update any such
forward-looking statements. Actual results could differ materially from those projected in the
forward-looking statements. In evaluating our business, you should carefully consider the
information provided under the caption "Risk Factors" in this annual report on Form 20-F. We
caution you that our business and financial performance are subject to substantial risks and
uncertainties.
A. Operating Results
Restatement of 2004 Consolidated Financial Statements
We have restated our consolidated financial statements for the year ended December 31, 2004.
The determination to restate these consolidated financial statements was made by our management in
consultation with the Audit Committee of the Board of Directors in February 2006. In October 2004,
we amended certain of our executive officers' prior stock option grants to provide that if we
terminated an officer without cause, as defined in our stock option plans, or if any such officer
resigns voluntarily, all or a portion of those options would immediately become fully vested and
exercisable at that time. Since upon voluntary termination a portion of those options vest and
become immediately exercisable, we determined that the full amount of the deferred compensation
relating to that portion of the options should have been expensed in the fourth quarter of 2004
when the amendments were effected. The restatement of our 2004 consolidated financial statements
increased stock compensation expense for the year ended December 31, 2004 by $1.4 million and
decreased net income before and after tax by $1.4 million or $0.006 per diluted share and per basic
share. This non-cash adjustment does not impact the Company's cash flow from operating activities.
All amounts relating to 2004 stock compensation and net income results discussed in this
annual report have been presented on a restated basis.
Overview
We provide entertainment-oriented internet and wireless value-added services to both consumers
and mobile phone users in China. Our revenues are primarily derived from the sale of various 2G,
2.5G and audio-related services to consumers through the mobile networks operated by China Mobile
and, to a lesser extent, China Unicom. In addition, in 2005, we continued to expand our service
offerings to fixed-line and wireless customers of China Telecom and China Netcom. We receive our
revenues principally in the form of payments from these telecommunication network operators after
the users have paid for our services and the operators have deducted their service and network
fees. Users pay for our services by monthly subscription and/or on a per use basis.
We achieved net income of $12.4 million for 2005, compared to net income of $11.1 million for
2004. For 2005, we generated $73.6 million in gross revenues, compared to $50.3 million for 2004,
representing an increase of 46.3%. Our increase in gross revenues during 2005 was due to increases
in the number of paying users, particularly for our audio-related services, as well as, to a lesser
extent,
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growth in sales of our SMS and 2.5G services in 2005. Our user base increased as a result of
our ongoing efforts to attract new users and the overall growth of the market for wireless (and, to
a lesser extent, fixed-line) value-added services in China, particularly growth in the popularity
of audio-related and 2.5G services. Our gross revenues in 2005 also increased as a result of a
significant increase in our estimated average revenue per user, which increased from $0.61 per
month in 2004 to $1.00 per month in 2005. In 2005, our SMS-based, audio-related and 2.5G services
accounted for $46.7 million, $17.0 million and $8.3 million of our gross revenues, or 63.5%, 23.1%
and 11.3%, respectively. This compares to our SMS-based, audio-related and 2.5G service revenues
for 2004, which accounted for $40.2 million, $3.7 million, and $6.4 million of our gross revenues,
or 79.9%, 7.4% and 12.7%, respectively.
The presentation of our financial results in this annual report is affected by the fact that
we, like other companies in the wireless value-added services industry in China, do not receive or
recognize revenue for services we provide that are characterized as billing and transmission
failures. These failures primarily result from the user's mobile phone being turned off, the user
experiencing problems with the mobile operators' networks or our system or other issues, which, in
each case, prevent delivery of our services to our users. The operators' monthly statements to
service providers regarding the services provided through their networks currently do not contain
billing and transmission failure information on either an aggregate or a service-by-service basis.
Although we maintain our own records reporting the services provided, and we receive separate
monthly statements from the mobile operators for each category of service platform (i.e., SMS, MMS,
WAP, Java™, IVR and ringback services), we can only estimate our actual gross revenues and cost of
services by specific service because we are unable to confirm which specific service we transmitted
that resulted in billing and transmission failures. Consequently, we are not able to determine the
aggregate amount of billing and transmission failures or definitively calculate and monitor
service-by-service gross revenue, margins and other financial information and also cannot
definitively determine which of our services are or may be profitable.
The major factors affecting our results of operations and financial condition include:
•
Growth of the Wireless Value-Added Services Market in China.
Our financial
results have been, and we expect them to continue to be, affected by the growth in the
wireless value-added services market in China, particularly growth in the audio-related
and 2.5G market in China. Wireless telephony has become an increasingly important
medium of communication. According to the Ministry of Information Industry, the number
of mobile subscribers in China increased from 43.2 million as of the end of 1999 to
393.4 million as of December 31, 2005. In 2005, SMS services continued to represent
the majority of the wireless value-added services market in China, with approximately
304.7 billion SMS messages sent in 2005. However, we believe that growth in
audio-related, MMS and WAP services increased significantly in 2005. We expect the
market for audio-related and 2.5G services to continue to grow at a faster rate than
the market for 2G services for the foreseeable future, and our future revenue growth
will depend to a significant extent on our continued expansion into the audio-related
and 2.5G service markets.
•
Increase in Volume of Sales.
Our gross revenues have increased also as a
result of the popularity of our services with the mobile phone user group that we
market to. We focus on entertainment-oriented services such as music-related services
(for example, music downloads, ringbacks or ringtones) which we believe are
particularly attractive to young mobile phone users in China who are early adopters of
new wireless value-added services.
•
Operator Service Agreements with China Mobile, China Unicom, China Telecom and
China Netcom.
Our ability to generate revenue and the terms under which we deliver our
services depend to a large extent on our ability to maintain good relationships with
the national,
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provincial and local offices of China Mobile and China Unicom and to differentiate our
services through, among other things, innovative product development and appealing
content from domestic and international content providers. This is particularly the
case in the wealthier, more densely populated coastal and southern provinces, such as
Liaoning, Jiangsu, Guangdong and Zhejiang provinces, as well as the municipalities of
Shanghai and Beijing, which are among our top revenue generating locales. The marketing
of our services is also significantly dependent on the sales channels of the mobile
operators. We have increased the number of our service contracts with the national,
provincial and local offices of China Mobile and China Unicom from 25 and 18 at the end
of 2004, respectively, to 41 and 35 at the end of 2005, respectively. We continue to
strive to maintain, expand and strengthen these relationships through our sales force
strategically located throughout China.
Each of China Mobile, China Unicom, China Telecom and China Netcom charge us service
fees from the gross revenues generated by our services. In addition, to the extent the
number of SMS or MMS messages sent by us over China Mobile's network exceeds the number
of SMS or MMS messages our customers send to us, we must also pay a per message network
fee. We also pay China Unicom, China Telecom and China Netcom network fees in most
provinces on the same basis. These service and network fees are reflected in our cost
of services, and as our business has grown, these costs have increased from $13.6
million in 2004 to $20.5 million for 2005. Each of China Mobile, China Unicom, China
Telecom or China Netcom could alter any of the terms of our service agreements with them
or terminate the agreements for a variety of reasons in the future, including, for
example, to increase their service or network fees to enhance their profitability at the
expense of service providers
.
We anticipate that China Telecom, China Netcom and possibly other parties will be
granted regional or national licenses to offer full mobility wireless services in China,
although the timing of any such grants is unclear. While we continue to provide IVR,
RBT and SMS services over the fixed line networks and limited mobility PHS and PAS
networks of China Telecom and China Netcom, our relationships with these operators are
not as developed as our relationships with China Mobile and China Unicom. Revenues
generated from these services were $3.2 million for 2005 and negligible in 2004. Our
revenues could be adversely affected in future periods if these parties receive regional
or national wireless licenses and are successful in the market but we are unable to
develop established cooperative relationships with them.
•
Changes in Mobile Operator Policies or the Manner in Which They are Enforced
.
China Mobile and China Unicom have adopted a wide range of policies and procedures
regarding customer service, quality control and other aspects of the wireless
value-added services industry. Changes in these policies have, among other things,
enabled customers to more easily cancel our services and required us to automatically
terminate subscription services for our inactive users. Due to previously announced
sanctions from China Mobile in December 2004 for violating certain of its customer
service policies, we were not able to bill WAP users from January 1, 2005 until October
10, 2005. In addition, China Mobile suspended approval of any new product applications
by us for its wireless platforms, including SMS, MMS, WAP, Java™, IVR and ringback,
between January 1, 2005 and June 30, 2005. These sanctions did not affect our ability
to offer our existing wireless value-added services through China Mobile's networks.
We are also subject on occasion to monetary fines and forfeited income for inadvertent
contravention of customer service policies. The monetary fines are recognized as
selling and marketing expenses. For 2005, the amount of fines was negligible, compared
to $0.7 million for 2004. We believe that the enhanced enforcement of customer
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service policies by China Mobile adversely affected the growth of our revenue from 2G,
2.5G and audio-related services in 2005.
•
Costs Associated with Content Provider Relationships.
Our wireless value-added
services include the delivery of third-party content, such as Hello Kitty cartoons and
music downloads for ringtones and ringbacks, to our end user customers. We provide
this content typically based on revenue sharing arrangements under which we pay the
third-party content provider an agreed percentage of the estimated revenues realized
from products incorporating the provider's content. Most of our content licenses have
a limited term, and grant us non-exclusive rights. Given the high demand for engaging,
trendy content in the China wireless value-added services market, we have limited
leverage to negotiate significantly favorable terms with third-party content providers.
During 2005, a greater percentage of our revenues were derived from third party
content-based services, resulting in increased revenue share payments to content
providers. Our cost of services in 2004 and 2005, which included such payments to
third party content providers, were $1.7 million and $6.0 million, respectively. Our
net income could be adversely affected in future periods if revenue share payments
continue to increase, both in absolute terms as well as a percentage of our gross
revenues.
•
Marketing Expenses.
In order to maintain visibility and demand for our SMS and
IVR products and our competitive position in the market, we need to make continued
investments in media advertising and integrated co-marketing. Our media advertising is
typically in the form of TV commercials and magazine placements, while our integrated
co-marketing typically takes the form of joint cooperation programs with content
providers such as TV programming. Fee rates for our various marketing channels are
becoming increasingly more expensive while generating only approximately the same level
of gross revenues. Our advertising costs increased during 2005 and in particular,
during the fourth quarter of 2005, from $3.4 million in 2004 to $6.2 million in 2005,
and our net income could be adversely affected in future periods if we are not able to
effectively manage advertising expenses and maximize the gross revenues we generate
from advertising.
•
Acquisition Costs
. We made a number of acquisitions and a strategic investment
in 2005, including Brilliant, Wang You and their affiliated Chinese company, Shenzhen
Yuanhang, Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei, Shanghai Qimingxing and
9Sky, which resulted in aggregate initial acquisition and investment costs of $11.6
million in that year.
•
Taxes.
Certain of our subsidiaries and affiliated Chinese entities enjoy tax
exemptions and reduced tax rates. See "Taxation" below. Such tax treatment increases
our net income. Our future results could be materially adversely affected if we are
not able to maintain similar tax treatment.
•
Stock-based Compensation Cost.
Stock-based compensation cost represents the
difference between the exercise price of options granted and the fair market value of
the underlying stock on the measurement date. Deferred stock compensation is amortized
on a straight-line basis and charged to expense over the vesting period of the
underlying options, which is generally four years. For 2004 and 2005, we incurred
stock-based compensation cost of $3.5 million (which reflects the restatement described
under "Restatement of 2004 Consolidated Financial Statements" above) and $2.0 million,
respectively, which was recorded as a component of general and administrative expenses.
Substantially all of these charges were related to the amortization of stock-based
compensation cost related to options granted in
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April 2003 to attract and retain certain of our executive officers, as well as to the
amendment of their stock options in October 2004.
•
Repurchase of ADSs
. On September 7, 2005, the Company's shareholders
authorized the repurchase of up to $15 million worth of American Depository Shares or
ADSs. As of December 31, 2005, the Company had repurchased 338,000 ADSs for an
aggregate consideration of $3.4 million, including brokerage commissions.
Our future revenues and results of operations may fluctuate significantly due to a combination
of factors, including:
•
the terms of our relationships with China Mobile and, to a lesser extent, China
Unicom, China Telecom and China Netcom,
•
the terms of our relationships with domestic and international content
providers, including the percentage of our revenues that we must pay to such providers
under revenue-sharing arrangements,
•
regulation of our market by the operators and the Chinese government (in
particular, the Ministry of Information Industry),
•
growth and acceptance of various wireless value-added services that we offer in
China, in particular our 2.5G and audio-related services,
•
our ability to attract and retain users, principally in the more affluent,
densely-populated provinces such as Guangdong, Jiangsu and Zhejiang provinces, and the
municipalities of Shanghai and Beijing,
•
our ability to expand the content and services that we offer and, in
particular, develop and aggregate innovative new content and service offerings,
•
our ability to continue to acquire users through print, broadcast and other
marketing channels in a cost efficient manner,
•
the level of billing and transmission failures in the provinces where we derive
significant portions of our revenue,
•
our ability to execute internal cost reductions, effectively control operating
expenses or make expenditures that effectively differentiate our services and brand in
future periods,
•
our ability to effectively integrate the operations of companies that we
acquire or make strategic investments such they will be accretive to future financial
periods,
•
our ability to retain qualified personnel, particularly at the senior management level,
•
competition in our markets, and
•
general economic conditions in China.
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Our Corporate Structure
Under the current shareholding structure, our Chinese affiliated entities, Shanghai Unilink,
Shanghai Weilan, Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, had
inter-provincial value-added telecommunication services licenses issued by the Ministry of
Information Industry. Each of Shanghai Weilan, Shanghai Unilink, Beijing Cosmos, Hainan Zhong
Tong, Beijing Lian Fei and Shanghai Qimingxing offer our services through one or more of the
telecommunications network operators in China. Shenzhen Yuanhang offers services related to our
casual gaming business. We hold no ownership interest in those companies.
We, our Chinese affiliated entities and their respective shareholders are parties to a series
of agreements governing the provision of our wireless valued-added services and our other services.
In addition, as of December 31 2005, we had provided long-term interest free loans to the
shareholders of our Chinese affiliated entities with an aggregate outstanding balance of
approximately $8.4 million. The proceeds from these loans have been used to fund investments in
our Chinese affiliated entities. See "Arrangements with Consolidated Affiliates" below.
Our primary internal source of funds is dividend payments from Linktone Consulting, Shanghai
Huitong, Linktone Internet and Brilliant and Wang You. Under current Chinese tax regulations,
dividends paid to us from Chinese entities are not subject to Chinese income or withholding tax.
However, Chinese legal restrictions permit payment of dividends only out of net income as
determined in accordance with Chinese accounting standards and regulations. Under Chinese law,
Linktone Consulting, Shanghai Huitong, Linktone Internet and Wang You are also required to set
aside a portion of their net income each year to fund certain reserve funds. These reserves are
not distributable as cash dividends. Dividends paid to us by Brilliant, which was incorporated in
the British Virgin Islands, are not subject to tax.
Arrangements with Consolidated Affiliates
Current Chinese laws and regulations impose significant restrictions on foreign ownership of
value-added telecommunication services businesses in China. Therefore, we conduct substantially
all of our operations in China through a series of agreements with our affiliated Chinese entities,
which were Shanghai Weilan, Shanghai Unilink, Shenzhen Yuanhang, Beijing Cosmos, Hainan Zhong Tong
and Beijing Lian Fei in 2005. The business operations of Shanghai Qimingxing were negligible in
2005.
Shanghai Weilan, Shanghai Unilink, Shenzhen Yuanhang, Beijing Cosmos, Hainan Zhong Tong,
Beijing Lian Fei and Shanghai Qimingxing are variable interest entities (VIEs) under FASB
Interpretation No. 46, or FIN 46, and accordingly, have been consolidated into our financial
statements. Transactions between these entities and our company and subsidiaries are eliminated in
consolidation.
We believe that the terms of these agreements are no less favorable than we could obtain from
disinterested parties. The material terms of the agreements among us, our respective affiliated
Chinese entities and their shareholders are substantially identical except for the amount of the
loans extended to the shareholders of each entity and the amount of license fees paid by each
entity. We believe that the shareholders of our VIEs will not receive any personal benefits from
these agreements, except as shareholders of our company. The principal terms of these agreements
with our VIEs are described below.
Powers of Attorney.
Each of the shareholders of our VIEs have irrevocably appointed Colin
Sung, chief financial officer of Linktone Ltd., as attorney-in-fact, to vote on their behalf on all
matters on which they are entitled to vote with respect to VIEs as the case may be, including
matters relating to the
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transfer of any or all of their respective equity interests in our VIEs and the appointment of
the directors and general manager of our VIEs. The term of each of the powers of attorney is 10
years. These powers of attorney do not extend to votes by the shareholders of our company or
subsidiaries.
Because the purpose of the irrevocable powers of attorney is to allow us to exercise
sufficient control over our affiliated Chinese entities, each such power by its terms is valid only
for so long as the designated attorney-in-fact remains an employee of one of our subsidiaries. If
the attorney-in-fact ceases to be an employee of any of our subsidiaries or if our subsidiaries
otherwise issue a written notice to dismiss or replace the attorney-in-fact, the power of attorney
will terminate automatically and be re-assigned to another employee.
Operating Agreements
. We guarantee the performance by our affiliated Chinese entities of
contracts, agreements or transactions with third parties. In return, our affiliated Chinese
entities have granted us a security interest over all of their assets, including all of their
accounts receivable. We also have the right of first refusal with respect to future loan
guarantees. In addition, our affiliated Chinese entities and their shareholders have each agreed
that they will not enter into any transaction, or fail to take any action, that would substantially
affect their assets, rights and obligations, or business without our prior written consent. They
will also appoint persons designated by us as the directors, officers and other senior management
personnel of our affiliated Chinese entities, as well as accept our guidance regarding their
day-to-day operations, financial management and the hiring and dismissal of their employees. While
we have the right to terminate all our agreements with our affiliated Chinese entities if any of
our agreements with them expires or is terminated, our affiliated Chinese entities may not
terminate the operating agreements during the term of the agreements, which is 10 years.
Exclusive Consulting Services Agreements
. We provide some of our affiliated Chinese entities
with exclusive consulting services related to legal, finance and office administration. The term
of these services agreements is renewable every year. We charged Shanghai Weilan and Shanghai
Unilink an aggregate fee of $3.1 million for these services for the year ended December 31, 2005.
The service fees payable to us are subject to our adjustment from time to time based on the actual
operating results of our affiliated Chinese entities.
Trademark, Domain Name and Software License Agreements
. We have granted Shanghai Weilan and
Shanghai Unilink a license to use our domain name (
www.linktone.com
) and our registered trademarks.
Linktone Consulting has also granted Shanghai Weilan and Shanghai Unilink licenses to use certain
of its domain names. The licensee of each of the licenses described above pays us an annual
license fee of RMB10,000 ($1,208). Because of the insignificant amounts involved, we waived these
fees in 2005. In addition, Shanghai Huitong and Linktone Internet have granted Shanghai Weilan and
Shanghai Unilink multiple licenses to use various mobile phone software such as software programs
relating to our SMS platform, databases and games. We charged Shanghai Weilan and Shanghai Unilink
an aggregate fee of $26.2 million (based on invoiced revenue) for the use of this software for the
year ended December 31, 2005.
The license agreements for trademark and domain names will terminate upon the earlier of 10
years or the expiration of our right to use the relevant domain names and trademarks. The term of
the software license agreements is one to two years. Our affiliated Chinese entities cannot assign
or transfer their rights under the licenses to any third party, and cannot use the licensed
trademarks in television, newspapers, magazines, the Internet or other public media without our
prior written consent.
Domain Name Transfer Arrangements.
To ensure we have control over the assets integral to our
operations, Shanghai Weilan has transferred to us its ownership rights in its domain name
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(
www.linktone.com.cn
) which we have licensed back for Shanghai Weilan's use in its operations
on a non- exclusive basis.
Contracts Relating to the Exclusive Purchase Right of Equity Interest.
Under the Contracts
Relating to the Exclusive Purchase Right of Equity Interest among us, each of our VIEs and their
respective shareholders, we or our designee has an exclusive option to purchase from each such
shareholder all or part of his or her equity interest in our VIEs at book value, to the extent
permitted by Chinese law. The term of these agreements is 10 years, renewable by us for an
additional 10-year term at our sole discretion.
Service Agreements.
Under existing service agreements, Messrs. Hu and Li are designated as
directors of Shanghai Weilan for a three-year term. All of the equity interests in Shanghai Weilan
held by each of these individuals will be transferred to us or our designee upon the individual's
termination of service as a director.
Loan Agreements.
We have extended interest-free loans to the shareholders of our affiliated
Chinese entities for the purpose of investing in our affiliated Chinese entities as registered
capital and to make payments to the selling shareholders from whom we acquired certain of our
affiliated Chinese entities for settlement of purchase price consideration pursuant to applicable
acquisition agreements. The term of these loans in each case is 10 years. The shareholders of our
affiliated Chinese entities can only repay the loans by transferring to us or our designees all of
their equity interest in the respective affiliated Chinese entity. The following table sets forth
the date the loan agreement was entered into, the borrower, the affiliated Chinese entity, the
interest, the maturity date and the amount of each loan, as of December 31, 2005.
Date of loan
Affiliated
Agreement
Borrower
Entity
Interest
Maturity date
Outstanding balance
(in thousands
(in thousands
of RMB)
of $)
November 27, 2003
Ankai Hu
Shanghai Weilan
None
November 26, 2013
2,798.7
338.1
November 27, 2003
Dong Li
Shanghai Weilan
None
November 26, 2013
2,365.8
285.8
August 25, 2004
Jinhua Yuan
Shanghai Unilink
None
August 25, 2014
5,000.0
604.1
August 25, 2004
Rong Zhang
Shanghai Unilink
None
August 25, 2014
5,000.0
604.1
May 31, 2005
Jinhua Yuan
Shenzhen Yuan Hang
None
May 30, 2015
2,403.9
290.4
May 31, 2005
Yan Ma
Shenzhen Yuan Hang
None
May 30, 2015
2,403.9
290.4
June 30, 2005
Teng Zhao
Beijing Cosmos
None
June 29, 2015
6,953.1
840.1
June 30, 2005
Rong Zhang
Beijing Cosmos
None
June 29, 2015
6,953.1
840.1
June 30, 2005
Yan Ma
Beijing Lian Fei
None
June 29, 2015
6,500.0
785.4
June 30, 2005
Rong Zhang
Beijing Lian Fei
None
June 29, 2015
7,690.2
929.2
June 30, 2005
Teng Zhao
Hainan Zhong Tong
None
June 29, 2015
7,023.8
848.5
June 30, 2005
Jinhua Yuan
Hainan Zhong Tong
None
June 29, 2015
7,023.8
848.5
August 31, 2005
Jinhua Yuan
Shanghai Qimingxing
None
August 30, 2015
3,778.5
466.0
August 31, 2005
Xinyong Ding
Shanghai Qimingxing
None
August 30, 2015
3,778.5
466.0
Total
69,673.3
8,436.7
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To the extent these loan agreements relate to loans made to the shareholders of our
affiliated Chinese entities in order to make payments to the former, selling shareholders of
certain of our affiliated Chinese entities, the loan amounts due under such loan agreements may be
updated in the future to account for further purchase price considerations that may be payable
pursuant applicable acquisition agreements.
Equity Interests Pledge Agreements.
The shareholders of Shanghai Weilan and Shanghai
Unilink have pledged their respective equity interests in Shanghai Weilan and Shanghai Unilink to
guarantee the performance and the payment of the service fees by Shanghai Weilan and Shanghai
Unilink under the Exclusive Consulting Services Agreements described above. If either Shanghai
Weilan or Shanghai Unilink breach any of their obligations under the Equity Interests Pledge
Agreements, we are entitled to sell the equity interests held by the relevant shareholders, and
retain the proceeds of such sale or require any of them to transfer to us his or her equity
interest in the applicable affiliated entity.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with generally
accepted accounting principles in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.
We evaluate our estimates on an on-going basis based on historical experience and on various 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. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our financial statements.
Revenue and Cost of Services Recognition
Substantially all of our revenues are derived from wireless value-added services to mobile
phone users through the platforms of various subsidiaries of the operators. We recognize all
revenues in the period in which the service is rendered, provided that persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is reasonably assured. Fees for these services are charged on a per message basis
or on a monthly subscription basis, and vary according to the type of products and services
delivered.
We contract with the operators for the transmission of services as well as for billing and
collection services. We measure our revenues based on the total amount paid by our customers,
which the operators bill and collect on our behalf. For the transmission, billing and collection
services, the operators retain a fixed percentage fee. To the extent that the number of SMS and
MMS messages sent by us over the operators' network exceeds the number of messages our customers
send to us, we must also pay a per message network fee.
The operators provide us statements after month-end indicating the amount of fees that were
charged to users for wireless value-added services that we provided during that month and the
portion of fees that are due to us in accordance with our contractual arrangements with the
operators. The operators deliver these statements to us typically within 20 to 60 days following
month-end, and we typically receive payment within 30 to 90 days following receipt of the
statement. In addition, we have developed our own internal system that records the number of
messages sent to and messages received from mobile
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users. Generally, there are differences between the expected value of delivered messages and
the fees charged by the operators for the delivered messages. These differences may result from
the user's mobile phone being turned off, problems with the operators' networks or our system or
other issues, which prevent delivery of our services to our users. These are known in the industry
as billing and transmission failures. We do not recognize revenues for services which result in
billing and transmission failures. Billing and transmission failures can vary significantly from
month to month, province to province and between operators. The billing and transmission failure
rates varied on a monthly basis from 10% to 60% during 2004 and from 10% to 53% during 2005. The
ratio of operators' confirmed revenues generated from our services as a percentage of the expected
value of delivered messages based on our own internal records was 66% for 2004 to 103% for 2005, as
we became more experienced in our estimation methodology and also took into account input from our
sales team. Also, if a user does not pay the applicable fees for our services to the operators,
the operators usually will not pay us for those services, and our expenses incurred in connection
with such services are included in our cost of services.
We are also required to pay most of our content providers a percentage of the revenue received
from or confirmed by the operators with respect to services incorporating the content providers'
products. In calculating the fees payable to these providers, we make estimates to take into
account billing and transmission failures which may have been applicable to the services
incorporating the providers' products and reduce the fees payable by us accordingly. Nonetheless,
as estimates involve making assumptions which may prove inaccurate, we have in the past paid, and
may continue to pay, such providers fees which are disproportionate to what we have been paid for
the relevant service. After we make payments to these providers for a particular period, we may
ask for refunds or make an additional payment, or make further adjustments or reconciliations with
respect to fees payable for future periods as a result of billing and transmission failures arising
in prior periods.
For content providers which are paid on a fixed fee basis, we do not incur additional charges
as their content is used. Accordingly, billing and transmission failures do not affect our cost of
services for services incorporating content from these providers. For 2005, most of our key
content providers were paid an initial fee and the revenue share to be paid was first offset
against the initial fee until the initial fee was fully utilized and then payment was made based on
the revenue share amount agreed with content providers.
We record our revenues in the period in which the services are performed. A substantial
portion of our revenue is recorded based on monthly statements received from operators. When a
statement is not received before closing our books, we are required to make an estimate of the
revenues and cost of services earned during the period covered by the statement. We base our
estimates on our internal records and input from our sales team and then factor in an adjustment
which takes account of historical experience, in the preceding recent months, of discrepancies
between final operator statements and our internal records. These discrepancies are the result of
billing and transmission failures which vary in amount from month to month. Given these failures,
our estimation will not be the same as actual results.
In addition, we have been focusing on increasing sales of our wireless value-added services
through China Telecom's and China Netcom's mobile PHS and PAS networks and sales of our audio
related services through China Telecom's and China Netcom's fixed line networks, which began
offering value-added services in late 2004 and have implemented comprehensive billing systems. At
the same time, China Mobile has completed the implementation of new billing systems in all
provinces in China. China Unicom has also implemented similar systems in substantially all
provinces. The information provided to third party service providers such as our company under
these new systems is less detailed in certain respects than before, making revenue estimations
somewhat more difficult.
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If actual results vary significantly from our estimate, it could result in an overstatement or
understatement of revenues and costs of services. The amount of net margin which was based on
estimates in 2004 and 2005 was $655,543 and $774,938, respectively. If this estimate was
inaccurate by plus or minus 5.0%, our net margin for the year would be overstated or understated,
as the case may be, by $32,777 and $38,747, respectively.
Approximately 97% and 98% of our revenues for the years ended December 31, 2004 and 2005,
respectively, were confirmed by monthly statements received by us from provincial mobile operators
prior to the finalization of the financial statements for such years. Since we systematically
track monthly discrepancies/failure rates by province using either monthly statements from the
operators or our own internal systems, we believe that we are able to make a reasonable estimate of
revenues and cost of services based on historical experience when a small portion of provincial
operator statements has not been received.
Our gross revenues include the gross amounts billed to customers, rather than the amounts
billed net of the operators' service and other fees. According to Emerging Issue Task Force Issue
No. 99-19, recognizing revenue on a gross basis in this manner is appropriate if we act as a
principal, rather than as an agent, in connection with the provision of our services. Factors
which support a conclusion that we are acting as a principal include:
•
ability to adjust the cost of services by adjusting the design or marketing of the service,
•
ability to determine prices within ranges prescribed by the operators,
•
assumption of risk of non-payment by customers, and
•
ability to control content of services and suppliers of that content.
In our case, we have some ability to adjust the ratio of our revenues to cost of services
(which include the operators' service and other fees) by, for example, changing the design and
marketing of our services to decrease the number of messages that we send which go unmatched by a
user's reply and thus incur a network fee. In addition, although the prices of our services must
be approved by the operators in advance, we have been able to adjust our prices from time to time
to reflect or react to changes in the market. The operators will also not usually pay us if users
of our services do not pay them and will not pay us if users do not receive the services due to
billing and transmission failures. As a result, we in fact bear the credit and delivery risk for
our portion of the revenues generated with respect to our services. Finally, we have discretion to
select the content for our services and the providers of that content, provided it does not violate
applicable Chinese law or the policies of the operators. Based on these factors, we have concluded
that recognizing revenues on a gross basis is appropriate.
Deferred Tax Valuation Allowance
Our provisions for income taxes, deferred tax assets and liabilities, and the extent to which
deferred tax assets can be recognized, are determined by our management. We make a valuation
allowance to reduce our deferred tax assets to the amount that is more likely than not to be
realized based on our estimate of future taxable income and prudent and feasible tax planning
strategies. A significant portion of our deferred tax assets relate to Linktone Consulting. Due
to changes in our tax planning in 2005, we believe it is likely that Linktone Consulting will
generate sufficient taxable income to utilize a portion of its tax loss carryforwards before
expiration and other accruals. As a result, we reduced our valuation allowance from $0.5 million
to $0.3 million for the year ended December 31, 2005.
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Table of Contents
Stock-based Compensation
We accounted for our stock-based compensation to employees in accordance with Accounting
Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employee." In general,
stock-based compensation cost under APB No. 25 represents the difference between the exercise price
of options granted and the fair market value of the underlying stock at the date of measurement.
For awards with fixed option terms, the date of measurement is normally the date of grant. For
awards with certain contingencies such as performance-based criteria, compensation cost will be
re-measured at each interim reporting period end until such contingencies are removed or no longer
applicable. Following our initial public offering, we have determined the fair market value of our
ordinary shares by reference to the current trading price of our ADSs on The NASDAQ National
Market.
Deferred stock-based compensation is amortized on a straight-line basis and charged to expense
over the vesting period of the underlying options, which is generally one to four years. The
amortization of deferred compensation was $1.1 million, $3.5 million and $2.0 million for 2003,
2004 and 2005, respectively.
As described in "Restatement of 2004 Consolidated Financial Statements" above, we have
restated our historical consolidated financial statements for 2004 to record the accounting impact
of certain amendments made in October 2004 to certain stock options granted to some of our
executive officers. The restatement increased the stock compensation expense for 2004 by $1.4
million to $3.5 million. In connection with these amendments, we also recorded in 2005 an
incremental compensation expense of $0.8 million related to the acceleration of vesting that
occurred following the resignation of certain of our executive officers in January and February
2006. See Note 5(l) — "Stock-based compensation" to our consolidated financial statements in this
annual report for more information on the effect of the $0.8 million incremental compensation
expense on 2005 amounts.
In December 2004, the FASB issued SFAS No.123(R), "
Shares Based Payment
." SFAS No.123(R)
establishes standards for the accounting for transactions in which an entity exchanges its equity
instruments for goods and services. It focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment transactions (e.g., employee stock
options). SFAS No.123(R) requires the measurement of the costs of employee services received in
exchange for an award of an equity instrument such as employee stock options at the fair value on
the grant date. Those costs will be recognized over the period during which an employee is
required to provide services in exchange for the award. Beginning on January 1, 2006, we adopted
the provisions of SFAS No.123(R) under the modified prospective method which does not require us to
restate our prior year financial statements to reflect expensing of stock-based compensation under
SFAS No. 123(R). Under SFAS No. 123(R), we will use the Black-Scholes option pricing model to
estimate the fair value of the stock-based compensation as of the grant date. The Black-Scholes
model requires us to make assumptions and judgments about the variables (including the option's
expected life, the price volatility of the underlying stock), risk free interest rate for the
periods within the expected term of the option and dividend yield to be used in the calculation.
The option's expected life and our stock price volatility are based on our management's best
estimates at the time of grant, both of which impact the fair value of the option calculated under
Black-Scholes model and, ultimately, the expense that will be recognized over the vesting term of
the option. SFAS 123(R) requires that we recognize compensation expense for only the portion of
options that are expected to vest. Therefore, we apply estimated forfeiture rates that are based
on historical employee termination behavior. We periodically adjust the estimated forfeiture rates
so that only the compensation expense related to stock-based compensation that vest are included in
the statement of operations. If the actual number of forfeitures differs from those estimated by
our management, additional adjustments to compensation expense may be required in future periods.
Upon adoption of FAS 123(R), we estimate that the stock option compensation expense related to
issued but
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unvested options at December 31, 2005 will be approximately $2 million to $2.5 million, which
would be recognized in 2006 and thereafter.
Revenues
As described in "Critical Accounting Policies and Estimates — Revenue and Cost of Services
Recognition," we generate revenues primarily from service fees paid by mobile phone users who use
our services through the operators. Our wireless value-added services fees are charged on a
monthly subscription or per use basis. Fees for our 2G SMS-based services currently range from
RMB0.1 ($0.01) to RMB2.0 ($0.25) per message and from RMB2.0 ($0.25) to RMB15.0 ($1.86) per month
for subscription services. Fees for 2.5G MMS, WAP and Java™ services currently range from RMB1.0
($0.12) to RMB10.0 ($1.24) per message and from RMB5.0 ($0.62) to RMB30.0 ($3.71) per month for
subscription services. Fees for audio-related services range from RMB0.5 ($0.06) to RMB3.0 ($0.37)
per audio content download. For 2005, our 2G, audio-related and 2.5G services represented 63.5%,
23.1% and 11.3%, respectively, of our gross revenues.
We also generate revenues by offering services through the fixed line networks, PHS and PAS
networks of China Telecom and China Netcom. This revenue was not a significant part of our total
gross revenues for 2004 but represented 4.3% of our total gross revenues for 2005.
Cost of Services
Our cost of services includes the following:
•
Service and network fees payable by us to the operators, and
•
Payments to certain content and marketing providers for the use of their content.
Service and network fees are deemed paid when the operators remit to us our portion of the
fees paid by users net of the service and network fees described above.
We pay our content and marketing providers directly, which payments are generally in the form
of a fixed periodic fee, or a percentage of our aggregate net revenue received from or confirmed by
the operators with respect to services provided that incorporate the providers' products, or a
combination of fixed and variable amounts.
The following table sets forth the amount of each category of cost of services for the periods
indicated:
Year ended December 31,
2003
2004
2005
(audited)
(audited)
(audited)
Cost of services:
Operators' fees
$
5,303,603
$
13,639,288
$
20,511,512
Payments to content and marketing providers
$
515,788
$
1,666,128
$
5,972,182
Total
$
5,819,391
$
15,305,416
$
26,483,694
Operating Expenses
Our operating expenses include product development, selling and marketing, stock-based
compensation and other general and administrative expenses.
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Product Development Expenses
Our product development expenses consist primarily of the salary and welfare expenses of our
technical support team, which is responsible for our LT-IAG technology platform and other technical
support, and our product development team, which focuses on aggregating, customizing and localizing
our services. This category of expenses also includes depreciation and amortization of computers
and software related to the activities of those teams.
Our SMS-based content and applications have been principally developed in-house. In the first
quarter of 2003, we began allocating product development resources to next generation MMS, WAP and
Java™ services, as well as audio-related services. We develop slightly more than half of our MMS,
WAP, Java™ and audio-related services content in-house with the remainder aggregated from third
parties. For the year ended December 31, 2005, approximately 35%, 29%, 7%, 13% and 16% of our
product development expenditures were related to our 2G services, 2.5G services, audio-related
services, general office information technology support and new businesses (such as casual gaming),
respectively. We expect that the portion of our product development expenditures devoted to 2.5G
and audio-related services will increase moderately in the future.
Although the monthly statements we receive from the operators do not include breakdowns of
gross revenues by service and not all of the affiliates of the operators provide daily reports on
services sent and received, we utilize a number of resources to plan and refine our product
development activities. For example, our internal records of the services we transmit to the
operators for delivery to the ultimate user provide us with extensive information about the
popularity of our services, such as gross usage and the number of repeat users. However, we can
only estimate the revenue those services generate due to the operators' unitemized monthly
statements. Nevertheless, our focus on maintaining, expanding and strengthening close
relationships with the operators helps keep us informed as to upcoming marketing and product
initiatives by the operators and rollouts of new mobile technology standards, which enables us to
tailor our product development efforts to address these trends.
We depreciate our computer hardware and office equipment on a straight-line basis over their
estimated useful lives.
As part of our continual assessment of our estimation techniques, we determined that our
previous estimates on residual value and the useful life of our computer equipment, software and
other assets required modification. Effective from January 1, 2005, we have modified our
estimation on the residual value of product development assets from 10% to zero, and the updated
useful life of such assets as follows:
Old Estimation
New Estimation
Computer hardware/equipment
60 months
36-60 months
Office equipment
60 months
12-36 months
These changes increased depreciation expense by $0.4 million and reduced income tax expense by
$0.1 million for the year ended December 31, 2005.
Selling and Marketing Expenses
Our selling and marketing expenses consist primarily of the direct costs attributable to our
sales and marketing activities, such as travel, entertainment, advertising expenses and cost of
promotions. It also includes the salary and welfare expenses of the staff in our sales department
and marketing
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department, as well as charges imposed on us by the mobile operators for our inadvertent
contravention of their customer service policies, which generally appear as separate charges on the
statements we receive from the operators.
Stock-based Compensation
Our operating expenses include stock-based compensation charges, which are described under
"Critical Accounting Policies and Estimates — Stock-based Compensation" above.
Other General and Administrative Expenses
Our other general and administrative expenses consist primarily of the salary and welfare
expenses of our customer research department, customer service department, business development
department and other administrative functions, such as legal, human resources, finance and senior
management. Other general and administrative expenses also include fees for professional services
(e.g., audit, tax, legal and recruitment), office rentals, relocation expenses (in 2005 which
included expenses incurred in connection with the move of our office in Beijing), bandwidth leasing
and server custody fees charged by the operators and the amortization of leasehold improvements.
Leasehold improvements are amortized on a straight-line basis over the lesser of the relevant lease
term or the assets' estimated useful lives.
Taxation
Under the current laws of the Cayman Islands and British Virgin Islands, we are not subject to
a tax on income or capital gain. However, our revenues are primarily derived from our affiliated
Chinese entities. Chinese companies are generally subject to Enterprise Income Tax (EIT)
comprising a national income tax and local tax. Linktone Consulting and Shanghai Weilan are
subject to a 30% national income tax and a 3% local tax. Shanghai Huitong and Linktone Internet
qualify as "foreign investment production enterprises established in a coastal economic development
zone in an old urban district" under applicable tax rules, and accordingly are subject to a 24.0%
national income tax and a 3.0% local tax in China. Additionally, Shanghai Huitong and Linktone
Internet are entitled to an exemption from the national income and local tax for the first two
years after cumulative profitability and a 50.0% reduction for the subsequent three years. Our
affiliated Chinese entities Shanghai Unilink and Shanghai Qimingxing are currently considered
"small businesses" under applicable tax rules, and are subject to a 2.4% tax on revenue and 4.8%
tax on the difference between revenue and cost of services, rather than on income. Shanghai Weilan
initially was also subject to tax on revenue rather than on income, however, its revenue in 2004
exceeded the revenue ceiling for entities qualified to be taxed under the revenue method.
Therefore, Shanghai Weilan has been subject to a 30.0% national income tax and 3.0% local tax since
2004. Because Hainan Zhong Tong, Wang You and Linktone Software are located in economic
development zones in coastal cities, they are subject to a preferential national income tax rate of
15%, and are permanently exempt from local tax. Shenzhen Yuanhang, Beijing Cosmos and Beijing Lian
Fei qualify as "high technology" enterprises, and are therefore entitled to: (i) with respect to
Beijing Cosmos and Beijing Lian Fei, a three (3) year national and local tax exemption followed by
three (3) years with a 50% reduction in the national income tax rate and continued exemption from
the local income tax rate, commencing from the first year of operations and (ii) with respect to
Shenzhen Yuanhang, a two (2) year national and local tax exemption followed by three (3) years with
a 50% reduction in the national income tax rate and continued exemption from the local income tax
rate, commencing from the first year of profitability.
If our income is generated from a permanent establishment in China, the income of such
permanent establishment would be subject to a 30.0% national income tax and 3.0% local income tax.
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Income of our company that is not connected to a permanent establishment in China would be
subject to a 10.0% withholding tax on gross receipts from profit, interest, rentals, royalties and
other income earned in China. Since Linktone Consulting, Shanghai Huitong, Linktone Internet,
Linktone Software and Wang You are our wholly-owned subsidiaries and are considered permanent
establishments in China for tax purposes, the income generated by these entities is subject to EIT,
and the dividends distributed from these entities to our company is exempt from Chinese withholding
tax.
Payments for software license fees and related technical consulting services provided by
Shanghai Huitong and Linktone Internet to Shanghai Weilan and Shanghai Unilink are subject to a
17.0% value-added tax, or VAT. Under applicable tax regulations, Shanghai Huitong and Linktone
Internet are entitled to a tax refund equivalent to the portion of VAT expense that is in excess of
3.0%. This VAT expense is shown in our "Consolidated Statements of Operations" as a reduction in
our revenue. For the year ended December 31, 2005, Shanghai Huitong and Linktone Internet paid a
total $6.3 million in VAT and received a $5.0 million tax refund. As of December 31, 2005,
Shanghai Huitong and Linktone Internet accrued VAT refund receivable and payable of $2.1 million
and $2.6 million, respectively, for approximately $11.4 million in software license fee revenue
invoiced in 2005 and $6.4 million in software license fee revenue expected to be invoiced in 2006.
The entire $2.1 million has been refunded.
We are subject to a business tax on our revenues derived from services in China, which is
generally 3% — 5% of the revenue. Business tax applies to the gross revenues recognized by our
Chinese affiliated entities and to the service fees charged to those entities by Linktone
Consulting. The business tax shown in our consolidated statements of operations causes a reduction
in our revenue.
Subject to the approval of the relevant tax authorities, Linktone Consulting, one of our
wholly owned subsidiaries in China, had total tax loss carryforwards of approximately $2.8 million
as of December 31, 2005 for EIT purposes. Approximately $0.02 million, $0.04 million, $2.3
million, $0.4 million and $0.03 million of such losses will expire in 2006, 2007, 2008, 2009 and
2010, respectively. These tax loss carryforwards give rise to potential deferred tax assets
totaling $0.8 million. For more information regarding our tax loss carryforwards and deferred tax
assets, see "Critical Accounting Policies and Estimates — Deferred Tax Valuation Allowance" above.
Capital Expenditures
Our capital expenditures for 2003, 2004 and 2005 were approximately $0.3 million, $2.4 million
and $2.0 million, respectively, consisting of the purchase of computer and office equipment and
leasehold improvements. Substantially all of our capital expenditures for 2005 were incurred in
connection with the expansion of our business, as well as furniture and computer equipment
purchased in connection with the relocation of our Beijing office in December 2005. We anticipate
that we will have capital expenditures in the next 12 months of approximately $1 million for
software and technology infrastructure products which we expect to finance with internal funds.
Results of Operations
The following table sets forth a summary of our audited consolidated statement of operations
for the periods indicated and as a percentage of gross revenues. Our historical operating results
are not necessarily indicative of the results for any future period.
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Year ended December 31,
2003
2004
2005
(audited)
%
(restated and
%
(audited)
%
audited)
Gross revenues
$
16,601,492
100.0
%
$
50,318,744
100.0
%
$
73,608,603
100.0
%
Net revenues
15,485,670
93.3
%
48,083,700
95.6
%
70,487,256
95.8
%
Cost of services
(5,819,391
)
(35.1
)%
(15,305,416
)
(30.4
)%
(26,483,694
)
(36.0
)%
Gross profit
9,666,279
58.2
%
32,778,284
65.2
%
44,003,562
59.8
%
Operating expenses:
Product development
(748,209
)
(4.5
)%
(2,807,720
)
(5.6
)%
(6,229,976
)
(8.5
)%
Selling and marketing
(2,144,540
)
(12.9
)%
(8,794,568
)
(17.5
)%
(14,719,763
)
(20.0
)%
Share-based compensation
(1,119,529
)
(6.7
)%
(3,464,807
)
(6.9
)%
(2,012,425
)
(2.7
)%
Other general and administrative
(2,070,141
)
(12.5
)%
(6,809,947
)
(13.5
)%
(9,774,570
)
(13.3
)%
Total operating expenses
(6,082,419
)
(36.6
)%
(21,877,042
)
(43.5
)%
(32,736,734
)
(44.5
)%
Income from operations
3,583,860
21.6
%
10,901,242
21.7
%
11,266,828
15.3
%
Interest income
32,223
0.2
%
815,447
1.6
%
1,965,801
2.7
%
Other income
—
346,652
0.7
%
720,763
0.9
%
Income tax expense
—
0.0
%
(997,307
)
(2.0
)%
(1,504,329
)
(2.0
)%
Income after tax
$
3,616,083
21.8
%
$
11,066,034
22.0
%
$
12,449,063
16.9
%
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Gross Revenues
Gross revenues increased by 46.3% to $73.6 million for the year ended December 31, 2005 from
$50.3 million in 2004, primarily as a result of increases in the number of paying users,
particularly for our audio-related services, as well as growth in sales of our SMS and 2.5G
services in 2005. We estimate that our user base expanded to an average of 7.7 million users per
month during 2005, reaching a peak of an average of 10.0 million users in August 2005, compared
with our estimate of an average of 6.8 million users per month during 2004. This increase was
primarily due to our ongoing efforts to attract new users from a broader geographic base as well as
gaining customers from our competitors through increased marketing channels, especially print and
broadcast media channels, and an expanded sales network. Our user base also increased as a result
of the overall growth of the wireless (and, to a lesser extent, fixed line) value-added services
market in China, particularly for audio-related and 2.5G services.
In addition, we estimate that our average revenue per user increased to $1.00 per month during
2005, compared to $0.61 per month during 2004. This increase was primarily due to our enhanced
product portfolio for all categories of our services. Growth in sales of our audio-related, 2G and
2.5G services contributed to 57.1%, 28.0% and 7.9%, respectively, of our total increase in gross
revenues for 2005 compared to 2004. In 2005, ringback and IVR services accounted for 11.0% and
12.0%, respectively, of our gross revenues. In 2005, MMS and WAP services accounted for 8.8% and
2.0%, respectively, of our gross revenues.
Our gross revenues for 2005 were negatively affected, however, by various sanctions imposed by
China Mobile in 2005, as described under "Overview — Changes in Mobile Operator Policies or the
Manner in Which They are Enforced." We cannot quantify the impact of the sanctions on our gross
revenue because we cannot estimate with precision the revenues we would have earned during the time
period affected by the sanctions. Also, we cannot predict whether we will be subject to additional
sanctions or penalties in future periods.
Cost of Services
Our cost of services increased by 73.2% to $26.5 million in 2005 from $15.3 million in 2004,
primarily due to the overall growth of our business resulting in increased service and network fees
being paid by us to the operators. Cost of services also increased in part due to increased
revenue share payments to our content providers and co-marketing partners, reflecting a greater
percentage of revenues derived from third party content. In 2005, our total service and network
fees paid to the operators were
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$20.5 million, representing 77.4% of our total cost of services, and fees paid to content and
marketing partners were $6.0 million, representing 22.6% of our total cost of services, compared to
$13.6 million, representing 88.9% of our total cost of services, and $1.7 million, representing
11.1% of our total cost of services, respectively, for the same period in 2004.
If we are successful in establishing collaborative relationships or partnerships involving
payments to additional domestic and international content providers, or to other parties such as
additional handset manufacturers that embed our services in their handsets, we expect that our cost
of services may increase.
Operating Expenses
Our operating expenses increased to $32.7 million in 2005 from $21.9 million in 2004.
Operating expenses as a percentage of gross revenues increased to 44.5% in 2005 from 43.5% in 2004.
The increase was mainly due to the fact that the rate of growth in our operating expenses, in
particular, our selling and marketing and product development expenses, outpaced the rate of growth
of our revenue. Depreciation and amortization expenses for computers and equipment in relation to
our total operating expenses were not material for 2005 and 2004.
Product development expenses increased by 121.4% to $6.2 million in 2005 from $2.8 million in
2004, primarily due to an increase in staff costs as a result of additional hiring to expand our
product development and technology support teams, which increased from 123 and 122 employees,
respectively, as of December 31, 2004 to 312 and 148 employees, respectively, as of December 31,
2005. Staff costs for product development increased to $4.4 million, or 13.5% of our total
operating expenses, in 2005 from $2.4 million, or 11.0% of our total operating expenses, in 2004.
Selling and marketing expenses increased by 67.0% to $14.7 million in 2005 from $8.8 million
in 2004, primarily due to increased investment in advertising and sales activities in online and
offline media, as well as an increase in the number of sales and marketing employees from 227 as of
December 31, 2004 to 280 as of December 31, 2005. Advertising and sales activities increased to
$8.6 million, or 26.3% of our total operating expenses, in 2005 from $4.3 million, or 19.6% of our
total operating expenses, in 2004. Staff costs increased to $2.9 million, or 8.9% of our total
operating expenses, in 2005 from $1.9 million, or 8.7% of our total operating expenses, in 2004.
In 2004 and 2005, approximately 55%, 44% and 1% and 50%, 17% and 33%, respectively, of such
expenses were incurred to promote our 2G, 2.5G and audio-related services, respectively. We expect
that the major portion of our sales and marketing expenses will be related to our 2.5G and
audio-related services in future periods.
We recorded stock-based compensation cost in the amount of $2.0 million in 2005, compared to
$3.5 million in 2004. The reduction was primarily due to stock-based compensation cost related to
options granted to our management and certain staff employees in April 2003 had been fully
amortized by July 2005. The decrease also resulted from the fact that stock-based compensation
cost incurred in connection with the amendment of certain executive officers' stock options in
October 2004 was significantly greater in 2004 than 2005.
Other general and administrative expenses increased by 44.1% to $9.8 million in 2005 from $6.8
million in 2004, primarily due to an increase in staff costs as a result of additional hiring of
staff from 46 to 85 employees, as well as an increase in professional service fees such as for
legal, audit and recruitment. The majority of new hires were in our legal, finance and human
resources departments. These staff costs increased to $2.9 million, or 8.9% of our total operating
expenses, in 2005 from $2.1 million, or 9.6% of our total operating expenses, in 2004.
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We expect that our operating expenses will increase at a slower pace in the near-term in
comparison to prior periods as we have implemented cost reductions beginning in the first quarter
of 2006 to create a leaner and more efficient company.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Gross Revenues
Gross revenues increased by 203.0% to $50.3 million for the year ended December 31, 2004 from
$16.6 million in 2003, primarily as a result of increases in the number of paying users and average
revenue per user, particularly for our SMS services, as well as growth in sales of our 2.5G and
audio-related services in 2004. We estimated that our user base expanded to an average of 6.8
million users per month during 2004, reaching a peak of an average of 7.2 million users in November
2004, compared with our estimate of an average of 3.3 million users per month during 2003. This
increase was primarily due to our efforts to attract new users from a broader geographic base as
well as gaining customers from our competitors through increased marketing channels, especially
print and broadcast media channels, and an expanded sales network. Our user base also increased as
a result of the overall growth of the wireless value-added services market in China, particularly
for 2.5G and audio-related services.
In addition, we estimated that our average revenue per user increased to $0.61 per month
during 2004, reaching a peak of $0.74 in December 2004, compared to $0.54 in December 2003. This
increase was due primarily to our enhanced product portfolio for all categories of our services and
the launch of IVR services in April 2004. Growth in sales of our 2G, 2.5G and audio-related
services contributed to 70.3%, 19.0% and 10.7%, respectively, of our total increase in gross
revenues for 2004 compared to 2003. In 2004, MMS and WAP services accounted for 10.5% and 2.0%,
respectively, of our gross revenues. In 2004, ringback and IVR services accounted for 3.5% and
3.7%, respectively, of our gross revenues.
Although our gross revenues for SMS services increased in 2004 compared to 2003, we
experienced a decline in SMS-related revenues between the second and third quarters and between the
third and fourth quarters of 2004. These declines resulted principally from the ongoing effects of
China Mobile's implementation of its new platform for customer service and billing management.
Cost of Services
Our cost of services increased by 163.8% to $15.3 million in 2004 from $5.8 million in 2003,
primarily due to the overall growth of our business resulting in increased service and network fees
being paid by us to the mobile operators. Cost of services also increased in part due to payments
to our content providers and marketing partners under our cooperation agreements with them. In
2004, our total service and network fees paid to the mobile operators were $13.6 million,
representing 88.9% of our total cost of services, and fees paid to content and marketing partners
were $1.7 million, representing 11.1% of our total cost of services, compared to $5.3 million,
representing 91.4% of our total cost of services, and $0.5 million, representing 8.6% of our total
cost of services, respectively, for the same period in 2003.
Operating Expenses
Our operating expenses increased significantly to $21.9 million in 2004 from $6.1 million in
2003. Operating expenses as a percentage of gross revenues increased from 36.6% in 2003 to 43.5%
in 2004. The increase was mainly due to the fact that the rate of growth in our operating
expenses, in particular, our selling and marketing and product development expenses, outpaced the
rate of growth of
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our revenue. Depreciation and amortization expenses for computers and equipment in relation
to our total operating expenses were not material for 2003 and 2004.
Product development expenses increased by 300.0% to $2.8 million in 2004 from $0.7 million in
2003, primarily due to an increase in staff costs as a result of additional hiring to expand our
product development and technology support teams, which increased from 64 and 30 employees as of
December 31, 2003 to 123 and 122 employees as of December 31, 2004. Staff costs for product
development increased to $2.4 million, or 11.0% of our total operating expenses, in 2004 from $0.7
million, or 11.5% of our total operating expenses, in 2003.
Selling and marketing expenses increased by 319.0% to $8.8 million in 2004 from $2.1 million
in 2003, primarily due to increased investment in advertising and sales activities in online and
offline media, as well as an increase in the number of sales and marketing employees from 97 as of
December 31, 2003 to 168 as of December 31, 2004. Such advertising and sales activities increased
to $4.3 million, or 19.6% of our total operating expenses, in 2004 from $0.9 million, or 14.8% of
our total operating expenses, in 2003. Staff costs increased to $1.9 million, or 8.7% of our total
operating expenses, in 2004 from $0.7 million, or 11.5% of our total operating expenses, in 2003.
In 2003, substantially all of our sales and marketing expenses were incurred promoting our 2G
services. However, in 2004, approximately 55%, 44% and 1% of such expenses were incurred to
promote our 2G, 2.5G and audio-related services, respectively. Our sales and marketing expenses
also increased during this period because we incurred charges imposed by the mobile operators for
the inadvertent contravention of certain of their policies, which totaled $0.7 million in 2004,
compared to nil in 2003.
We recorded stock-based compensation cost in the amount of $3.5 million in 2004, compared to
$1.1 million in 2003, primarily due to amortization of stock-based compensation cost related to
options granted to our management and certain staff employees in April 2003. The increase also
resulted from stock-based compensation cost incurred in connection with the amendment of certain
executive officers' stock options in October 2004.
Other general and administrative expenses increased by 223.8% to $6.8 million in 2004 from
$2.1 million in 2003, primarily due to an increase in staff costs as a result of additional hiring
of staff from 43 to 105 employees. The majority of new hires were in our finance and human
resources departments as well as senior management. These staff costs increased to $2.1 million,
or 9.6% of our total operating expenses, in 2004 from $1.1 million, or 18.0% of our total operating
expenses, in 2003. An increase in our lease expenses, incurred in connection with our move to new
corporate offices in July 2004, in the amount of $0.7 million for the year ended December 31, 2004,
also contributed to the increase in other general and administrative expenses.
B. Liquidity and Capital Resources
Our primary sources of liquidity have historically been proceeds from our private placements
of preferred shares to investors and from our initial public offering in March 2004 and cash flow
from operations. In the future, we anticipate that our primary sources of liquidity will come from
cash flow from operations. The following table sets forth the summary of our cash flows for the
periods indicated:
For the year ended December 31,
2003
2004
2005
(audited)
(restated and
(audited)
audited)
Net cash provided by operating activities
$
2,880,751
$
9,654,127
$
9,561,944
Net cash used in investing activities
(304,380
)
(17,266,029
)
(34,440,154
)
Net cash (used in)/provided by financing activities
—
65,412,374
(2,832,327
)
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For the year ended December 31,
2003
2004
2005
(audited)
(restated and
(audited)
audited)
Foreign currency translation adjustment
457
264
549,586
Net increase in cash and cash equivalents
2,576,828
57,800,736
(27,160,951
)
Cash and cash equivalents, beginning of year
3,036,065
5,612,893
63,413,629
Cash and cash equivalents, end of year
$
5,612,893
$
63,413,629
$
36,252,678
The ability of our subsidiaries to obtain cash or other assets from our affiliated
Chinese entities, Shanghai Weilan, Shanghai Unilink, Shenzhen Yuanhang, Beijing Cosmos, Hainan
Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing depends on the effectiveness and
enforceability of our agreements with those entities and their owners. A description of these
agreements is set forth under "Arrangements with Consolidated Affiliates" above. In turn, the
ability of our subsidiaries to convert Renminbi into U.S. dollars and transfer them to our company
is subject to the Chinese foreign exchange regulations, including primarily the restriction that
foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks
authorized to conduct foreign exchange business after providing valid commercial documents.
Pursuant to various software license and service agreements, our subsidiaries charged Shanghai
Weilan and Shanghai Unilink an aggregate fee of $39.1 million for the year ended December 31, 2005.
After these charges, as of December 31, 2005, approximately $7.1 million and $0.02 million of
profits (determined based on invoiced revenue) remained in Shanghai Weilan and Shanghai Unilink,
respectively. As of December 31, 2005, approximately $1 million of profit (determined based on
invoiced revenue) remained in Shenzhen Yuanhang. Beijing Cosmos, Hainan Zhong Tong, Beijing Lian
Fei and Shanghai Qimingxing, each had accumulated losses as of December 31, 2005. Of the profits
remaining in Shanghai Weilan, Shanghai Unilink and Shenzhen Yuanhang, $5.8 million related to 2003,
$1.2 million related to 2004 and $1.12 million related to 2005. For tax planning reasons and
because we usually charge our affiliated Chinese entities fees for the current year only, we do not
anticipate transferring such cumulative retained profits relating to earlier years to our
subsidiaries via service charges in the future. In addition, because Shanghai Weilan, Shanghai
Unilink and Shenzhen Yuanhang are only affiliated entities of us rather than subsidiaries, such
profits cannot be transferred to us in the form of cash dividends. However, our subsidiaries
normally have access to the cash or other assets retained in Shanghai Weilan, Shanghai Unilink,
Shenzhen Yuanhang, Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing via
inter-company advances.
Operating Activities
Cash provided by operating activities was $2.9 million, $9.7 million and $9.6 million for
2003, 2004 and 2005, respectively. For 2003, 2004 and 2005, cash provided by operating activities
consisted primarily of our operating profit.
Investing Activities
Cash used in investing activities in 2003, 2004 and 2005 was approximately $0.3 million, $17.3
million and $34.4 million, respectively. In 2003 and 2004, cash expenditures consisted primarily
of the purchase of short term investments and fixed assets, including computers and office
equipment and leasehold improvements, in connection with the expansion of our business. In 2005,
cash expenditures included the acquisitions of Shenzhen Yuanhang through Brilliant, Beijing Cosmos,
Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing, our strategic investment in 9Sky, and
the purchase of short term investments and fixed assets such as computers and office equipment and
leasehold improvements.
We had no material commitments for capital expenditures as of December 31, 2003, 2004 and
2005. During 2003, 2004 and 2005, we spent approximately $0.3 million, $2.4 million and $2.0
million,
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respectively, for renovations of our new corporate offices and for the purchase of computer
and office equipment.
Financing Activities
Cash used in financing activities was $2.8 million for 2005, which consisted primarily of
funds used to finance our ADS repurchase program. Cash provided by financing activities was $65.4
million for 2004, which consisted of the net proceeds from our initial public offering and from the
exercise of stock options. We had no cash provided by or used in financing activities for 2003.
We have no written treasury or borrowing policy. We keep almost all of our cash in U.S.
dollar or RMB denominated bank accounts, short-term time deposits or short-term, investment grade
fixed income securities for two principal purposes: to finance our operations, and to manage the
interest rate and currency risks arising from our operations. We adjust the amount of cash held in
U.S. dollars and RMB from time to time to maximize our interest rate returns and to ensure that we
have sufficient RMB for our operational needs, including for lease and other commitments. We have
not historically financed our operations through borrowings and have not used derivative
instruments to hedge market risks.
We believe that current cash and cash equivalents will be sufficient to meet anticipated
working capital (net cash used in operating activities), commitments and capital expenditures for
the foreseeable future. We also believe that our recent acquisitions of Shenzhen Yuanhang through
Brilliant, Beijing Cosmos, Hainan Zhong Tong, Beijing Lian Fei and Shanghai Qimingxing and our
strategic investment in 9Sky will have no material impact on our future liquidity or capital
resources in the near-term. We may, however, require additional cash resources due to changed
business conditions or other future developments, including any investments or acquisitions we may
decide to pursue. If these sources are insufficient to satisfy cash requirements, we may seek to
sell additional equity or debt securities or to obtain a credit facility. The sale of additional
equity or convertible debt securities could result in additional dilution to shareholders. The
incurrence of indebtedness would result in increased debt service obligations and could result in
operating and financial covenants that would restrict operations. Financing may not be available
in amounts or on terms acceptable to us, if at all.
C. Research and Development, Patents and Licenses
RESEARCH AND DEVELOPMENT
We believe that a key part of our future success will depend on our ability to develop and
enhance our services by leveraging our expertise in entertainment-oriented wireless value-added
services. Our product development activities are led by our 312-member product development
department based in Shanghai, Beijing and Shenzhen, of which approximately 103 work on new services
such as MMS, WAP and Java
TM
and the remainder focusing on SMS-based services,
audio-related services and casual gaming. Our total expenditures for research and development were
$0.7 million, $2.8 million and $6.2 million for the years ended 2003, 2004 and 2005, respectively.
We develop the content for our services in-house, aggregate it from domestic and international
providers or through acquisitions. We plan to enter into additional relationships with domestic
and international providers, in particular with respect to the development of games, music and
content for all of our 2.5G services, in order to fully utilize the technological benefits of 2.5G
and the sophisticated premium content which users will demand. For aggregated third party content,
most of our efforts involve customization, localization and related development activities of the
content for the Chinese market to create appealing, user-friendly products. We also intend to make
additional strategic
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investments or acquisitions such as our acquisitions of Shenzhen Yuanhang through Brilliant
and Beijing Cosmos in order to build more robust interactive entertainment services.
Our services development team in Shanghai and Beijing focuses on MMS and WAP products, as well
as Java
TM
and Brew games. We currently develop or aggregate from third parties,
particularly from game developers in Japan and Korea, a variety of action and adventure
Java
TM
games. For this purpose, we have a game development team which is highly
experienced working in the Java
TM
and Brew programming languages to customize and
localize games for the Chinese market.
Finally, certain provincial and local offices of the mobile operators use different software
and technology, and our product development department must conform our services so that they are
interoperable with China Mobile's and China Unicom's networks at all levels.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We rely primarily on a combination of copyright laws and contractual restrictions to establish
and protect our intellectual property rights. We require our employees to enter into agreements to
keep confidential all information relating to our customers, methods, business and trade secrets
during and after their employment with us. Our employees are required to acknowledge and recognize
that all inventions, trade secrets, works of authorship, developments and other processes, whether
or not patentable or copyrightable, made by them during their employment are our property. They
also sign agreements to substantiate our sole and exclusive right to those works and to transfer
any ownership that they may claim in those works to us.
While we actively take steps to protect our proprietary rights, such steps may not be adequate
to prevent the infringement or misappropriation of our intellectual property. This is particularly
the case in China where the laws may not protect our proprietary rights as fully as in the United
States. Infringement or misappropriation of our intellectual property could materially harm our
business. We have registered 80 Internet and WAP domain names in English and Chinese, of which our
primary domain names are listed below.
•
www.linktone.com
,
•
www.linktone.com.cn
,
•
www.lt2000.com.cn
,
•
www.lt2000.net
,
•
www.ul9000.com
,
•
www.ul9000.com.cn
,
•
www.ul9000.cn
,
•
www.soring.cn
,
•
www.i-liao.com
,
•
wap.linktone.com,
•
wap.linktone.com.cn
,
•
www.i-liao.com
,
•
wap.linktone.com,
•
wap.linktone.com.cn
,
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•
www.my1828.com,
•
www.smschina.com,
•
www.8228.com,
•
www.yhgame.com, and
•
www.vrhappy.com.
We have registered 90 trademarks with China's Trademark Office and one trademark in each of
Hong Kong, Singapore and Taiwan, relating to our company name and logo and some of our services.
We are in the process of applying for 36 additional trademarks in China and two trademarks in the
United States.
China's trademark law adopts a "first-to-file" system for obtaining trademark rights. As a
result, the first applicant to file an application for registration of a mark will preempt all
other applicants. Prior use of unregistered marks, except for statutorily defined "well known"
marks, is generally not a basis for legal action in China. We may not be able to successfully
defend or claim any legal rights in those trademarks for which applications have been made but for
which the Trademark Office has not issued a registration certificate.
We have also obtained 21 copyright certificates in China for cartoons and images and 26
copyright certificates for computer software.
Many parties are actively developing and seeking patent protection for wireless
services-related technologies. We expect these parties to continue to take steps to protect these
technologies, including seeking patent protection. There may be patents issued or pending that are
held by others and that cover significant parts of our technology, business methods or services.
Disputes over rights to these technologies are likely to arise in the future. We cannot be certain
that our products do not or will not infringe valid patents, copyrights or other intellectual
property rights held by third parties. We may be subject to legal proceedings and claims from time
to time relating to the intellectual property of others.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any recent trends
that are likely to have a material effect on our business.
E. Off-Balance Sheet Arrangements
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees,
interest rate swap transactions or foreign currency forward contracts. We do not engage in trading
activities involving non-exchange traded contracts.
F. Tabular Disclosure of Contractual Obligations
We have entered into leasing arrangements relating to our office premises. We also have
commitments in respect of advertising agreements with third parties, and contingent purchase price
commitments in respect of certain acquisition and loan agreements to which we are a party. The
following table sets forth our commitments under operating leases, advertising commitments and
acquisition agreements as of December 31, 2005:
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Office
Advertising
Contingent Purchase
Premises
Commitments
Price Commitments
Total
Less than one year
$
1,498,556
$
2,384,236
$
4,467,697
$
8,350,489
1 - 3 years
$
1,174,058
—
—
$
1,174,058
3 - 5 years
$
50,324
—
—
$
50,324
Total
$
2,722,938
$
2,384,236
$
4,467,697
$
9,574,871
The contingent purchase price commitments referenced above include the following:
In connection with our acquisition of Beijing Cosmos, we may be obligated to pay approximately
$2.5 million out of a maximum of $3.1 million in contingent consideration to the selling
shareholders of Beijing Cosmos if certain financial performance objectives are achieved by March
31, 2006. $0.6 million of the maximum $3.1 million in contingent consideration was already paid to
the selling shareholders of Beijing Cosmos as an advance payment prior to December 31, 2005.
In connection with our strategic investment in 9Sky, we are obligated to advance further loans
in the aggregate amount of approximately $2 million to 9Sky, if certain conditions pursuant to a
convertible loan agreement are achieved.
Inflation
Inflation in China has not had a material impact on our results of operations in recent years.
According to the National Bureau of Statistics of China, the change in the Consumer Price Index in
China was 1.2%, 3.9% and 1.8% in 2003, 2004 and 2005, respectively.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to risk for changes in interest rates relates primarily to our investments in
short-term financial instruments. 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. Partly as a result of this, our future interest income may fall
short of expectations due to changes in interest rates, or we may suffer losses in principal if we
are forced to sell securities that have fallen in estimated fair value due to changes in interest
rates. However, 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 an interest rate change.
Foreign Currency Risk
Substantially all our revenues and expenses are denominated in Renminbi, but a substantial
portion of our cash is kept in U.S. dollars. Although we believe that, in general, our exposure to
foreign exchange risks should be limited, our cash flows and revenues will be affected by the
foreign exchange rate between U.S. dollars and Renminbi. It is possible that the Chinese
government may elect to loosen further its current controls over the extent to which the Renminbi
is allowed to fluctuate in value in relation to foreign currencies. Our business and the price of
our ordinary shares and ADSs could be negatively affected by a revaluation of the Renminbi against
the U.S. dollar or by other fluctuations in prevailing Renminbi-U.S. dollar exchange rates. For
example, to the extent that we need to convert U.S. dollars into Renminbi for our operational needs
and should the Renminbi appreciate against the U.S. dollar at that time, our cash flows would be
reduced which could materially adversely affect our business. Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of declaring dividends
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on our ordinary shares or for other business purposes and the U.S. dollar appreciates against
the Renminbi, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be
reduced.
We do not engage in any hedging activities, and we may in the future experience economic loss
as a result of any foreign currency exchange rate fluctuations. During the twelve months ended
December 31, 2005, the foreign currency translation adjustments to our comprehensive income was
$0.8 million and the currency loss was $0.36 million, primarily as a result of the Chinese Renminbi
appreciating approximately 2.5% against the U.S. dollar in connection with the Chinese government's
decision in July 2005 to tie the Renminbi to a basket of currencies rather than to the U.S. dollar.
The following is a sensitivity analysis showing the impact of hypothetical changes in the value of
the Renminbi against the U.S. dollar as of December 31, 2005 on our results for 2005:
Change in the Value of Chinese
Renminbi against the U.S. Dollar
Additional Translation Adjustments
from Actual Value as of December
to Comprehensive Income
Additional Transaction Gain/(Loss)
31, 2005
(in thousands)
(in thousands)
2.5% Appreciation
$
823
$
(36
)
5% Appreciation
$
1646
$
(72
)
2.5% Depreciation
$
(823
)
$
36
5% Depreciation
$
(1646
)
$
72
Recent Accounting Pronouncements
In November 2005, the FASB issued FSP 115-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments" nullifies the guidance in EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," on determining whether
an impairment of a security is other than temporary (including guidance on the investor's ability
and intent to hold investments, the severity of the impairment, the duration of the impairment, and
the forecasted recovery of fair value). FSP 115-1 shall be applied to reporting periods beginning
after December 15, 2005, although earlier application of FSP 115-1 is permitted. We do not expect
a material impact on our financial position or on our results of operation upon the adoption of FSP
115-1 in 2006.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS
123(R)), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values, beginning with the first interim or annual
period after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement recognition. Under SFAS 123(R), we must
determine the appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used at date of adoption.
The transition methods include prospective and retroactive adoption options. Under the
retroactive method, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires that compensation expense
be recorded for all unvested stock options and restricted stock at the beginning of the first
quarter of adoption of SFAS 123(R), while the retroactive method would record compensation expense
for all unvested stock options and restricted stock beginning with the first period restated. We
have adopted the provisions of SFAS No. 123(R) under the prospective method using the Black-Scholes
option pricing model beginning January 1, 2006.
SFAS No. 154, "Accounting Changes and Error Corrections," a replacement of Accounting
Principles Board Opinion No. 20 and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
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Statements," was issued in June 2005. SFAS No. 154 requires retrospective application to
financial statements of prior periods for changes in accounting principles that are not adopted
prospectively. This statement is effective January 1, 2006. The application of this standard had
no impact on our 2005 consolidated financial statements.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The names of our current directors and executive officers, their ages and the principal
positions with Linktone held by them, as of May 31, 2006, are as follows:
Name
Age
Position
Class
Term of Office
Mark Begert
34
Director
I
3 years
David C. Wang (2)(3)
62
Director
I
3 years
Thomas Hubbs (1)(2)
61
Director
II
3 years
Elaine La Roche (1)(2)(3)
56
Chairperson of the Board
II
3 years
Michael Guangxin Li (4)
39
Director
II
3 years
Jun Wu (3)
34
Director
III
3 years
Derek Sulger (1)
34
Director
III
3 years
Colin Sung (4)
40
Acting Chief Executive
Officer and Chief
Financial Officer
(1)
Member of audit committee.
(2)
Member of compensation committee.
(3)
Member of nominating committee.
(4)
Mr. Sung served as our acting Chief Executive Officer from February 2006 until
April 2006, at which time Mr. Li was appointed as our Chief Executive Officer.
Our Amended and Restated Memorandum and Articles of Association provide for the division of
the board of directors into three classes: Class I directors (currently Mark Begert and David C.
Wang), Class II directors (currently Elaine La Roche, Thomas Hubbs and Michael Guangxin Li) and
Class III directors (currently Jun Wu and Derek Sulger). The current terms of the Class I, II and
III directors expire upon the election and qualification of directors at the annual general
meetings to be held on 2008, 2006 and 2007, respectively. At each annual general meeting,
directors who are elected will serve a three-year term until such director's successor is elected
and is duly qualified, or until such director's earlier death, bankruptcy, insanity, resignation or
removal. There are no family relationships among any of the directors or executive officers of our
company.
Biographical Information
Mark Begert
served as our Chief Financial Officer from April 2001 when our affiliated business
division, which focused on wireless data software, was spun-off to a newly established holding
company, Intrinsic Technology, until May 2005. He has served on our board since September 2005.
Previously, he managed the corporate finance, investor relations and corporate communications
departments of Intrinsic Technology from May 2000 to April 2001. From June 1994 until May 2000, Mr.
Begert was a Vice President and manager in the fixed income capital markets group of Merrill Lynch.
Mr. Begert graduated cum laude from Harvard University with a Bachelor of Arts degree.
David C. Wang
has served on our board since February 2004. Since November 2002, he has worked
as the President of Boeing China where he leads Boeing's growth and localization in the region. Prior to
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joining Boeing, he worked at General Electric for more than 20 years, most recently as
Chairman and Chief Executive Officer of General Electric China and as a member of the corporate
business development group. Mr. Wang graduated magna cum laude from St. Louis University with a
Bachelor of Science degree in Electrical Engineering and holds a Master of Science degree in
Electrical Engineering from the University of Missouri.
Thomas Hubbs
has served on our board since February 2004. He is an Executive Vice President
and the Chief Financial Officer of Bytemobile, Inc., a Silicon Valley-based mobile technology
company, where he has worked since October 2001. From October 1998 to August 2001, he worked at
InterWave Communications International, Ltd., a provider of wireless microcellular network
equipment, as an Executive Vice President and Chief Financial Officer of the company. He currently
serves on the Board of Directors of DCL Corporation and Provista Software International, Inc. Mr.
Hubbs graduated from Lehigh University with a Bachelor of Science in Business Administration and
received a Masters of Business Administration from the University of Santa Clara.
Elaine La Roche
has served on our board since February 2004. Ms. La Roche currently serves as
an independent director of China Construction Bank and sits on its Audit, Nomination and Strategy
committees. From 2005 to 2006, she was a financial executive at Cantor Fitzgerald, a global
interdealer broker. From June 2000 until April 2005, Ms. La Roche was the Chief Executive Officer
of Salisbury Pharmacy Group, which is in the business of acquiring, restructuring and operating
independent community pharmacies in the Northeastern United States. From February 1998 to June
2000, Ms. La Roche was seconded from Morgan Stanley to serve as the Chief Executive Officer of
China International Capital Corporation, a joint venture investment bank in the People's Republic
of China in which Morgan Stanley is a primary shareholder. Prior to that, she worked at Morgan
Stanley from May 1978 to February 1998, including as a Managing Director since 1987 where she
served in various capacities including as Chief of Staff to the Chairman and President of Morgan
Stanley. Ms. La Roche graduated from Georgetown University School of Foreign Service with a degree
in International Affairs and from the American University with a Masters of Business Administration
in finance.
Michael Guangxin Li
has served on our board since February 2006 and as our Chief Executive
Officer since April 2006. Previously, he served as our Chief Operating Officer from March 2003
until January 2006. From August 2000 until February 2003, he was Senior Vice President of
Operations and Strategy at Newpalm (China) Information Technology Co., Ltd., a wireless value-added
service provider in China. Prior to that, he worked as an associate at Mercer Management
Consulting, a corporate strategy and operations consulting firm, from August 1999 to August 2000
and as a sales manager and director at IBM in China from August 1991 to June 1997. Mr. Li graduated
from Beijing University with a degree in Mechanical Engineering and from the Wharton School,
University of Pennsylvania, with a Masters of Business Administration.
Jun Wu
has served as a director since April 2001. Mr. Wu is one of our founders and served as
Chairman of our Board before our initial public offering in March 2004. From November 1999 until
November 2002, Mr. Wu was also the Chief Executive Officer and Chairman of the Board of Intrinsic
Technology, a wireless data software developer in China. Prior to 1999, he was the Chief Systems
Architect for Sendit AB, a Swedish-based mobile messaging company until May 1999. Mr. Wu received
a first degree in Computer Science from the Imperial College of Science and Technology at the
University of London.
Derek Sulger
served as a director from November 1999 until November 2002, and has served again
as a director since July 2003. Mr. Sulger serves as Executive Director and Chief Financial Officer
of SmartPay Jieyin Ltd., a Shanghai-based mobile payment technology company which he co-founded.
He also serves as the co-chairman of Lunar Group, an investment holding company which was the
original
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investor in our company. Mr. Sulger is one of our founders and served as Executive
Director and Chief Financial Officer of our company from December 1999 through April 2001. From
April 2001 through September 2002, he served as Executive Director and Chief Operating Officer of
Intrinsic Technology, a wireless data software concern which was spun off from our company. From
July 1993 until April 2000, he worked at Goldman Sachs in London and New York, most recently as an
Executive Director in the Fixed Income, Currency and Commodities Division. Mr. Sulger graduated
cum laude from Harvard University with a Bachelor of Arts degree.
Colin Sung
has served as our Chief Financial Officer since June 2005. He also served as our
acting Chief Executive Officer from February 2006 until April 2006. From June 2004 until April
2005, Mr. Sung served as corporate controller of UTI, United States, Inc., a subsidiary of
International Freight Forwarder, which is listed on The Nasdaq National Market. From August 2001
until May 2004, he was the Vice President of Finance and Corporate Controller of USF Worldwide,
Inc., a subsidiary of USFreightways, which is listed on The Nasdaq National Market and was acquired
by GPS Logistics in October 2002. Mr. Sung has a Bachelor of Science degree from William Paterson
University and a Masters of Business Administration degree from American Intercontinental
University.
None of the directors or executive officers of our company were selected pursuant to
arrangements or understandings with our major shareholders, customers, suppliers or others.
B. Compensation
Compensation to our Directors
In 2005, we paid an aggregate of $190,152 to our non-executive directors. In addition, we
granted stock options in 2005 under our 2003 Stock Incentive Plan, or the 2003 Plan, to our
directors as stated below:
Number of ordinary shares
Name of Directors
underlying stock options
Raymond Lei Yang
500,000
Elaine La Roche
86,667
David C. Wang
86,667
Thomas Hubbs
86,667
Mark Begert
20,000
Derek Sulger
20,000
Jun Wu
20,000
Directors who are also employed by our company do not receive separate fees as our directors.
All of our current directors have entered into indemnification agreements in which we agree to
indemnify, to the fullest extent allowed by Cayman law, our charter documents or other applicable
law, those directors from any liability or expenses, unless the liability or expense arises from
the director's own willful negligence or willful default. The indemnification agreements also
specify the procedures to be followed with respect to indemnification. We currently maintain
directors' and officers' liability insurance on behalf of our directors and officers.
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Executive Officer Compensation
The following table sets forth certain information concerning compensation paid during 2005 to
our executive officers:
Long-Term
Annual Compensation
Compensation
Ordinary Shares
All Other
Salary
Bonus
Underlying Options
Compensation
(US$)
(US$) (1)
(#)
(US$)
Colin Sung, Chief Financial Officer
133,333
20,000
1,000,000
(2)
56,929
(4)
Raymond Lei Yang, former Chief
Executive Officer
266,667
—
500,000
(3)
100,173
(4)
Michael Guangxin Li, former Chief
Operating Officer and current
Chief Executive Officer and
director (5)
170,000
—
—
77,365
(4)
Mark Begert, former Chief
Financial Officer and director (6)
190,987
—
—
28,839
(4)
Xin Ye, former Chief Technology
Officer (7)
160,000
—
—
82,478
(4)
(1)
The bonus amount earned was based upon our company's achievement of certain
corporate financial performance goals and designated individual goals
established during the fiscal year.
(2)
These options have an exercise price of US$0.676 and expire on May 2, 2015.
(3)
These options have an exercise price of US$1.038 and expire on December 31, 2015.
(4)
Consists of expenses paid to the executive officer for housing allowance,
transportation, education and health insurance expenses and tax advisory
expenses.
(5)
Mr. Li was appointed to serve as our Chief Executive Officer in April 2006.
(6)
Mr. Begert served as our Chief Financial Officer until May 2005. His
compensation during 2005 includes certain severance benefits.
(7)
Mr. Ye served as our chief Technology Officer until February 2006.
Full-time employees of our company and our subsidiaries in China also participate in a
government-mandated multi-employer defined contribution plan pursuant to which pension benefits,
medical care, unemployment insurance and other welfare benefits are provided to those employees.
The total provision for such employee benefits, corresponding to the full amount of our company's
obligation in connection therewith was $1.3 million for 2005.
Employment Agreements
General
We have entered into employment and related agreements with Colin Sung and Michael Guangxin
Li. The employment agreements with Mr. Sung and Mr. Li provide that neither Mr. Sung nor Mr. Li
will be entitled to receive severance benefits if he resigns other than for a good reason or is
discharged by us for cause. However, if Mr. Sung or Mr. Li is terminated without cause or resigns
for good reason, we are obligated to provide severance benefits to him. The term "cause" includes
actions by the officer involving:
•
a crime involving dishonesty, breach of trust or physical harm to any person,
•
conduct which is in bad faith and materially injurious to the company,
including misappropriation of trade secrets, fraud or embezzlement,
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•
a material breach of the employment agreement or its related agreements,
•
refusal to follow or implement a company directive, or
•
malfeasance or other similar conduct.
The term "good reason" includes:
•
a material reduction in the employee's monthly base salary, or
•
relocation of the officer's principal place of employment by more than 50 miles.
The severance benefits to which Mr. Sung and Mr. Li are entitled upon termination without
cause or resignation for a good reason include a payment by us equal to: (a) his then-current
monthly base salary multiplied by six plus the number of years between May 2, 2005 and the
termination date, in the case of Mr. Sung, or (b) his then-current monthly base salary multiplied
by six plus the number of years between April 3, 2006 and the termination date, in the case of Mr.
Li. Each of Mr. Sung and Mr. Li is also entitled to exercise his stock options which have vested
at the time of his termination without cause or resignation for good reason.
If a change of control occurs with respect to our company and Mr. Sung or Mr. Li is terminated
without cause or resigns for good reason, we will be obligated, in addition to the severance
benefits described in the preceding paragraph, to pay to Mr. Sung or Mr. Li (as the case may be) an
amount equal to the greater of (a) six times his then-current monthly base salary, or (b) 12 times
his then-current monthly base salary, less any compensation paid to him during the period between
the change of control and the termination date. If a change of control occurs, we will also be
obligated to pay health and life insurance premiums for the greater of six months or the number of
months between the termination date and the first anniversary of the change in control.
Proprietary Rights and Information and Non-competition Agreements
Under proprietary rights and information agreements, each of Mr. Li and Mr. Sung has agreed,
among other things, to assign all rights in company-related inventions to us, and to keep our
proprietary information confidential. Under non-competition agreements, each of Mr. Li and Mr.
Sung is prohibited from directly or indirectly (i) being employed by or participate in the
management or operation of any business or entity that is or may be directly competitive with and
offering similar products or services as us, for a period of one year after termination of
employment for any reason, (ii) soliciting for employment any person who was employed by us during
his employment with us, for a period of two years after termination of employment for any reason or
(iii) working for any customer or potential customer of ours during his employment with us, for a
period of two years after termination of employment for any reason.
Option Grants in Last Fiscal Year
The following table sets forth information regarding stock options granted to our current
Chief Financial Officer, former Chief Executive Officer, former Chief Operating Officer (who is now
our Chief Executive Officer), former Chief Technology Officer, and former Chief Financial Officer
during 2005:
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Individual Grants
Ordinary
% of Total
Shares
Options
Potential Realizable Value at
Underlying
Granted to
Assumed Annual Rate of Stock
Options
Employees in
Exercise
Price Appreciation for Option
Name
Granted
Fiscal Year (1)
Price (2)
Date of Grant
Date of Expiration
Term (3)
5%
10%
Colin Sung
1,000,000
14.2
%
US$
0.676
May 2, 2005
May 2, 2015
US$
145,682
US$
313,732
Raymond Lei Yang
500,000
7.1
%
US$
1.038
December 31, 2005
December 31, 2015
US$
111,848
US$
240,868
Michael Guangxin Li
—
—
—
—
—
—
—
Xin Ye
—
—
—
—
—
—
—
Mark Begert
—
—
—
—
—
—
—
(1)
Based on a total of 7,022,900 options granted to our employees in 2005, including options
granted to the executive officers, but excluding all options which were granted and terminated
in that same year.
(2)
The exercise price per share of options granted represented the fair market value of the
underlying shares of ordinary shares on the date the options were granted.
(3)
The potential realizable value is calculated based upon the term of the option at its time of
grant. It is calculated assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the option, and that the
option is exercised and sold on the last day of its term for the appreciated stock price. The
appreciated stock prices used in these calculations do not represent our projections or
estimates of the price of our ordinary shares or ADSs. Tax consequences relating to stock
option transactions have not been taken into account.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth certain information with respect to stock options exercised by
the executive officers during 2005. In addition, the table sets forth the number of shares covered
by stock options as of December 31, 2005, and the value of "in-the-money" stock options, which
represents the difference between the exercise price of a stock option and the market price of the
shares subject to such option on December 31, 2005. The closing price of our ADSs as reported on
the Nasdaq National Market on December 30, 2005 was $10.38.
Number of Ordinary Shares
Ordinary
Underlying Unexercised
Value of Unexercised
Shares
Value
Options at
In-the-Money Options at
Acquired on
Realized
December 31, 2005 (#)
December 31, 2005 (US$)
Name
Exercise
(US$)(1)
Exercisable
Unexercisable
Exercisable
Unexercisable
Colin Sung
—
—
—
1,000,000
—
362,000
Raymond Lei Yang
1,500,000
1,008,000
7,228,842
661,458
7,054,616
—
Michael Guangxin Li
1,500,000
948,000
5,242,071
80,729
5,135,426
—
Xin Ye
—
—
660,417
639,583
173,750
159,850
Mark Begert
1,997,700
1,866,976
5,150,000
20,000
5,072,800
400
(1)
The value realized upon the exercise of stock options represents the positive spread between
the exercise price of stock options and the fair market of the shares subject to such options
on the exercise date.
Summary of Stock Plans
2003 Stock Incentive Plan
Our board of directors and shareholders adopted our 2003 Plan in November 2003. Under the 2003
Plan, we may grant awards (as defined below), including incentive stock options (also known as
ISOs) within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended, or
the Code, to qualifying plan participants who are located in the U.S. or who are U.S. taxpayers. As
of December 31, 2005, our board of directors had authorized the issuance of an aggregate of up to
24,364,724 of our ordinary shares under the 2003 Plan. A general description of the terms of the
2003 Plan is set forth below.
Types of Awards.
Awards that can be granted under the 2003 Plan consist of:
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•
our ordinary shares,
•
options to purchase our ordinary shares,
•
dividend equivalent rights, the value of which is measured by the
dividends paid with respect to our ordinary shares,
•
stock appreciation rights the value of which is measured by
appreciation in the value of our ordinary shares, and
•
any other securities the value of which is derived from the value of
our ordinary shares and which can be settled for cash, our ordinary shares or
other securities or a combination of cash, our ordinary shares or other
securities.
Plan Administration.
The compensation committee of our board, pursuant to delegated authority,
currently administers the 2003 Plan.
Eligibility.
Under the 2003 Plan, awards may be issued to employees, directors or consultants
of our company or our subsidiaries, although ISOs may only be issued to our employees or the
employees of our subsidiaries.
Acceleration of Awards upon Corporate Transactions or Changes in Control.
The 2003 Plan
provides for acceleration of awards upon the occurrence of specified corporate transactions or
changes in control. In the event of certain corporate transactions, including specified types of
reorganizations and acquisition transactions, each outstanding award granted under the 2003 Plan
will automatically become fully vested and exercisable and be released from any restrictions on
transfer (other than transfer restrictions applicable to the award) and repurchase or forfeiture
rights immediately prior to the specified effective date of the corporate transaction, unless the
award is assumed by the successor company or its parent company in connection with the corporate
transaction. Upon consummation of the corporate transaction, each outstanding award will be
terminated unless the award is assumed by the successor company or its parent company. Assumed
options automatically become fully vested and exercisable if the grantee is terminated by the
successor company without cause within 12 months of the corporate transaction.
In the event of a change in control of our company (other than a change in control which is
also a specified corporate transaction described in the paragraph above), and upon the termination
of the continuous service of a grantee without cause by us or our related parties (including our
subsidiaries or other entities in which we or our subsidiaries hold a substantial ownership
interest) within 12 months after such change in control, the grantee's awards will become fully
vested and exercisable and be released from any repurchase or forfeiture rights (other than
repurchase rights exercisable at fair market value).
Evergreen Provision.
The 2003 Plan includes a mechanism for an automatic annual increase in
the number of ordinary shares available under the plan equal to the lesser of 2.5% of the total
shares outstanding or 15,175,000 ordinary shares. This mechanism is known as an "evergreen
provision." Pursuant to the evergreen provision, as of January 2, 2006 the number of ordinary
shares available under the 2003 Plan was increased by 6,517,447 shares, resulting in a total of
30,882,171 shares authorized for issuance under the 2003 Plan.
Awards.
Awards under the 2003 Plan are evidenced by an award agreement which contains, among
other things, provisions concerning exercisability and forfeiture upon termination of employment or
consulting arrangement (by reason of death, disability, retirement or otherwise) as have been
determined by our board. In addition, in the case of stock options the award agreement also
specifies whether the option constitutes an ISO or a non-qualified stock option (also known as
NQSOs) and may,
but need not,
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include a provision whereby a grantee at any time during his or her employment with
us may exercise any part or all of the award prior to full vesting of the award.
Exercise Price and Term of Stock Options.
An option may be exercised when a holder delivers a
written notice of such exercise to us. The option price to exercise the option for our ordinary
shares must be paid at the time of exercise in full by cash, check or whole ordinary shares with a
fair market value at least equal to the option price (or in another appropriate manner approved by
us, such as in a combination of cash and whole ordinary shares or by cashless exercise of options
through a broker-dealer).
Under the 2003 Plan, the exercise price for the options is specified in the award agreement
for those options. In any event, the exercise price of ISOs cannot be less than the fair market
value of our ordinary shares on the date of grant. However, in the case of an ISO granted to a
grantee, who, at the time the ISO was granted, owned stock possessing more than 10.0% of the
combined voting power of all classes of our share capital, the option price may not be less than
110.0% of the fair market value of our ordinary shares on the date of grant of such ISO. To the
extent that the aggregate fair market value of our ordinary shares subject to options granted as
ISOs under the 2003 Plan which become exercisable for the first time by a recipient during any
calendar year exceeds $100,000, then options represented by ordinary shares in excess of the
$100,000 limitation shall be treated as NQSOs.
The exercise price for NQSOs is determined by the administrator of the 2003 Plan.
The term of all ISOs and NQSOs will be stated in the applicable award agreement. The term of
an ISO cannot exceed 10 years. In addition, the term of an ISO granted to a person, who, at the
time of grant, owns stock possessing more than 10.0% of the combined voting power of all classes of
our share capital, is limited to five years from the date of the grant of the award.
Our First Right of Refusal.
Holders of our ordinary shares issued upon the exercise of options
are obligated to first offer our company the right to purchase those ordinary shares before
selling, hypothecating, encumbering or otherwise transferring any of such ordinary shares. Our
first right of refusal will terminate upon the closing of this offering.
Termination of Service.
The period following the termination of a grantee's employment with us
during which the grantee can exercise his or her option, if any, will be provided in the award
agreement, and it cannot end later than the last day of the original term of the award. Any ISO
granted under the 2003 Plan, if not exercised within the time period provided by law for the
exercise of ISOs following the termination of a grantee's employment with us, shall automatically
convert to a NQSO thereafter.
Amendment or Termination of 2003 Plan.
Under the 2003 Plan, our board may at any time
terminate, suspend, or amend the 2003 Plan in any respect, except that no termination, suspension
or amendment will be effective without shareholder approval if such approval is required to comply
with any law, regulation or stock exchange rule and no such change may adversely affect any award
previously granted without the written consent of the recipient. The 2003 Plan will expire on the
tenth anniversary of the date that it was approved by the shareholders.
2000-1 Employee Stock Option Scheme
In November 2003, our board of directors approved the 2000-1 Scheme which governs all of our
stock option grants outstanding as of that date for an aggregate of 29,991,700 ordinary shares. It
is anticipated that all future stock incentive awards will be granted pursuant to the 2003 Plan or
any other plan which is adopted from time to time. The 2000-1 Scheme is substantially identical to
the 2003 Plan in all material aspects, except for the following:
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Awards.
Awards granted under the 2000-1 Scheme consist only of options for our ordinary
shares.
Evergreen Provision.
The 2000-1 Scheme does not contain an evergreen provision as described
above.
Exercise Price.
NQSOs granted pursuant to the 2000-1 Scheme can have an exercise price of no
less than 85% of the fair market value of our ordinary shares on the date of grant.
Acceleration of Awards upon Corporate Transactions or Changes in Control.
The 2000-1 Scheme's
provision for acceleration of the vesting of awards upon the occurrence of specific significant
corporate transactions does not depend on whether the options are assumed by the successor company
or its parent company. In addition, the vesting of awards will accelerate in the event of a change
in control of our company whether or not the grantee's continuous service is terminated without
cause by us or our related parties within 12 months after such change in control.
C. Board Practices
For information regarding the terms of our current directors and the period during which our
officers and directors have served in their respective positions, please refer to Item 6.A.
"Directors and Senior Management" above.
During 2005, our board of directors met in person or passed resolutions by unanimous written
consent 11 times. All of the directors who were serving in office during 2005 attended at least
75% of all the meetings of our board of directors and its committees on which such director served
after becoming a member of our board of directors. We have no specific policy with respect to
director attendance at our annual general meetings of shareholders, and one of our directors
attended the annual general meeting of shareholders held on September 7, 2005. Our board has
determined that a majority of our board of directors members, namely Messrs. Hubbs, Sulger, Wang,
Wu and Ms. La Roche, are "independent" as that term is defined in Rule 4200 of the listing
standards of the Marketplace Rules of the Nasdaq Stock Market, Inc. ("Nasdaq").
The Board has three committees: the audit committee, the compensation committee and the
nominating committee.
The audit committee held 14 formal meetings in 2004. The members of the audit committee are
Thomas Hubbs (Chairperson), Elaine La Roche and Derek Sulger. The audit committee is composed
solely of non-employee directors, as such term is defined in Rule 16b-3 under the Exchange Act and
our board of directors has determined that all members of the audit committee are "independent" as
that term is defined in Rule 4200(a)(15) of the Marketplace Rules of Nasdaq. The Board has further
determined that Mr. Hubbs is an "audit committee financial expert" as defined by Item 16A. of Form
20-F.
The board of directors has adopted a written audit committee charter pursuant to which the
audit committee is responsible for overseeing the accounting and financial reporting processes of
our company, including the appointment, compensation and oversight of the work of our independent
auditors, monitoring compliance with our accounting and financial policies and evaluating
management's procedures and policies relative to the adequacy of our internal accounting controls.
The compensation committee met in person or passed resolutions by unanimous written consent
eight times in 2005. The members of the compensation committee are Elaine La Roche (Chairperson),
David C. Wang and Thomas Hubbs. The compensation committee's functions are to review and make
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recommendations to our board regarding our compensation policies and all forms of compensation to
be provided to our executive officers and directors. In addition, the compensation committee
reviews bonus and stock compensation arrangements for all of our other employees.
No interlocking relationships have existed between our board of directors or compensation
committee and the board of directors or compensation committee of any other company.
The nominating committee held one meeting in 2005. The members of the nominating committee
are Jun Wu, Elaine La Roche and David C. Wang. The nominating committee's functions are to monitor
the size and composition of our board of directors and consider and make recommendations to our
board of directors with respect to the nomination or election of directors. The nominating
committee will consider and make recommendations to our board of directors regarding any
shareholder recommendations for candidates to serve on our board of directors. The nominating
committee will review periodically whether a more formal policy should be adopted. Shareholders
wishing to recommend candidates for consideration by the nominating committee may do so by writing
to the Vice President of Legal Affairs of Linktone Ltd. at 5/F, Eastern Tower, No. 689, Beijing
Dong Road, Shanghai, 200001, People's Republic of China, providing the candidate's name,
biographical data and qualifications, a document indicating the candidate's willingness to act if
elected, and evidence of the nominating shareholder's ownership of our company's ordinary shares or
ADSs at least 120 days prior to the next annual general meeting to assure time for meaningful
consideration by the nominating committee. There are no differences in the manner in which the
nominating committee evaluates nominees for director based on whether the nominee is recommended by
a shareholder. The company currently does not pay any third party to identify or assist in
identifying or evaluating potential nominees.
D. Employees
At December 31, 2003, 2004 and 2005, we had 234, 518 and 825 full-time employees,
respectively.
The following table summarizes the functional distribution of our full-time employees as of
December 31, 2003, 2004 and 2005:
As of December 31,
Department
2003
2004
2005
Business Development
4
9
14
Customer Research
5
8
6
Customer Service
16
52
84
Finance
7
11
22
Human Resources
3
7
13
Investor Relations
1
2
3
Legal and Administrative
7
16
27
Sales and Marketing
97
168
196
Product Development
64
123
312
Technical Support
30
122
148
Total
234
518
825
Our product development and other departments also included three part-time content editors
and seven service professionals as of December 31, 2005.
None of our personnel are represented under collective bargaining agreements. We consider our
relations with our employees to be good.
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E. Share Ownership
The following table sets forth certain information known to us with respect to the beneficial
ownership as of March 31, 2006 by:
•
all persons who are beneficial owners of five percent or more of our ordinary shares,
•
our current executive officers and directors, and
•
all current directors and executive officers as a group.
As of March 31, 2006, 257,241,700 of our ordinary shares were outstanding. The amounts and
percentages of ordinary shares beneficially owned are reported on the basis of regulations of the
SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC,
a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such security, or "investment
power," which includes the power to dispose of or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities of which that person has a right
to acquire beneficial ownership within 60 days. Under these rules, more than one person may be
deemed a beneficial owner of securities as to which such person has no economic interest. To our
company's knowledge and unless otherwise indicated in the footnotes that follow, the parties named
below have sole voting and dispositive powers over the shares beneficially owned by them.
Number of Ordinary Shares
Beneficially Owned
Name and Address of Beneficial Owners
Number
Percentage
5% or more shareholders
Merry Asia Limited (1)
33,865,549
13.2
%
FMR Corporation (2)
26,380,420
10.3
%
RS Investment Management, L.P. (3)
27,017,487
10.5
%
Munder Capital Management (4)
15,548,160
6.0
%
Executive Officers, Directors and Director Nominees (5)
Colin Sung (6)
250,000
*
Michael Guangxin Li
—
*
Mark Begert (7)
6,505,100
2.5
%
Elaine La Roche (8)
115,000
*
Thomas Hubbs (9)
140,000
*
David C. Wang (10)
170,000
*
Jun Wu (11)
34,205,549
13.3
%
Derek Sulger (12)
9,533,921
3.7
%
All current directors, director nominees and executive
officers as a group (8 persons) (13)
50,919,570
19.8
%
(1)
Merry Asia Limited is a British Virgin Islands company which is 100%
owned by one of our directors, Jun Wu. Its address is c/o Haw
Technology Ltd., 18A1 Han Wei Plaza, 7 Guang Hua Road, Chao Yang
District, Beijing, 100004, People's Republic of China.
(2)
Includes 14,555,740 ordinary shares held by Fidelity Management Trust
Company, 6,753,000 ordinary shares held by Fidelity New Millennium
Fund and 5,071,680 ordinary shares held by Fidelity International
Limited, which are affiliated with FMR Corporation. This information
is as of March 31,
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2006 and is based upon reports on Schedule 13F
filed by Fidelity Management Trust Company and Fidelity International
Limited with the Securities and Exchange Commission. We have no
further information regarding the beneficial ownership of FMR
Corporation. The address of FMR Corporation is 82 Devonshire Street,
Boston, MA 02109.
(3)
Includes 5,860,490 ordinary shares held by RS Emerging Growth Fund,
5,817,000 ordinary shares held by RS Diversified Growth Fund and
1,819,407 ordinary shares held by RS Internet Age Fund. RS Investment
Management, L.P. is the investment adviser for each of RS Emerging
Growth Fund, RS Diversified Growth Fund and RS Internet Age Fund.
This information is as of March 31, 2006 and is based upon a report on
Schedule 13F filed by RS Investment Management, L.P. with the
Securities and Exchange Commission. We have no further information
regarding the beneficial ownership of RS Investment Management, L.P.
The address of RS Investment Management, L.P. is 388 Market Street,
Suite 1700, San Francisco, CA 94111.
(4)
Includes 10,080,000 ordinary shares held by Comerica Bank, 2,890,000
ordinary shares held by Munder Internet Fund, 1,462,156 ordinary
shares held by Munder Micro-Cap Equity Fund and 1,116,004 ordinary
shares held by Aegon/Transamerica Series Trust-Munder Net50. Munder
Capital Management, which is majority owned by Comerica, Inc., is the
investment adviser for Munder Internet Fund and Munder Micro-Cap
Equity Fund and an investment sub-adviser for Aegon/Transamerica
Series Trust-Munder Net50. This information is as of March 31, 2006
and is based upon a report on Schedule 13F filed by Munder Capital
Management with the Securities and Exchange Commission. We have no
further information regarding the beneficial ownership of Munder
Capital Management. Munder Capital Management's address is 480 Pierce
Street, Birmingham, MI 48009.
(5)
The address of our current executive officers and directors is c/o
Linktone Ltd., 5/F, Eastern Tower, No. 689 Beijing Dong Road,
Shanghai, 200001, People's Republic of China.
(6)
Includes stock options to acquire an aggregate of 250,000 ordinary
shares, which are exercisable within 60 days of March 31, 2006, with
an exercise price of $0.676 per share and an expiration date of May 2,
2015.
(7)
Includes 5,305,200 ordinary shares held by Mr. Begert and 499,900
ordinary shares held by Mudhouse Trust of which Mr. Begert and his
spouse, Leslie Omana Begert, are the sole grantors and grantees. Also
includes stock options to acquire an aggregate of 700,000 ordinary
shares, which are exercisable within 60 days of March 31, 2006, with
an exercise price of $0.072 per ordinary share and an expiration date
of March 1, 2011.
(8)
Includes 15,000 ordinary shares held by Ms. La Roche.
Also includes stock options to acquire an aggregate of
100,000 ordinary shares which are exercisable within
60 days of March 31, 2006. The options have the
following features: (i) 33,333 of the options have an
exercise price of $1.40 per ordinary share and an
expiration date of March 3, 2014 and (ii) 66,667 of
the options have an exercise price of $1.018 per
ordinary share and an expiration date of December 1,
2015.
(9)
Includes 40,000 ordinary shares held by the Hubbs
Family Trust, a revocable family trust, of which Mr.
Hubbs and his spouse, Helen K. Hubbs, are the
trustees. Also includes stock options to acquire an
aggregate of 100,000 ordinary shares which are
exercisable within 60 days of March 31, 2006. The
options have the following features: (i) 33,333 of the
options have an exercise price of $1.40 per ordinary
share and an expiration date of March 3, 2014; and
(ii) 66,667 of the options have an exercise price of
$1.018 per ordinary share and an expiration date of
December 1, 2015.
(10)
Includes 70,000 ordinary shares held by David Wang &
Darlene Wang TTE, Revocable Living Trust. Also
includes stock options to acquire an aggregate of
100,000 ordinary shares which are exercisable within
60 days of March 31, 2006. The options have the
following features: (i) 33,333 of the options have an
exercise price of $1.40 per ordinary share and an
expiration date of March 3, 2014; and (ii) 66,667 of
the options have an exercise price of $1.018 per
ordinary share and an expiration date of December 1,
2015.
(11)
Includes 33,865,549 ordinary shares held by Merry Asia
Limited which is 100% owned by Mr. Wu. Also includes
stock options held by Mr. Wu to acquire an aggregate
of 340,000 ordinary shares which
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are exercisable
within 60 days of March 31, 2006. The options have
the following features: (i) 90,000 of the options have
an exercise price of $0.0985 per ordinary share and an
expiration date of June 1, 2010; and (ii) 250,000 of
the options have an exercise price of $0.0985 per
ordinary share and an expiration date of June 1, 2011.
(12)
Includes 50,000 ordinary shares held by Mr. Sulger.
Also includes 68,510 ordinary shares held by Lunar
Group Stokenchurch Partners I LLC ("Lunar
Stokenchurch"), a Delaware limited liability company,
of which Sulger Foundation (USA) Trust ("Sulger
Foundation"), a Delaware trust established by Mr.
Sulger for the benefit of his family, holds a 0.10%
ownership interest therein and Sulger Trust ("Sulger
Trust"), a Delaware trust established by Michelle
Leung Sulger, Mr. Sulger's wife, for the benefit of
her family, holds a 99.90% ownership interest therein.
Also includes 9,075,411 ordinary shares held by
Cassia Finance Investment Incorporated ("Cassia"), a
company incorporated under the laws of the British
Virgin Islands, of which Sulger Trust holds 100%
ownership interest therein. As investment advisor of
Lunar Stokenchurch and Cassia, Mr. Sulger may, for
purposes of Rule 13d-3 under the Securities Exchange
Act of 1934, as amended, be deemed to own beneficially
the ordinary shares held by Lunar Stokenchurch and
Cassia due to his voting and dispositive power over
the shares. Mr. Sulger disclaims beneficial ownership
of shares held by Michelle Leung Sulger, Cassia and
Lunar Stokenchurch, except to the extent of his
pecuniary interest therein. Also includes stock
options held by Mrs. Sulger to acquire an aggregate of
340,000 ordinary shares which are exercisable within
60 days of March 31, 2006. The options have the
following features: (i) 90,000 of the options have an
exercise price of $0.0985 per ordinary share and an
expiration date of June 1, 2010 and (ii) 250,000 of
the options have an exercise price of $0.0985 per
ordinary share and an expiration date of June 1, 2011.
(13)
This amount also includes 1,930,000 ordinary shares
subject to stock options currently exercisable or
exercisable within 60 days of March 31, 2006 and
33,865,549 ordinary shares held by Merry Asia Limited.
As of March 31, 2006, based on public filings with the SEC, there are no major shareholders
holding 5% or more of our ordinary shares or ADSs representing ordinary shares, except as described
above.
As of April 18, 2006, approximately 912,294 of our ordinary shares were held by 20 U.S.
holders of record, excluding shares held by our ADS depositary bank, The Bank of New York, on
behalf of our ADS holders. On that date, approximately 7,262,993 ADSs outstanding were held by
approximately 3,442 U.S. holders of record.
Our company's major shareholders do not have different voting rights from each other or other
shareholders of our company.
To our knowledge, except as disclosed above, we are not owned or controlled, directly or
indirectly, by another corporation, by any foreign government or by any other natural or legal
person or persons, severally or jointly.
To our knowledge, there are no arrangements the operation of which may at a subsequent date
result in us undergoing a change in control.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
Please refer to Item 6.E. "Directors, Senior Management and Employees — Share Ownership."
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B. Related Party Transactions
See Item 4.A. of this annual report under the headings "History and Development of the
Company" and "Recent Developments" and Item 5 of this annual report under the headings "Our
Corporate Structure" and "Arrangements with Consolidated Affiliates" for information regarding our
corporate structure and our arrangements with our consolidated affiliates.
Our primary internal source of funds is dividend payments from Linktone Consulting, Shanghai
Huitong, Linktone Internet, Linktone Software, Brilliant and Wang You. Under current Chinese tax
regulations, dividends paid to us from Chinese entities are not subject to Chinese income or
withholding tax. However, Chinese legal restrictions permit payment of dividends only out of net
income as determined in accordance with Chinese accounting standards and regulations. Under
Chinese law, Linktone Consulting, Shanghai Huitong, Linktone Internet, Linktone Software and Wang
You are also required to set aside a portion of their net income each year to fund certain reserve
funds. These reserves are not distributable as cash dividends. Dividends paid to us by Brilliant,
which was incorporated in the British Virgin Islands, are not subject to tax.
Other Related Party Transactions
In January 2005, we entered into a cooperation agreement with Mitsubishi whereby we license
mobile entertainment content from Mitsubishi for distribution in the Chinese market. We pay
royalties equal to 45.0% of the net revenue generated from the sales of the entertainment content.
This agreement has a term of one year and is automatically renewable year to year unless otherwise
terminated by either party.
In addition, we have entered into a shareholders' agreement with Mitsubishi, Icon Ventures
Asia Limited, IP Fund One, L.P., Index Corp. and Cresciendo Investments Limited pursuant to which
such shareholders may require us at any time, subject to certain limitations, to register for
public sale all or any portion of our ordinary shares held by such shareholders so long as the
aggregate offering price of the registered securities is expected to be at least $10.0 million. In
addition, such shareholders are entitled to require us to register their ordinary shares when we
register shares to be newly issued by us or to be sold by other shareholders.
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 18. "Financial Statements" for our audited consolidated financial statements filed as
part of this annual report.
A.7 Legal Proceedings
We are not currently a party to any material litigation and are not aware of any pending or
threatened litigation.
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A.8 Dividend Policy
We have never declared or paid any cash dividends on our ordinary shares, but it is possible
that we may declare dividends in the future. We have historically retained earnings to finance
operations and the expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our financial condition,
operating results, capital requirements and such other factors as our board of directors deems
relevant.
B. Significant Changes
See Item 4.A. of this annual report under the heading "Recent Developments" and Item 18. of
this annual report under the heading "Financial Statements" for information regarding significant
changes to us since December 31, 2005.
Item 9. The Offer and Listing
Not applicable except for Item 9.A.4. and Item 9.C.
American Depositary Shares, or ADSs, each representing 10 of our ordinary shares, have been
listed on the Nasdaq National Market since March 4, 2004. Our ADSs trade under the symbol "LTON."
The following table provides the high and low prices for our ADSs on the Nasdaq National
Market for (1) each year since our initial public offering, (2) each quarter in the two most recent
financial years and the most recent quarter and (3) each of the most recent six months.
Sales Price
High
Low
Annual highs and lows
2004 (March 4, 2004 through December 31, 2004)
$
19.50
$
5.91
2005 (January 1, 2005 through December 31, 2005)
$
11.57
$
6.00
Quarterly highs and lows
First Quarter 2004
$
19.50
$
9.69
Second Quarter 2004
$
15.24
$
7.37
Third Quarter 2004
$
12.13
$
5.91
Fourth Quarter 2004
$
10.60
$
7.01
First Quarter 2005
$
8.53
$
6.72
Second Quarter 2005
$
8.95
$
6.00
Third Quarter 2005
$
11.28
$
7.65
Fourth Quarter 2005
$
11.57
$
8.75
First Quarter 2006
$
10.92
$
6.47
Monthly highs and lows
December 2005
$
10.80
$
9.45
January 2006
$
10.92
$
8.36
February 2006
$
7.82
$
6.68
March 2006
$
7.69
$
6.47
April 2006
$
8.13
$
6.80
May 2006
$
8.44
$
6.75
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Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Please see "Description of Share Capital" in our registration statement on Form F-1 filed on
February 17, 2004, as amended, with the SEC.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business
and other than those described in Item 4. "Information on the Company" or elsewhere in this annual
report on Form 20-F.
D. Exchange Controls
China's government imposes control over the convertibility of Renminbi into foreign
currencies. Under the current unified floating exchange rate system, the People's Bank of China
publishes a daily exchange rate for Renminbi, or the PBOC Exchange Rate, based on the previous
day's dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal
in foreign currency may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC Exchange Rate according to market conditions.
Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January
29, 1996 and effective as of April 1, 1996 (and amended on January 14, 1997) and the Administration
of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1,
1996 regarding foreign exchange control, or the Regulations, conversion of Renminbi into foreign
exchange by foreign investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors of joint ventures, is permissible. Foreign investment
enterprises are permitted to remit foreign exchange from their foreign exchange bank account in
China on the basis of, inter alia, the terms of the relevant joint venture contracts and the board
resolutions declaring the distribution of the dividend and payment of profits. Conversion of
Renminbi into foreign currencies and remittance of foreign currencies for capital account items,
including direct investment, loans and security investment, is still subject to the approval of
SAFE, in each such transaction. On January 14, 1997, the State Council amended the Foreign Exchange
Control Regulations to provide, among other things, that the State shall not impose restrictions on
recurring international payments and transfers.
Under the Regulations, foreign investment enterprises are required to open and maintain
separate foreign exchange accounts for capital account items (but not for other items). In
addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies at
those banks authorized to conduct foreign exchange business upon the production of valid commercial
documents and, in the case of capital account item transactions, document approval from SAFE.
Currently, foreign investment enterprises are required to apply to SAFE for "foreign exchange
registration certificates for foreign investment enterprises." With such foreign exchange
registration
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certificates (which are granted to foreign investment enterprises upon fulfilling
specified conditions and which are subject to review and renewal by SAFE on an annual basis) or
with the foreign exchange sales
notices from the SAFE (which are obtained on a transaction-by-transaction basis),
foreign-invested enterprises may enter into foreign exchange transactions at banks authorized to
conduct foreign exchange business to obtain foreign exchange for their needs.
In addition, pursuant to regulations recently promulgated by SAFE, PRC subsidiaries of
offshore parent companies may be prohibited from making distributions of profits to such offshore
parent companies and from paying the offshore parent companies proceeds from any reduction in
capital, share transfer or liquidation in respect of such PRC subsidiaries, if PRC shareholders
with a direct or indirect stake in the offshore parent company fail to make the required SAFE
registrations.
These new regulations require PRC residents to file with the competent SAFE offices
information about offshore companies in which they have directly or indirectly invested (including
with respect to investments already made as of the inception of the new regulation) and to make
follow-up filings in connection with certain material transaction involving such offshore
companies, such as mergers or acquisitions, capital increases or decreases, and external equity
investments or equity transfers. For additional information on the new SAFE regulations and the
related risks to our company, see Item 3.D. "Risk Factors — Risks Related to Doing Business in
China — Recent Chinese regulations relating to acquisitions of Chinese companies by foreign
entities may limit our ability to acquire Chinese companies and adversely affect the implementation
of our acquisition strategy as well as our business and prospects."
E. Taxation
The following summary of the material Cayman Islands and United States federal income tax
consequences relevant to the purchase, ownership or sale of our ADSs is based upon laws and
relevant interpretations thereof in effect as of the date of this annual report, all of which are
subject to change. The summary does not purport to be a comprehensive description of all of the
tax considerations that may be relevant to any particular investor depending on its individual
circumstances. Accordingly beneficial owners of shares should consult their own tax advisors
regarding the application of the considerations discussed below to their particular situations and
the consequences, including U.S. federal estate or gift tax laws, foreign, state, or local laws,
and tax treaties.
Cayman Islands Taxation
The Cayman Islands currently levy no taxes on individuals or corporations based upon profits,
income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate
duty. There are no other taxes likely to be material to Linktone levied by the Government of the
Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands are not party
to any double tax treaties. There are no exchange control regulations or currency restrictions in
the Cayman Islands.
United States Federal Income Taxation
The following is a summary of material United States federal income tax consequences under
present law relating to the purchase, ownership, and disposition of the ordinary shares or ADSs.
This description does not provide a complete analysis of all potential tax consequences. The
information provided below is based on the Internal Revenue Code of 1986, as amended, or the Code,
Treasury Regulations, proposed Treasury Regulations, Internal Revenue Service, or the IRS,
published rulings and court decisions, all as of the date hereof. These authorities may change,
possibly on a retroactive basis, or the IRS might interpret the existing authorities differently.
In either case, the tax consequences of
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purchasing, owning or disposing of ordinary shares or ADSs
could differ from those described below. We
do not intend to obtain a ruling from the IRS with respect to the tax consequences of acquiring or
holding the ordinary shares or ADSs.
This description is general in nature and does not discuss all aspects of U.S. federal income
taxation that may be relevant to a particular investor in light of the investor's particular
circumstances, or to certain types of investors subject to special treatment under U.S. federal
income tax laws, such as:
•
banks or financial institutions,
•
life insurance companies,
•
tax-exempt organizations,
•
dealers in securities or foreign currencies,
•
traders in securities that elect to apply a mark-to-market method of accounting,
•
persons holding ordinary shares or ADSs as part of a position in a "straddle"
or as part of a "hedging," "conversion" or "integrated" transaction for U.S.
federal income tax purposes,
•
persons subject to the alternative minimum tax provisions of the Code, and
•
persons that have a "functional currency" other than the U.S. dollar.
This description generally applies to purchasers of the ordinary shares or ADSs as capital
assets. This description does not consider the effect of any foreign, state, local or other tax
laws that may be applicable to particular investors.
Investors considering the purchase of ADSs should consult their own tax advisors regarding the
application of the U.S. federal income tax laws to their particular situations and the consequences
of U.S. federal estate or gift tax laws, foreign, state, or local laws, and tax treaties.
U.S. Holders
As used herein, the term "U.S. Holder" means a beneficial owner of ordinary shares or ADSs
that is:
•
a citizen or resident of the U.S. or someone treated as a U.S. citizen or resident for U.S. federal
income tax purposes;
•
a corporation or other entity taxable as a corporation for U.S. federal income tax purposes
organized in or under the laws of the U.S. or any political subdivision thereof;
•
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
•
a trust, if such trust validly elects to be treated as a U.S. person for U.S. federal income tax
purposes, or if (a) a court within the U.S. can exercise primary supervision over its administration
and (b) one or more U.S. persons have the authority to control all of the substantial decisions of
such trust.
If a partnership (including for this purpose any entity treated as a partnership for U.S. tax
purposes) is a beneficial owner of the ordinary shares or ADSs, the U.S. tax treatment of a partner
in the partnership will generally depend on the status of the partner and the activities of the
partnership. A holder of the ordinary shares or ADSs that is a partnership and partners in such
partnership should consult their individual tax advisors about the U.S. federal income tax
consequences of holding and disposing of the ordinary shares or ADSs.
For U.S. federal income tax purposes, U.S. Holders of ADSs will be treated as owners of the
underlying shares represented by such ADSs.
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If you are not a U.S. Holder, this subsection does not apply to you and you should refer to
"Non-U.S. Holders" below.
Taxation of Dividends and Other Distributions on Ordinary Shares or ADSs
Subject to the passive foreign investment company rules discussed below, all distributions to
a U.S. Holder with respect to the ordinary shares or ADSs, other than certain pro rata
distributions of our shares, will be includible in a U.S. Holder's gross income as ordinary
dividend income when received, but only to the extent that the distribution is paid out of our
current or accumulated earnings and profits. For this purpose, earnings and profits will be
computed under U.S. federal income tax principles. The dividends will not be eligible for the
dividends-received deduction allowed to corporations. To the extent that the amount of the
distribution exceeds our current and accumulated earnings and profits, it will be treated first as
a tax-free return of your tax basis in the ordinary shares or ADSs, and to the extent the amount of
the distribution exceeds the U.S. Holder's tax basis, the excess will be taxed as capital gain. Any
gain recognized by a non-corporate U.S. Holder on the sale or exchange of ordinary shares or ADSs
generally will be subject to a maximum tax rate of 15%, which maximum tax rate will increase under
current law to 20% for dispositions occurring during taxable years beginning on or after January 1,
2009.
Dividends paid in Renminbi will be included in your income as a U.S. dollar amount based on
the exchange rate in effect on the date that the U.S. Holder receives the dividend, regardless of
whether the payment is in fact converted into U.S. dollars. If the U.S. Holder does not receive
U.S. dollars on the date the dividend is distributed, the U.S. Holder will be required to include
either gain or loss in income when the U.S. Holder later exchanges the Renminbi for U.S. dollars.
The gain or loss will be equal to the difference between the U.S. dollar value of the amount that
the U.S. Holder includes in income when the dividend is received and the amount that the U.S.
Holder receives on the exchange of the Renminbi for U.S. dollars. The gain or loss generally will
be ordinary income or loss from United States sources. If we distribute as a dividend non-cash
property, the U.S. Holder will generally include in income an amount equal to the U.S. dollar
equivalent of the fair market value of the property on the date that it is distributed.
Dividends will constitute foreign source income for foreign tax credit limitation purposes.
The limitation on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by us with respect to the
ordinary shares or ADSs will be "passive income" or, in the case of certain U.S. Holders,
"financial services income." In particular circumstances, a U.S. Holder that:
•
has held the ordinary shares or ADSs for less than a specified minimum
period during which it is not protected from risk of loss,
•
is obligated to make payments related to the dividends, or
•
holds the ordinary shares or ADSs in arrangements in which the U.S.
Holder's expected economic profit, after non-U.S. taxes, is
insubstantial will not be allowed a foreign tax credit for foreign
taxes imposed on dividends paid on the ordinary shares or ADSs.
Distributions to a U.S. Holder of shares or rights to subscribe for shares that are received
as part of a pro rata distribution to all our shareholders should not be subject to U.S. federal
income tax. The basis of the new shares or rights so received will be determined by allocating the
U.S. Holder's tax basis in the ordinary shares between the ordinary shares and the new shares or
rights received, based on their relative fair market values on the date of distribution. However,
the basis of the new shares or rights will be zero if (i) the fair market value of the new shares
or rights is less than 15.0% of the fair market value of the old ordinary shares at the time of
distribution and (ii) the U.S. Holder does not make an election to determine the basis of the new
shares by allocation as described above. The U.S. Holder's holding period
in the new
shares or rights will generally include the holding period of the old ordinary shares on
which the distribution was made.
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Taxation of Disposition of Ordinary Shares or ADSs
Subject to the passive foreign investment company rules discussed below, a U.S. Holder will
recognize taxable gain or loss on any sale or exchange of ordinary shares or ADSs equal to the
difference between the amount realized (in U.S. dollars) for the ordinary shares or ADSs and the
U.S. Holder's tax basis (in U.S. dollars) in the ordinary shares or ADSs. The gain or loss will be
capital gain or loss. Any gain or loss that you recognize will generally be treated as United
States source income or loss, except that losses will be treated as foreign source losses to the
extent you received dividends that were includible in the financial services income basket during
the 24-month period prior to the sale. If the units are not stock in a passive foreign investment
company with respect to a U.S. Holder in either the taxable year of the distribution or the
preceding taxable year, the distribution otherwise constitutes qualified dividend income for United
States federal income tax purposes, certain holding period and other requirements are met, and the
distribution is received in a taxable year beginning prior to January 1, 2009, the distribution
will be taxable to a non-corporate U.S. Holder at a maximum rate of 15%.
Passive Foreign Investment Company
We believe that we are not a passive foreign investment company for U.S. federal income tax
purposes, but we cannot be certain whether we will be treated as a passive foreign investment
company for any future taxable year. If we are a passive foreign investment company in any year in
which a U.S. Holder holds ordinary shares or ADSs, the U.S. Holder generally will be subject to
increased U.S. tax liabilities and reporting requirements on receipt of certain dividends or on a
disposition of ordinary shares or ADSs, in that year and all subsequent years although a
shareholder election to terminate such deemed passive foreign investment company status may be made
in certain circumstances. U.S. Holders should consult their own tax advisors regarding our status
as a passive foreign investment company, the consequences of an investment in a passive foreign
investment company, and the consequences of making a shareholder election to terminate deemed
passive foreign investment company status if we no longer meet the income or asset test for passive
foreign investment company status in a subsequent taxable year.
A company is considered a passive foreign investment company for any taxable year if either
•
at least 75.0% of its gross income is passive income, or
•
at least 50.0% of the value of its assets (based on an average of the
quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive
income.
We will be treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own, directly or indirectly,
more than 25.0% (by value) of the stock of such corporation.
Our belief that we are not a passive foreign investment company is based on our estimate of
the fair market value of our intangible assets, including goodwill, not reflected in our financial
statements under U.S. GAAP. In the future, in calculating the value of these intangible assets, we
will value our total assets, in part, based on our total market value determined using the average
of the quarterly selling prices of the ADSs for the relevant year. We believe this valuation
approach is reasonable. However, it is possible that the IRS will challenge the valuation of our
intangible assets, which may result in our classification as a passive foreign investment company.
In addition, if our actual acquisitions and capital
expenditures do
not match our projections, the likelihood that we are or will be classified as a
passive foreign investment company may also increase.
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A separate determination must be made each year as to whether we are a passive foreign
investment company. As a result, our passive foreign investment company status may change.
If we are a passive foreign investment company for any taxable year during which a U.S. Holder
holds ordinary shares or ADSs, the U.S. Holder will be subject to special tax rules with respect
to:
•
any "excess distribution" that the U.S. Holder receives on ordinary shares or ADSs and
•
any gain the U.S. Holder realizes from a sale or other disposition (including a
pledge) of the ordinary shares or ADSs, unless the U.S. Holder makes a
"mark-to-market" election as discussed below.
Distributions the U.S. Holder receives in a taxable year that are greater than 125% of the
average annual distributions the U.S. Holder received during the shorter of the three preceding
taxable years or the U.S. Holder's holding period for the ordinary shares will be treated as an
excess distribution. Under these special tax rules:
•
the excess distribution or gain will be allocated ratably over your
holding period for the ordinary shares or ADSs,
•
the amount allocated to the current taxable year, and any taxable year
prior to the first taxable year in which we were a passive foreign
investment company, 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.
The tax liability for amounts allocated to years prior to the year of disposition or "excess
distribution" cannot be offset by any net operating losses, and gains (but not losses) realized on
the sale of the ordinary shares or ADSs cannot be treated as capital, even if the U.S. Holder holds
the ordinary shares or ADSs as capital assets.
A U.S. shareholder of a passive foreign investment company may avoid taxation under the excess
distribution rules discussed above by making a "qualified electing fund" election to include the
U.S. Holder's share of our income on a current basis. However, a U.S. Holder may make a qualified
electing fund election only if the passive foreign investment company agrees to furnish the
shareholder annually with certain tax information, and we do not presently intend to prepare or
provide such information.
Alternatively, a U.S. Holder of "marketable stock" in a passive foreign investment company may
make a mark-to-market election for stock of a passive foreign investment company to elect out of
the excess distribution rules discussed above. If a U.S. Holder makes a mark-to-market election for
the ordinary shares or ADSs, the U.S. Holder will include in income each year an amount equal to
the excess, if any, of the fair market value of the ordinary shares or ADSs as of the close of your
taxable year over the U.S. Holder's adjusted basis in such ordinary shares or ADSs. A U.S. Holder
is allowed a deduction for the excess, if any, of the adjusted basis of the ordinary shares or ADSs
over their fair market value as of the close of the taxable year only to the extent of any net
mark-to-market gains on the ordinary shares or ADSs included in the U.S. Holder's income for prior
taxable years. Amounts included in a U.S. Holder's income under a mark-to-market election, as well
as gain on the actual sale or other disposition of the ordinary shares or ADSs, are treated as
ordinary income. Ordinary loss treatment also applies to the deductible portion of any
mark-to-market loss on the ordinary shares or ADSs, as well as to any loss realized on the actual
sale or disposition of the ordinary shares or ADSs, to the extent that the
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amount of such loss does not exceed the net mark-to-market gains previously included for such
ordinary shares ADSs. A U.S. Holder's basis in the ordinary shares or ADSs will be adjusted to
reflect any such income or loss amounts. The tax rules that apply to distributions by corporations
which are not passive foreign investment companies would apply to distributions by us.
The mark-to-market election is available only for stock which is regularly traded on a
national securities exchange that is registered with the Securities and Exchange Commission or on
Nasdaq, or an exchange or market that the U.S. Secretary of the Treasury determines has rules
sufficient to ensure that the market price represents a legitimate and sound fair market value. The
mark-to-market election would be available to a U.S. Holder unless our ordinary shares or ADSs are
delisted from The Nasdaq National Market and do not subsequently become regularly traded on The
Nasdaq SmallCap Market or other qualified exchange or market.
A U.S. Holder who holds our ordinary shares or ADSs in any year in which we are a passive
foreign investment company would be required to file IRS Form 8621 regarding distributions received
on our ordinary shares and any gain realized on the disposition of our ordinary shares.
Non-U.S. Holders
A Non-U.S. Holder generally will not be subject to U.S. federal income tax on dividends paid
by us with respect to our ordinary shares or ADSs unless the income is effectively connected with
the Non-U.S. Holder's conduct of a trade or business in the United States.
A Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain
attributable to a sale or other disposition of our ordinary shares or ADSs unless such gain is
effectively connected with the Non-U.S. Holder's conduct of a trade or business within the United
States or the Non-U.S. Holder is a natural person who is present in the United States for 183 days
or more and certain other conditions exist.
Dividends and gains that are effectively connected with a Non-U.S. Holder's conduct of a trade
or business in the United States generally will be subject to tax in the same manner as they would
be if the Non-U.S. Holder were a U.S. Holder, except that the passive foreign investment company
rules will not apply. Effectively connected dividends and gains received by a corporate Non-U.S.
Holder may also be subject to an additional branch profits tax at a 30.0% rate or a lower tax
treaty rate.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends in respect of our
ordinary shares or ADSs or the proceeds received on the sale, exchange or redemption of our
ordinary shares or ADSs paid within the United States (and, in certain cases, outside the United
States) to U.S. Holders other than certain exempt recipients, such as corporations, and backup
withholding tax may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer
identification number or to report interest and dividends required to be shown on its U.S. federal
income tax returns. The amount of any backup withholding from a payment to a U.S. Holder will be
allowed as credit against the U.S. Holder's U.S. federal income tax liability provided that the
appropriate returns are filed.
A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup
withholding by providing certification of its foreign status to the payor, under penalties of
perjury, on IRS Form W-8BEN.
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Enforcement of Civil Liabilities
We are incorporated in the Cayman Islands because of the following benefits found there:
•
political and economic stability;
•
an effective judicial system;
•
a favorable tax system;
•
the absence of exchange control or currency restrictions; and
•
the availability of professional and support services.
However, certain disadvantages accompany incorporation in the Cayman Islands. These
disadvantages include:
(1) the Cayman Islands has a less developed body of securities laws as compared to the
United States and provides significantly less protection to investors; and
(2) Cayman Islands companies may not have standing to sue before the federal courts of
the United States.
Our constituent documents do not contain provisions requiring that disputes, including those
arising under the securities laws of the United States, between us, our officers, directors and
shareholders be arbitrated.
A substantial portion of our current operations is conducted in China through our wholly-owned
subsidiaries which are incorporated in China or the British Virgin Islands. All or most of our
assets are located in China. We have appointed CT Corporation System, 111 Eighth Avenue, New York,
NY 10011, as our agent upon whom process may be served in any action brought against us under the
securities laws of the United States. A majority of our directors and officers are nationals or
residents of jurisdictions other than the United States and a substantial portion of their assets
are located outside the United States. As a result, it may be difficult for a shareholder to
effect service of process within the United States upon these persons, or to enforce against us or
them judgments obtained in United States courts, including judgments predicated upon the civil
liability provisions of the securities laws of the United States or any state in the United States.
Maples and Calder, our counsel as to Cayman Islands law, and Fangda Partners, our counsel as
to Chinese law, have advised us that there is uncertainty as to whether the courts of the Cayman
Islands or China would:
(1) recognize or enforce judgments of United States courts obtained against us or our
directors or officers predicated upon the civil liability provisions of the securities laws
of the United States or any state in the United States; or
(2) entertain original actions brought in the Cayman Islands or China against us or our
directors or officers predicated upon the securities laws of the United States or any state
in the United States.
Maples and Calder has further advised us that a final and conclusive judgment in the federal
or state courts of the United States under which a sum of money is payable, other than a sum
payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement
proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of
obligation.
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Fangda Partners has advised us further that the recognition and enforcement of foreign
judgments are provided for under Chinese Civil Procedures Law. Chinese courts may recognize and
enforce foreign judgments in accordance with the requirements of Chinese Civil Procedures Law based
either on treaties between China and the country where the judgment is made or on reciprocity
between jurisdictions.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have previously filed with the Commission our registration statement on Form F-1 and
prospectus under the Securities Act of 1933, as amended, with respect to our ADSs.
We are subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the Securities and Exchange Commission.
Specifically, we are required to file annually a Form 20-F no later than six months after the close
of each fiscal year, which is December 31. Copies of reports and other information, when so filed,
may be inspected without charge and may be obtained at prescribed rates at the public reference
facilities maintained by the Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents upon payment
of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The SEC also maintains a Web site at
www.sec.gov
that contains reports, proxy and information statements, and other information
regarding registrants that make electronic filings with the SEC using its EDGAR system. As a
foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the
furnishing and content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.
Our financial statements have been prepared in accordance with U.S. GAAP.
We will furnish our shareholders with annual reports, which will include a review of
operations and annual audited consolidated financial statements prepared in conformity with U.S.
GAAP.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Please refer to Item 5. "Operating and Financial Review and Prospects — Quantitative and
Qualitative Disclosures About Market Risk."
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Item 12. Description of Securities Other than Equity Securities
Not Applicable.
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
Use of Proceeds
The following "Use of Proceeds" information relates to the registration statement on Form F-1
(File No. 333-112903) (the "Registration Statement") for our initial public offering of 6,140,000
American Depositary Shares, each representing 10 of our ordinary shares, which were sold by us and
certain selling shareholders for an aggregate offering price of $85.96 million. Our Registration
Statement was declared effective by the SEC on March 3, 2004.
We received net proceeds of approximately $67.05 million from our initial public offering
(taking into account underwriting discounts of approximately $6.02 million, but not taking into
account transaction expenses of approximately $1.43 million). None of the transaction expenses
included payments to directors or officers of our company or their associates, persons owning 10%
or more of our equity securities or our affiliates.
We have used the net proceeds from our initial public offering to satisfy past indebtedness,
reduce our accounts payable and to fund expenses primarily for marketing, employee compensation,
next generation service research and development, software and technology infrastructure products
and other capital expenditures. None of the net proceeds from the initial public offering were
paid, directly or indirectly, to any of our directors or officers of our company or their
associates, persons owning 10% or more of our equity securities or our affiliates.
Credit Suisse First Boston, JP Morgan, Piper Jaffray and CLSA Asia Pacific Markets were the
underwriters for our initial public offering.
Item 15. Controls and Procedures
Disclosure Controls and Procedures
As disclosed under Item 5. "Operating and Financial Review and Prospects," we have restated
our consolidated financial statements for the years ended December 31, 2004.
As of the end of the period covered by this report, our principal executive officer and
principal financial officer have performed an evaluation of the effectiveness of our disclosure
controls and procedures within the meaning of Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
Based upon that evaluation, they have concluded that as of December 31, 2005, our disclosure
controls and procedures were not effective due to certain material weaknesses as
described more fully below. The material weaknesses related to (1) management's inadequate
knowledge and experience in
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application of U.S. GAAP, commensurate with our financial reporting requirements, which had led to
the restatement of our financial statements for year ended December 31, 2004, and (2) lack of
policy and procedures over data security/access, data backup, system change and spreadsheet
control.
Changes in Internal Control Over Financial Reporting
We are aware of the importance of maintaining controls and procedures and are working towards
improving our controls and procedures. Beginning with the fiscal year ending December 31, 2006,
Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require us to include an
internal control report of management with our annual report on Form 20-F. The internal control
report must contain (1) a statement of management's responsibility for establishing and maintaining
adequate internal control over financial reporting, (2) a statement identifying the framework used
by management to conduct the required evaluation of the effectiveness of our internal control over
financial reporting, (3) management's assessment of the effectiveness of our internal control over
financial reporting as of the end of our most recent fiscal year, including a statement as to
whether or not our internal control over financial reporting is effective and (4) a statement that
our independent auditors have issued an attestation report on management's assessment of our
internal control over financial reporting.
In connection with the required Section 404 evaluation described above, we have been
performing the system and process evaluation and testing required (and any necessary remediation)
in an effort to comply with such requirements by the effective date for compliance. Our efforts to
implement standardized internal control procedures and develop the internal tests necessary to
verify the proper application of the internal control procedures and their effectiveness will be a
key area of focus for our board of directors, our audit committee and our senior management. This
evaluation is expected to underlie the internal control report of management and auditor
attestation requirements of Section 404.
Also, in connection with the audit of our financial statements for the year ended December 31,
2005, we have identified a number of control deficiencies, some of which constitute material
weaknesses. A control deficiency exits when the design of operation of a control does not enable
management or employees, in the normal course of performing their assigned functions, to prevent or
detect misstatements on a timely basis; a material weakness is a control deficiency, or combination
of control deficiencies, that result in more than a remote likelihood that a material misstatement
of the financial statements will not be prevented or detected. Areas classified as material
weaknesses are management's inadequate knowledge and experience in application of U.S. GAAP and
lack of policy and procedures over data security/access, data backup, system change and spreadsheet
control.
We consulted with our audit committee and undertook or are undertaking remedial measures to
make improvements as soon as practicable. Our board of directors and the audit committee have been
advised of these issues. Under the supervision and with the participation of our senior
management, including our principal executive officer and principal financial officer, we are in
the process of conducting further evaluation of our internal control over financial reporting,
designing enhanced processes and controls to address these and any other issues that might be
identified through our review. As we are still in the evaluation and design process, we may
identify other conditions that may result in significant deficiencies or material weaknesses in the
future. Should we discover such conditions, we will take action to correct them. We are committed
to taking appropriate steps for remediation, as needed.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Mr. Thomas Hubbs qualifies as an Audit Committee
Financial Expert as defined by the applicable rules of the SEC and that Mr. Hubbs is "independent"
as
that term is defined in Rule 4200 of the listing standards of the Marketplace Rules of the Nasdaq
Stock Market, Inc.
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Item 16B. Code of Ethics
We have adopted a Code of Business Conduct which applies to our employees, officers and
non-employee directors, including our principal executive officer, principal financial officer,
principal accounting officer or controller, and persons performing similar functions. This code is
intended to qualify as a "code of ethics" within the meaning of the applicable rules of the SEC,
and has been included as Exhibit 11.1 to this annual report.
The Code of Business Conduct is available on our website at www.english.linktone.com. To the
extent required by law, any amendments to, or waivers from, any provision of the Code of Business
Conduct will be promptly disclosed to the public. Copies of the Code of Business Conduct will be
provided to any shareholder upon written request to the Vice President of Legal Affairs of Linktone
Ltd., 5/F, Eastern Tower, No. 689, Beijing Dong Road, Shanghai, 200001, People's Republic of China.
Item 16C. Principal Accountant Fees and Services
Disclosure of Fees Charged by Independent Accountants
The following table summarizes the fees charged by PricewaterhouseCoopers (our independent
accountants from the fourth quarter of 2000 until the present time) for certain services rendered
to our company during 2004 and 2005.
For the year ended
December 31,
2004
2005
Audit fees(1)
$
325,000
$
307,500
Audit related fees (2)
300,000
—
Tax related fees(3)
168,562
95,919
Other fees(4)
114,989
16,088
(1)
"Audit fees" means the aggregate fees billed in each of the fiscal years listed for our
calendar year audits and reviews of financial statements.
(2)
"Audit-related fees" means the aggregate fees billed in each of the fiscal years listed for
professional services related to the audit of our financial statements that are not reported
under "Audit fees" and consultation on accounting standards or transactions.
(3)
"Tax related fees" means the aggregate fees billed in each of the fiscal years listed for
professional services rendered for tax compliance, tax advisor and tax planning (domestic and
international). These services include assistance regarding federal, state and international
tax compliance and tax planning.
(4)
"All other fees" means fees for advisory services for the compliance with the Sarbanes-Oxley
Act.
Audit Committee Pre-approval Policies and Procedures
Our audit committee has adopted procedures which set forth the manner in which the committee
will review and approve all audit and non-audit services to be provided by PricewaterhouseCoopers
before that firm is retained for such services. The pre-approval procedures are as follows:
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•
Any audit or non-audit service to be provided to us by the independent accountant
must be submitted to the audit committee for review and approval, with a description of
the services to be performed and the fees to be charged.
•
The audit committee in its sole discretion then approves or disapproves the proposed
services and documents such approval, if given, through written resolutions or in the
minutes of meetings, as the case may be.
Item 16D. Exemptions from the Listing Standards for Audit Committees
We have not been granted an exemption from the applicable listing standards for the audit
committee of our board of directors.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
(c) Total Number of
(d) Maximum Number of
Ordinary Shares
Ordinary Shares (or
(a) Total Number
(b) Average Price
Purchased as Part of a
Dollar Value) That May
of Ordinary
Paid per Ordinary
Publicly Announced
Yet be Purchased Under
Period
Shares Purchased
Share (1)
Plan or Program (2)
the Plan or Program (3)
September 1, 2005 – September 30, 2005
150,000
$
1.022
150,000
$
14,846,700
October 1, 2005 – October 31, 2005
540,000
$
1.008
540,000
$
14,302,380
November 1, 2005 – November 30, 2005
510,000
$
1.037
510,000
$
13,773,510
December 1, 2005 – December 31, 2005
2,180,000
$
0.998
2,180,000
$
11,597,870
(1)
Average price paid per ordinary share includes brokerage commission.
(2)
Such share repurchase plan was announced on May 10, 2005 and became effective on September 7,
2005 when our shareholders approved it at a general meeting. Under the plan, we may purchase
up to $15 million worth of our issued and outstanding ADSs in open-market transactions on the
Nasdaq National Market. There is no expiration date for the plan.
(3)
The share repurchase plan was still in effect as of December 31, 2005.
PART III
Item 17. Financial Statements
The Company has elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
The consolidated financial statements for Linktone Ltd. and its subsidiaries are included at
the end of this annual report.
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Item 19. Exhibits
Exhibit
Number
Document
1.1
Amended and Restated Memorandum and Articles of Association of the
Company (incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
2.1
Specimen American Depositary Receipt of the Company (incorporated
by reference to Exhibit 1 to the Company's Registration Statement
on Form F-6 (Registration No. 333-112897) as filed with the
Securities and Exchange Commission on February 17, 2004).
2.2
Specimen Share Certificate of the Company (incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form F-1 (Registration No. 333-112903) as filed with the Securities
and Exchange Commission on February 17, 2004).
2.3
Deposit Agreement dated March 3, 2004 among the Company, The Bank
of New York and owners and beneficial owners of the American
Depositary Receipts issued thereunder (incorporated by reference to
Exhibit 1 to the Company's Registration Statement on Form F-6
(Registration No. 333-112897) as filed with the Securities and
Exchange Commission on February 17, 2004).
2.4
Amended and Restated Shareholders' Agreement dated as of November
19, 2001 among IP Fund One, L.P., Intrinsic Technology (Holdings)
Ltd, Jun Wu, Lee Haichao, Shao Xiaoli and Lunar Occidental Group
LLC, Mitsubishi Corporation, Index Corporation, Hong Lim Investment
Pte Ltd, the other shareholders of the Company and the Company
(incorporated by reference to Exhibit 4.4 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
2.5
Amendment to the Shareholders Agreement dated as of November 19,
2001 (by written resolution of the shareholders of the Company
dated December 13, 2002) (incorporated by reference to Exhibit 4.5
to the Company's Registration Statement on Form F-1 (Registration
No. 333-112903) as filed with the Securities and Exchange
Commission on February 17, 2004).
2.6
Amendment to Shareholders Agreement dated February 4, 2004
(incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
2.7
Lock-up Agreement by and among the Company and certain of its
shareholders (incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February 17, 2004).
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Exhibit
Number
Document
2.8
Accession to Lock-up Agreement dated August 30, 2004, by and among
the Company and Asiainfo (Indigo) Holdings Ltd, Fidelity Investors
III Limited Partnership, Hiking Corporation Ltd, Icon Ventures Asia
Ltd, Carlos Cordeiro, Kipp Nelson, Hu An Kai, Greenacre Ventures
Ltd., Fidelity International Limited and FIL Ventures Limited.
(incorporated by reference to Exhibit 2.8 to the Company's Annual
Report on Form 20-F for the year ended December 31, 2005 filed with
the Securities and Exchange Commission on June 30, 2005).
2.9
Accession to Lock-up Agreement dated August 30, 2004, by and among
the Company and IP Fund One, L.P. (incorporated by reference to
Exhibit 2.9 to the Company's Annual Report on Form 20-F for the
year ended December 31, 2005 filed with the Securities and Exchange
Commission on June 30, 2005).
4.1
Form of 2000-1 Employee Stock Option Scheme (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement
on Form F-1 (Registration No. 333-112903) as filed with the
Securities and Exchange Commission on February 17, 2004).
4.2
Form of 2003 Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form F-1
(Registration No. 333-112903) as filed with the Securities and
Exchange Commission on February 17, 2004).
4.3
Form of Indemnification Agreement with the Company's directors and
officers (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February 17, 2004).
4.4
Employment Agreement dated October 1, 2004 between the Company and
Raymond Yang Lei (incorporated by reference to Exhibit 4.4 to the
Company's Annual Report on Form 20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).
4.5
Employment Termination Agreement dated February 24, 2006 between
the Company and Raymond Yang Lei.
4.6
Employment Agreement dated October 1, 2004 between the Company and
Michael Guangxin Li (incorporated by reference to Exhibit 4.5 to
the Company's Annual Report on Form 20-F for the year ended
December 31, 2005 filed with the Securities and Exchange Commission
on June 30, 2005).
4.7
Employment Termination Agreement dated August 31, 2005 between the
Company and Michael Guangxin Li.
4.8
Employment Agreement dated April 3, 2006 between the Company and
Michael Guangxin Li.
4.9
Employment Agreement dated October 1, 2004 between the Company and
Ye Xin (incorporated by reference to Exhibit 4.6 to the Company's
Annual Report on Form 20-F for the year ended December 31, 2005
filed with the Securities and Exchange Commission on June 30,
2005).
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Exhibit
Number
Document
4.10
Employment Termination Agreement dated March 20, 2006 between the
Company and Ye Xin.
4.11
Employment Agreement dated May 2, 2005 between the Company and
Colin Sung (incorporated by reference to Exhibit 4.7 to the
Company's Annual Report on Form 20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).
4.12
Employment Separation Agreement dated May 23, 2005 between the
Company and Mark Begert (incorporated by reference to Exhibit 4.8
to the Company's Annual Report on Form 20-F for the year ended
December 31, 2005 filed with the Securities and Exchange Commission
on June 30, 2005).
4.13
Summary of Key Terms in the
Monternet(TM) SMS Cooperation Agreement
dated June 18, 2003 between Shanghai Weilan Computer Co., Ltd. and
Jiangsu Mobile Communication Co., Ltd. (incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement on Form F-1
(Registration No. 333-112903) as filed with the Securities and
Exchange Commission on February 17, 2004).
4.14
Cooperation Agreement dated June 3, 2003 between Shanghai Linktone
Consulting Co., Ltd. and Satellite Television Asian Region Limited
(incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
4.15
Mobile License Agreement dated May 1, 2003 between Shanghai
Linktone Consulting Co., Ltd., Shanghai Weilan Computer Co., Ltd.
and Turner Broadcasting System Asia Pacific, Inc. (incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form F-1 (Registration No. 333-112903) as filed with the
Securities and Exchange Commission on February 17, 2004).
4.16
Translation of Copyright License Agreement dated September 1, 2005
between Shanghai Weilan Computer Co., Ltd. and Shanghai Yide
Networking Co., Ltd.
4.17
Translation of Sales Agreement in Relation to True Tone, Ringback
Tone and IVR dated April 11, 2005 between Shanghai Huitong
Information Co., Ltd. and Sony BMG Music Entertainment (Hong Kong)
Ltd. (incorporated by reference to Exhibit 4.14 to the Company's
Annual Report on Form 20-F for the year ended December 31, 2005
filed with the Securities and Exchange Commission on June 30,
2005).
4.18
Finder's Fee Agreement for Licensing dated August 26, 2004 between
Shanghai Linktone Consulting Co., Ltd. and Mitsubishi Corporation
(incorporated by reference to Exhibit 4.15 to the Company's Annual
Report on Form 20-F for the year ended December 31, 2005 filed with
the Securities and Exchange Commission on June 30, 2005).
4.19
Cooperation Agreement dated January 1, 2005 between Shanghai
Huitong Information Co., Ltd. and Mitsubishi Corporation
(incorporated by reference to Exhibit 4.16 to the Company's Annual
Report on Form 20-F for the year ended December 31, 2005 filed with
the Securities and Exchange Commission on June 30, 2005).
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Exhibit
Number
Document
4.20
Translation of Exclusive Technical Consulting and Services
Agreement dated as of November 27, 2003 between Shanghai Linktone
Consulting Co., Ltd. and Shanghai Weilan Computer Co., Ltd.
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
4.21
Translation of Exclusive Technical Consulting and Services
Agreement dated as of November 27, 2003 between Shanghai Huitong
Information Co., Ltd. and Shanghai Unilink Computer Co., Ltd.
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
4.22
Translation of Loan Agreement dated as of November 27, 2003 between
the Company and Hu Ankai (incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form F-1
(Registration No. 333-112903) as filed with the Securities and
Exchange Commission on February 17, 2004).
4.23
Translation of Loan Agreement dated as of November 27, 2003 between
the Company and Li Dong (incorporated by reference to Exhibit 10.17
to the Company's Registration Statement on Form F-1 (Registration
No. 333-112903) as filed with the Securities and Exchange
Commission on February 17, 2004).
4.24
Translation of Loan Agreement dated as of August 25, 2004 between
the Company and Wei Long (incorporated by reference to Exhibit 4.21
to the Company's Annual Report on Form 20-F for the year ended
December 31, 2005 filed with the Securities and Exchange Commission
on June 30, 2005).
4.25
Translation of Loan Agreement dated as of August 25, 2004 between
the Company and Jing Wang (incorporated by reference to Exhibit
4.22 to the Company's Annual Report on Form 20-F for the year ended
December 31, 2005 filed with the Securities and Exchange Commission
on June 30, 2005).
4.26
Translation of Equity Interests Pledge Agreement dated November 27,
2003 between Shanghai Linktone Consulting Co., Ltd. and Hu Ankai
(incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
4.27
Translation of Equity Interests Pledge Agreement dated November 27,
2003 between Shanghai Linktone Consulting Co., Ltd. and Li Dong
(incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
4.28
Translation of Equity Interests Pledge Agreement dated August 25,
2004 between Shanghai Huitong Information Co., Ltd. and Wei Long
(incorporated by reference to Exhibit 4.25 to the Company's Annual
Report on Form 20-F for the year ended December 31, 2005 filed with
the Securities and Exchange Commission on June 30, 2005).
4.29
Translation of Equity Interests Pledge Agreement dated August 25,
2004 between Shanghai Huitong Information Co., Ltd. and Jing Wang
(incorporated by reference to Exhibit 4.26 to the Company's Annual
Report on Form 20-F for the year ended December 31, 2005 filed with
the Securities and Exchange Commission on June 30, 2005).
101
Table of Contents
Exhibit
Number
Document
4.30
Translation of Contract Relating to the Exclusive Purchase Right of
an Equity Interest dated as of November 27, 2003 among the Company,
Hu Ankai and Shanghai Weilan Computer Co., Ltd. (incorporated by
reference to Exhibit 10.25 to the Company's Registration Statement
on Form F-1 (Registration No. 333-112903) as filed with the
Securities and Exchange Commission on February 17, 2004).
4.31
Translation of Contract Relating to the Exclusive Purchase Right of
an Equity Interest dated as of November 27, 2003 among the Company,
Li Dong and Shanghai Weilan Computer Co., Ltd. (incorporated by
reference to Exhibit 10.26 to the Company's Registration Statement
on Form F-1 (Registration No. 333-112903) as filed with the
Securities and Exchange Commission on February 17, 2004).
4.32
Translation of Contract Relating to the Exclusive Purchase Right of
Equity Interest dated as of August 25, 2004 among the Company, Wei
Long and Shanghai Unilink Company Ltd. (incorporated by reference
to Exhibit 4.29 to the Company's Annual Report on Form 20-F for the
year ended December 31, 2005 filed with the Securities and Exchange
Commission on June 30, 2005).
4.33
Translation of Contract Relating to the Exclusive Purchase Right of
Equity Interest dated as of August 25, 2004 among the Company, Jing
Wang and Shanghai Unilink Company Ltd. (incorporated by reference
to Exhibit 4.30 to the Company's Annual Report on Form 20-F for the
year ended December 31, 2005 filed with the Securities and Exchange
Commission on June 30, 2005).
4.34
Translation of Operating Agreement dated November 27, 2003 among
Shanghai Linktone Consulting Co., Ltd., Shanghai Weilan Computer
Co., Ltd., Hu Ankai and Li Dong (incorporated by reference to
Exhibit 10.30 to the Company's Registration Statement on Form F-1
(Registration No. 333-112903) as filed with the Securities and
Exchange Commission on February 17, 2004).
4.35
Translation of Operating Agreement dated August 25, 2004 among
Shanghai Huitong Information Co., Ltd., Jing Wang, Wei Long, and
Shanghai Unilink Computer Co., Ltd. (incorporated by reference to
Exhibit 4.32 to the Company's Annual Report on Form 20-F for the
year ended December 31, 2005 filed with the Securities and Exchange
Commission on June 30, 2005).
4.36
Translation of Domain Name License Agreement dated as of November
27, 2003 between the Company and Shanghai Weilan Computer Co., Ltd.
(incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
4.37
Translation of Domain Name License Agreement dated as of November
27, 2003 between Shanghai Linktone Consulting Co., Ltd. and
Shanghai Unilink Computer Co., Ltd. (incorporated in by reference
to Exhibit 10.33 to the Company's Registration Statement on Form
F-1 (Registration No. 333-112903) as filed with the Securities and
Exchange Commission on February 17, 2004).
102
Table of Contents
Exhibit
Number
Document
4.38
Translation of Domain Name Assignment Agreement dated as of
November 27, 2003 between Shanghai Weilan Computer Co., Ltd. and
Shanghai Linktone Consulting Co., Ltd. (incorporated by reference
to Exhibit 10.34 to the Company's Registration Statement on Form
F-1 (Registration No. 333-112903) as filed with the Securities and
Exchange Commission on February 17, 2004).
4.39
Translation of Domain Name License Agreement dated as of November
27, 2003 between Shanghai Linktone Consulting Co., Ltd. and
Shanghai Weilan Computer Co., Ltd. (incorporated by reference to
Exhibit 10.35 to the Company's Registration Statement on Form F-1
(Registration No. 333-112903) as filed with the Securities and
Exchange Commission on February 17, 2004).
4.40
Translation of Trademark License Agreement dated as of November 27,
2003 between the Company and Shanghai Weilan Computer Co., Ltd.
(incorporated by reference to Exhibit 10.36 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
4.41
Translation of Trademark License Agreement dated as of November 27,
2003 between the Company and Shanghai Unilink Computer Co., Ltd.
(incorporated by reference to Exhibit 10.37 to the Company's
Registration Statement on Form F-1 (Registration No. 333-112903) as
filed with the Securities and Exchange Commission on February 17,
2004).
4.42
Translation of Power of Attorney dated November 27, 2003 granted by
Hu Ankai (incorporated by reference to Exhibit 10.39 to the
Company's Registration Statement on Form F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February 17, 2004).
4.43
Translation of Power of Attorney dated November 27, 2003 granted by
Li Dong (incorporated by reference to Exhibit 10.40 to the
Company's Registration Statement on Form F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February 17, 2004).
4.44
Translation of Power of Attorney dated August 25, 2004 granted by
Wei Long (incorporated by reference to Exhibit 4.42 to the
Company's Annual Report on Form 20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).
4.45
Translation of Power of Attorney dated August 25, 2004 granted by
Jing Wang (incorporated by reference to Exhibit 4.43 to the
Company's Annual Report on Form 20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).
4.46
Translation of Service Agreement dated January 16, 2002 between the
Company and Hu Ankai (incorporated by reference to Exhibit 10.44 to
the Company's Registration Statement on Form F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February 17, 2004).
4.47
Translation of Service Agreement dated January 16, 2002 between the
Company and Li Dong (incorporated by reference to Exhibit 10.45 to
the Company's Registration Statement on Form F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February 17, 2004).
103
Table of Contents
Exhibit
Number
Document
4.48
Translation of Lease Agreement, effective March 22, 2004, between
Shanghai Linktone Consulting Co., Ltd. and Shanghai Allianz
Investment and Development Company (incorporated by reference to
Exhibit 4.46 to the Company's Annual Report on Form 20-F for the
year ended December 31, 2005 filed with the Securities and Exchange
Commission on June 30, 2005).
4.49
Summary of Lease Agreement, effective September 7, 2005, between
Shanghai Linktone Consulting Co., Ltd. and Beijing Sunbase Real
Estate Ltd.
4.50
Translation of Monternet(TM) MMS Cooperation Agreement dated June
25, 2003 between Shanghai Weilan Computer Co. Ltd. and China Mobile
Communications Corporation (incorporated by reference to Exhibit
10.64 to the Company's Registration Statement on Form F-1
(Registration No. 333-112903) as filed with the Securities and
Exchange Commission on March 1, 2004).
4.51
Summary of Key Terms in SMS Cooperation Agreement dated January 16,
2004 between Guangdong Mobile Communications Corporation and
Shanghai Weilan Computer Co., Ltd. (incorporated by reference to
Exhibit 10.65 to the Company's Registration Statement on Form F-1
(Registration No. 333-112903) as filed with the Securities and
Exchange Commission on February 17, 2004).
4.52
Translation of Mobile Value-added Service Cooperation Agreement
dated March 31, 2005 between Shanghai Weilan Computer Co., Ltd. and
China United Telecommunications Corporation (incorporated by
reference to Exhibit 4.50 to the Company's Annual Report on Form
20-F for the year ended December 31, 2005 filed with the Securities
and Exchange Commission on June 30, 2005).
4.53
Translation of Music Copyright License Agreement, effective January
1, 2004, among Speedline Enterprise Limited, Shanghai Linktone
Consulting Co., Ltd. and its affiliate, and Shanghai BigIn Digital
Technology Co., Ltd. (incorporated by reference to Exhibit 10.68 to
the Company's Registration Statement on Form F-1 (Registration No.
333-112903) as filed with the Securities and Exchange Commission on
February 17, 2004).
4.54
Licensing Contract for Ringtones dated December 6, 2004, between
Shanghai Linktone Consulting Co., Ltd. and BMG Music Publishing
Hong Kong Ltd. (incorporated by reference to Exhibit 4.54 to the
Company's Annual Report on Form 20-F for the year ended December
31, 2005 filed with the Securities and Exchange Commission on June
30, 2005).
4.55
Translation of Mobile Ringback Tone Contract dated January 18,
2005, between Shanghai Linktone Consulting Co., Ltd. and EMI Music
(China) (incorporated by reference to Exhibit 4.55 to the Company's
Annual Report on Form 20-F for the year ended December 31, 2005
filed with the Securities and Exchange Commission on June 30,
2005).
4.56
Share Purchase Agreement, dated April 22, 2005, by and among
Linktone Ltd., Linktone Information Technology Co., Ltd., Mingji
Guan, Shubing Zheng, Crown River Enterprises Ltd., Yuanhang Wang,
Dong Li, Brilliant Concept Investments Ltd., Wangyou Digital
Science & Technology (Shenzhen) Co., Ltd. and Shenzhen Yuanhang
Science and Technology Co., Ltd. (incorporated by reference to
Exhibit 99.1 to the Company's Report of Foreign Issuer on Form 6-K
as filed with the Securities and Exchange Commission on May 24,
2005).
104
Table of Contents
Exhibit
Number
Document
4.57
Equity Transfer Agreement, dated April 22, 2005, by and among
Mingji Guan, Shubing Zheng, Yuanhang Wang and Dong Li (incorporated
by reference to Exhibit 99.2 to the Company's Report of Foreign
Issuer on Form 6-K as filed with the Securities and Exchange
Commission on May 24, 2005).
4.58
Instrument of Transfer, dated May 13, 2005, by and among Crown
River Enterprises Ltd. and Linktone Ltd. (incorporated by
reference to Exhibit 99.3 to the Company's Report of Foreign Issuer
on Form 6-K as filed with the Securities and Exchange Commission on
May 24, 2005).
4.59
Translation of Software License Agreement dated January 1, 2005
between Shanghai Huitong Information Co., Ltd. and Shanghai Weilan
Computer Company Limited (Short Message Platform System Software).
4.60
Translation of Software License Agreement dated January 1, 2005
between Shanghai Huitong Information Co., Ltd. and Shanghai Weilan
Computer Co., Ltd. (Database Software).
4.61
Translation of Software License Agreement dated September 1, 2003
between Shanghai Huitong Information Co., Ltd. and Shanghai Weilan
Computer Co., Ltd. (PETS Cellphone Games Software V1.0)
(incorporated by reference to Exhibit 4.61 to the Company's Annual
Report on Form 20-F for the year ended December 31, 2005 filed with
the Securities and Exchange Commission on June 30, 2005).
4.62
Translation of Supplemental Agreement, dated July 1, 2005, to the
Software License Agreement dated September 1, 2003 between Shanghai
Huitong Information Co., Ltd. and Shanghai Weilan Computer Co.,
Ltd. (PETS Cellphone Games Software V1.0).
4.63
Translation of Software License Agreement dated January 1, 2004
between Shanghai Huitong Information Co., Ltd. and Shanghai Weilan
Computer Co., Ltd. (Photos and Tones Cellphone Software V1.0)
(incorporated by reference to Exhibit 4.62 to the Company's Annual
Report on Form 20-F for the year ended December 31, 2005 filed with
the Securities and Exchange Commission on June 30, 2005).
4.64
Translation of Supplemental Agreement, dated July 1, 2005, to the
Software License Agreement dated January 1, 2004 between Shanghai
Huitong Information Co., Ltd. and Shanghai Weilan Computer Co.,
Ltd. (Photos and Tones Cellphone Software V1.0).
4.65
Translation of Software License Agreement dated January 12, 2005
between Shanghai Linktone Internet Technology Co., Ltd. and
Shanghai Weilan Computer Co., Ltd. (RBT Software V1.0).
4.66
Translation of Supplemental Agreement, dated July 1, 2005, to the
Software License Agreement dated January 12, 2005 between Shanghai
Linktone Internet Technology Co., Ltd. and Shanghai Weilan Computer
Co., Ltd. (RBT Software V1.0).
4.67
Translation of Software License Agreement dated January 12, 2005
between Shanghai Linktone Internet Technology Co., Ltd. and
Shanghai Weilan Computer Co., Ltd. (MMS Software V1.0).
105
Table of Contents
Exhibit
Number
Document
4.68
Translation of Supplemental Agreement, dated July 1, 2005, to the
Software License Agreement dated January 12, 2005 between Shanghai
Linktone Internet Technology Co., Ltd. and Shanghai Weilan Computer
Co., Ltd. (MMS Software V1.0).
4.69
Translation of Software License Agreement dated January 12, 2005
between Shanghai Linktone Internet Technology Co., Ltd. and
Shanghai Weilan Computer Co., Ltd. (IVR Software V1.0).
4.70
Translation of Supplemental Agreement, dated July 1, 2005, to the
Software License Agreement dated January 12, 2005 between Shanghai
Linktone Internet Technology Co., Ltd. and Shanghai Weilan Computer
Co., Ltd. (IVR Software V1.0).
4.71
Translation of Exclusive Consulting and Service Agreement dated
January 1, 2005 between Shanghai Linktone Consulting Co., Ltd. and
Shanghai Weilan Computer Co., Ltd.
4.72
Translation of Exclusive Consulting and Service Agreement dated
July 1, 2005 between Shanghai Linktone Consulting Co., Ltd. and
Shanghai Weilan Computer Co., Ltd.
4.73
Mobile Value-added Service Business Cooperation Agreement, between
China Unicom and Shanghai Unilink, dated as of May 18, 2005.
4.74
Translation of Loan Agreement dated as of June 1, 2005 between the
Company and Yuan Jinhua.
4.75
Translation of Loan Agreement dated as of June 1, 2005 between the
Company and Zhao Teng.
4.76
Translation of Equity Interests Pledge Agreement dated June 1, 2005
between Shanghai Huitong Information Co., Ltd. and Yuan Jinhua.
4.77
Translation of Equity Interests Pledge Agreement dated June 1, 2005
between Shanghai Huitong Information Co., Ltd. and Zhao Teng.
4.78
Translation of Contract Relating to the Exclusive Purchase Right of
an Equity Interest dated as of June 1, 2005 among the Company, Yuan
Jinhua and Hainan Zhong Tong Computer Co., Ltd.
4.79
Translation of Contract Relating to the Exclusive Purchase Right of
an Equity Interest dated as of June 1, 2005 among the Company, Zhao
Teng and Hainan Zhong Tong Computer Co., Ltd.
4.80
Translation of Exclusive Consulting and Service Agreement dated
June 1, 2005 between Shanghai Huitong Information Co., Ltd. and
Hainan Zhong Tong Computer Co., Ltd.
4.81
Equity Transfer Agreement, dated June 15, 2005, by and among
Shanghai Weilan Computer Co., Ltd., Yuan Jinhua, Zhao Teng, Jing
Shengmei, Zhao Huiping, Chen Huawei and Huang Chang in relation to
Hainan Zhong Tong Computer Co., Ltd.
4.82
Translation of Operating Agreement dated June 1, 2005 among
Shanghai Huitong Information Co., Ltd., Hainan Zhong Tong Computer
Co., Ltd., Yuan Jinhua and Zhao Teng.
106
Table of Contents
Exhibit
Number
Document
8.1
Significant Subsidiaries.
11.1
Code of Business Conduct (incorporated by reference to Exhibit 11.1
to the Company's Annual Report on Form 20-F for the year ended
December 31, 2005 filed with the Securities and Exchange Commission
on June 30, 2005).
12.1
Certification of Chief Executive Officer Required by Rule 13a-14(a).
12.2
Certification of Chief Financial Officer Required by Rule 13a-14(a).
13.1
Certification of Chief Executive Officer Required by Rule 13a-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
13.2
Certification of Chief Financial Officer Required by Rule 13a-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
15.1
Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company,
Independent Registered Public Accounting Firm.
15.2
Consent of Maples and Calder.
15.3
Consent of Fangda Partners.
107
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.
LINKTONE LTD.
By:
/s/ Colin Sung
Colin Sung
Chief Financial Officer
Date: June 30, 2006
Table of Contents
LINKTONE LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets as of December 31, 2004 and 2005
F-3
Consolidated Statements of Operations and Comprehensive Income for the years ended
December 31, 2003, 2004 and 2005
F-4
Consolidated Statements of 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-6
Notes to the Consolidated Financial Statements
F-7
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
LINKTONE LTD.
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations and comprehensive income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Linktone Ltd. ("the Company") and its
subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 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.
As discussed in note 2 to the consolidated financial statements, the Company has restated its
2004 consolidated financial statements.
/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Shanghai, People's Republic of China
April 11, 2006
F-2
Table of Contents
LINKTONE LTD.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars, except share data)
As of December 31,
Note
2004
2005
(Restated)
Assets
Current assets:
Cash and cash equivalents
8
$
63,413,629
$
36,252,678
Short term investments
9
14,860,365
41,580,530
Accounts receivable, net
10
10,445,535
15,945,662
Tax refund receivable
11
2,597,167
2,131,128
Deposits and other receivables
12
2,900,433
5,136,949
Deferred tax assets
20
416,632
811,014
Total current assets
94,633,761
101,857,961
Property and equipment, net
15
2,527,813
3,565,446
Intangible assets
16
—
2,234,185
Goodwill
7
—
10,171,219
Other long term assets
282,784
—
Deferred tax assets
20
763,597
1,051,469
Total assets
$
98,207,955
$
118,880,280
Liabilities and shareholders' equity
Current liabilities:
Taxes payable
17
$
5,078,967
$
5,898,782
Accrued liabilities and other payables
18
4,181,346
11,886,705
Due to related parties
13,792
—
Deferred revenue
—
93,327
Deferred tax liabilities
20
1,115,351
881,279
Total current liabilities
10,389,456
18,760,093
Long term liabilities
Other long term liabilities
149,411
30,276
Total liabilities
10,538,867
18,790,369
Commitments and contingencies
24
—
—
Shareholders' equity
Ordinary shares ($0.0001 par value; 500,000,000
shares authorized, 253,772,990 and 257,317,900 shares
issued and outstanding as of December 31, 2004 and
December 31, 2005)
6
25,377
25,732
Additional paid-in capital
6, 22
78,345,352
78,674,885
Deferred stock-based compensation
2, 23
(1,227,018
)
—
Statutory reserves
19
1,531,760
2,007,776
Accumulated other comprehensive (loss)/income
(64,825
)
726,837
Retained earnings
9,058,442
18,654,681
Total shareholders' equity
87,669,088
100,089,911
Total liabilities and shareholders' equity
$
98,207,955
$
118,880,280
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
LINKTONE LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In U.S. dollars, except per share data)
For the year ended December 31,
Note
2003
2004
2005
(Restated)
Gross revenues
13
$
16,601,492
$
50,318,744
$
73,608,603
Business tax
(1,115,822
)
(2,235,044
)
(3,121,347
)
Net revenues
15,485,670
48,083,700
70,487,256
Cost of services
(5,819,391
)
(15,305,416
)
(26,483,694
)
Gross profit
9,666,279
32,778,284
44,003,562
Operating expenses:
Product development
(748,209
)
(2,807,720
)
(6,229,976
)
Selling and marketing
(2,144,540
)
(8,794,568
)
(14,719,763
)
Stock-based compensation *
2, 23
(1,119,529
)
(3,464,807
)
(2,012,425
)
Other general and administrative
(2,070,141
)
(6,809,947
)
(9,774,570
)
Total operating expenses
(6,082,419
)
(21,877,042
)
(32,736,734
)
Income from operations
3,583,860
10,901,242
11,266,828
Interest income
32,223
815,447
1,965,801
Other income, net
—
346,652
720,763
Income before tax
3,616,083
12,063,341
13,953,392
Income tax expense
20
—
(997,307
)
(1,504,329
)
Net income
3,616,083
11,066,034
12,449,063
Accretion on Series B convertible redeemable preferred
shares
(143,936
)
(28,206
)
—
Amount allocated to participating preferred shareholders
(1,769,080
)
(794,307
)
—
Net income attributable to ordinary shareholders
$
1,703,067
$
10,243,521
$
12,449,063
Other comprehensive income/(loss)
457
(64,414
)
791,662
Comprehensive income
$
3,616,540
$
11,001,620
$
13,240,725
Earning per share:
25
Basic
$
0.02
$
0.05
$
0.05
Diluted
$
0.02
$
0.04
$
0.05
Weighted average ordinary shares:
Basic
97,390,000
224,569,476
257,020,040
Diluted
109,556,852
248,081,126
275,385,579
*
Stock-based compensation is a component of general and administrative expenses.
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
LINKTONE LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
(In U.S. dollars, except share data)
Accumulated
Retained
Additional
Deferred
other
earnings/
Total
Ordinary shares
paid-in
Convertible
stock based
Statutory
comprehensive
(Accumulated
shareholders'
Shares
Amount
capital
preferred shares
compensation
reserves
income/(loss)
Deficit)
equity/(deficit)
Balance as of December 31, 2002
97,390,000
$
9,739
$
—
$
3,525,388
$
—
$
—
$
(868
)
$
(3,919,773
)
$
(385,514
)
Accretion of Series B redeemable
convertible preferred shares
—
—
—
—
—
—
—
(143,936
)
(143,936
)
Deferred stock-based compensation
—
—
5,811,354
—
(4,691,825
)
—
—
—
1,119,529
Other comprehensive income:
Translation adjustments
—
—
—
—
—
—
457
—
457
Net income
—
—
—
—
—
—
—
3,616,083
3,616,083
Appropriations to statutory
reserves
—
—
—
—
—
500,000
—
(500,000
)
—
Balance as of December 31, 2003
97,390,000
9,739
5,811,354
3,525,388
(4,691,825
)
500,000
(411
)
(947,626
)
4,206,619
Issuance of ordinary shares in
initial public offering
51,500,000
5,150
67,046,483
—
—
—
—
—
67,051,633
Costs of initial public offering
—
—
(1,941,409
)
—
—
—
—
—
(1,941,409
)
Conversion of redeemable preferred
shares to ordinary shares
41,294,500
4,129
3,579,539
—
—
—
—
—
3,583,668
Conversion of convertible
preferred shares to ordinary
shares
59,870,500
5,987
3,519,401
(3,525,388
)
—
—
—
—
—
Issuance of ordinary shares
from exercise of stock option
3,717,990
372
301,778
—
—
—
—
—
302,150
Accretion of series B redeemable
convertible preferred shares
—
—
28,206
—
—
—
—
(28,206
)
—
Deferred stock–based
compensation (Restated)
—
—
—
—
3,464,807
—
—
—
3,464,807
Other comprehensive income:
Translation adjustment
—
—
—
—
—
—
264
—
264
Unrealized loss on investments
in marketable securities
—
—
—
—
—
—
(64,678
)
—
(64,678
)
Net income (Restated)
—
—
—
—
—
—
—
11,066,034
11,066,034
Appropriation to Statutory reserves
—
—
—
—
—
1,031,760
—
(1,031,760
)
—
Balance as of December 31,
2004 (Restated)
253,772,990
$
25,377
$
78,345,352
$
—
$
(1,227,018
)
$
1,531,760
$
(64,825
)
$
9,058,442
$
87,669,088
Issuance of ordinary shares from
exercise of stock options
6,924,910
693
568,777
—
—
—
—
—
569,470
Retirement of shares from stock
repurchase
(3,380,000
)
(338
)
(1,024,651
)
—
—
—
—
(2,376,808
)
(3,401,797
)
Deferred stock–based compensation
—
—
785,407
—
1,227,018
—
—
—
2,012,425
Other comprehensive income:
Translation adjustment
—
—
—
—
—
—
823,301
—
823,301
Unrealized loss on investments
in marketable securities
—
—
—
—
—
—
(31,639
)
—
(31,639
)
Net income
—
—
—
—
—
—
—
12,449,063
12,449,063
Appropriation to Statutory reserves
—
—
—
—
—
476,016
—
(476,016
)
—
Balance as of December 31, 2005
257,317,900
$
25,732
$
78,674,885
$
—
$
—
$
2,007,776
$
726,837
$
18,654,681
$
100,089,911
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
LINKTONE LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars)
For the year ended December 31,
2003
2004
2005
(Restated)
Cash flow from operating activities
Net income
$
3,616,083
$
11,066,034
$
12,449,063
Adjustments to reconcile net
income to net cash provided
by operating activities:
Stock compensation costs
1,119,529
3,464,807
2,012,425
Loss on disposal of fixed assets
—
49,064
—
Depreciation
90,856
429,516
1,419,609
Amortization of intangible assets
—
—
760,299
Provision for bad debts
161,478
176,813
(190,054
)
Deferred income tax benefits
—
(64,878
)
(914,668
)
Loss on foreign exchange
—
—
36,415
Gain on short term investments
—
(81,094
)
(1,060,041
)
Changes in assets and liabilities net of effect of
acquisitions and disposals:
Accounts receivable
(2,690,310
)
(7,529,729
)
(4,550,229
)
Tax refund receivable
—
(2,597,167
)
532,431
Deposits and other receivables
(429,087
)
(1,198,857
)
(561,247
)
Taxes payable
704,645
4,092,219
689,980
Accrued liabilities and other payables
307,552
1,847,399
(1,047,894
)
Due to related parties
5
—
(14,145
)
Net cash provided by operating activities
2,880,751
9,654,127
9,561,944
Cash flow from investing activities
Purchase of property and equipment
(304,380
)
(2,422,079
)
(1,967,541
)
Purchase of intangible assets
—
—
(306,050
)
Proceeds from sale of short term investments
—
22,181
27,001,194
Cash paid for short term investments
—
(14,866,131
)
(52,692,957
)
Cash paid for business acquisitions, net off cash acquired
—
—
(5,459,324
)
Cash paid for convertible loans
—
—
(581,782
)
Cash paid to staff for business acquisitions
—
—
(433,694
)
Net cash used in investing activities
(304,380
)
(17,266,029
)
(34,440,154
)
Cash flow from financing activities:
Proceeds from initial public offering, net of issuance costs
paid
—
65,110,224
—
Proceeds from the exercise of stock options
—
302,150
569,470
Cash paid for repurchase of stock
—
—
(3,401,797
)
Net cash provided by financing activities
—
65,412,374
(2,832,327
)
Effect of exchange rate change on cash
457
264
549,586
Net (decrease)/increase in cash and cash
equivalents
2,576,828
57,800,736
(27,160,951
)
Cash and cash equivalents, beginning of
year
3,036,065
5,612,893
63,413,629
Cash and cash equivalents, end of
year
$
5,612,893
$
63,413,629
$
36,252,678
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Cash paid for business and other taxes on
revenues
$
681,161
$
1,224,397
$
8,800,560
Cash received for value added tax refund
—
—
4,960,196
Cash paid for income tax
—
518,262
607,940
Cash paid for interest
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
1 Organization and Nature of Operations
Linktone Ltd. ("Linktone" or the "Company"), a Cayman Islands Corporation, is a provider of
wireless media, entertainment and communication services or wireless value added services ("WVAS")
to mobile phone users in the People's Republic of China ("PRC"). The Company specializes in the
development, aggregation, marketing and distribution of consumer wireless applications for access
by mobile phone users in the PRC.
The accompanying consolidated financial statements include the results of operations of the
Company, its subsidiaries, Shanghai Linktone Consulting Co., Ltd. ("Linktone Consulting"), Shanghai
Huitong Information Co., Ltd. ("Huitong"), Shanghai Linktone Internet Technology Co., Ltd.
("Linktone Internet"), Shanghai Linktone Software Co., Ltd. ("Linktone Software"), Brilliant
Concept Investment Ltd. ("Brilliant") and Wang You Digital Technology Co., Ltd. ("Wang You"), and
variable interest entities ("VIE" or "VIEs") for which the Company is the primary beneficiary.
Brilliant and Wang You were acquired by the Company in May 2005 (note 7). The Company and its
subsidiaries and consolidated VIEs (see below) are collectively referred to as the "Group".
The business in which the Group is engaged is subject to a number of industry-specific risk
factors, including, but not limited to, dependence on mobile and fixed line network operators,
rapid development of the market, large number of competitors, and evolving regulatory environment.
To comply with PRC laws and regulations that prohibit or restrict foreign ownership of
companies that provide value-added telecommunications services, which includes wireless value-added
services and Internet content services, the Company conducts substantially all of its operations
via its VIEs. These VIEs are wholly owned by certain shareholders or employees of the Company. The
capital and additional payments to the selling shareholders are funded by the Company and recorded
as interest-free loans to these PRC shareholders and employees. The portion of the loans for
capital injection was eliminated with the capital of the VIEs during consolidation.
Under various contractual agreements, employee shareholders of the VIEs are required to
transfer their ownership in these entities to the Company's subsidiaries in the PRC when permitted
by PRC laws and regulations or to designees of the Company at any time for the amount of loans
outstanding. All voting rights of the VIEs are assigned to the Company and the Company has the
right to appoint all directors and senior management personnel of the VIEs. As of December 31,
2005, the Company entered into exclusive technical service and software licensing agreements with
Shanghai Weilan Computer Co., Ltd. ("Weilan") and Shanghai Unilink Computer Co., Ltd. ("Unilink")
under which the Company provides technical and other services and software products to these VIEs
in exchange for substantially all net income of the VIEs. In addition, employee shareholders of the
VIEs have pledged their shares in the VIEs as collateral for the non-payment of loans or for the
fees for technical and other services and use of software due to the Company. The amounts of
interest-free loans to the employee shareholders of VIEs listed below as of December 31, 2004 and
December 31, 2005 were $1.8 million and $8.4 million respectively.
The following is a summary of the VIEs of the Company:
l
Weilan, a PRC company controlled through contractual agreements. Weilan was registered
on December 2, 1999 and is 50.0% owned by each of the two of our shareholders, Ankai Hu and
Dong Li. As of December 31, 2004 and 2005, total interest free loans to shareholders
amounted to $0.6 million.
l
Unilink, a PRC company controlled through contractual agreements. Unilink was registered
in June 2003 and is 50.0% owned by our former Vice President of Product Development, Jing
Wang and 50% owned by our former Vice President of Business Development, Wei Long. Their
ownerships are in the process of being transferred to our Financial Controller Jinhua Yuan
and our Human Resource manager Rong Zhang. As of December 31, 2004 and 2005, total interest
free loans to shareholders amounted to $1.2 million.
F-7
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
l
Shenzhen Yuan Hang Technology Co., Ltd. ("Yuan Hang"), a PRC company controlled through
contractual agreements. Yuan Hang was registered in June 2001 and acquired by the Company
in May 2005 (note 7). Yuan Hang is 50% owned by our Vice president of Business Development,
Yan Ma, and our Financial Controller, Jinhua Yuan. As of December 31, 2005, total interest
free loans to shareholders amounted to $0.6 million.
l
Beijing Cosmos Digital Technology Co., Ltd. ("Cosmos"), a PRC company controlled through
contractual agreements. Cosmos was registered in May 2003 and acquired by the Company in
June 2005 (note 7). Cosmos is 50% owned by our Human Resource manager Rong Zhang and
Product Development Manager Teng Zhao. As of December 31, 2005, total interest free loans
to shareholders amounted to $1.7 million.
l
Hainan Zhong Tong Computer Network Co., Ltd.("Zhong Tong"), a PRC company controlled
through contractual agreements. Zhong Tong was registered in October 2000, and acquired by
the Company in June 2005 (note 7). Zhong Tong is 50.0% owned by our Finance Controller,
Jinhua Yuan and our Product Development Manager, Teng Zhao. As of December 31, 2005, total
interest free loans to shareholders amounted to $1.7 million.
l
Beijing Lian Fei Wireless Communication Technology Co., Ltd.("Lian Fei"), a PRC company
controlled through contractual agreements. Lian Fei was registered in June 2002, and
acquired by the Company in June 2005 (note 7). Lian Fei is 50% owned by our Vice president
of Business Development, Yan Ma, and our Human Resource manager, Rong Zhang. As of December
31, 2005, total interest free loans to shareholders amounted to $1.7 million.
l
Shanghai Qimingxing E-commerce Co., Ltd. ("Qimingxing"), a PRC company controlled
through contractual agreements. Qimingxing was registered in February 2000, and acquired by
the Company in August 2005 (note 7). Qimingxing is 50% owned by our Financial Controller,
Jinhua Yuan and our Technical senior manager, Xingyong Ding. As of December 31, 2005, total
interest free loans to shareholders amounted to $0.9 million.
All the above VIEs are engaged in the business of providing WVAS to mobile phone users in
China via third party operators except Yuan Hang, which is engaged in providing online gaming
services in China.
2 Restatement of 2004 Consolidated Financial Statements
The Company has restated its consolidated financial statements for the year ended December 31,
2004 ("the Restatement"). The determination to restate these consolidated financial statements was
made by our management in consultation with the Audit Committee of the Board of Directors in
February 2006, as a result of an error related to the accounting for stock options. In October
2004, the Company amended certain of its executive officers' prior stock option grants to provide
that if the Company terminates an officer without cause, as defined in the Company's stock option
plans, or if any such officer resigns voluntarily, all or a portion of those options would
immediately become fully vested and exercisable at that time. Since upon voluntary termination a
portion of those options vest and become immediately exercisable, the Company determined that the
full amount of the deferred compensation relating to that portion of the options should have been
expensed in the fourth quarter of 2004, when the amendments were effected. The Restatement
increases the stock compensation expense for the year ended December 31, 2004 by $1,444,000 and
decreases net income before and after tax by $1,444,000, or $0.006 per diluted share and per basic
share. This non-cash adjustment does not impact the Company's cash flow from operating activities.
3 Basis of presentation
These consolidated financial statements have been prepared in accordance with the accounting
principles generally accepted in the United States of America ("U.S. GAAP").
All transactions and balances between the Group's businesses have been eliminated upon
consolidation.
F-8
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
4 Use of estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect the reported assets, liabilities, revenue and expenses
and the disclosure of contingent assets and liabilities. Actual results could differ from these
estimates.
5 Summary of significant accounting policies
(a) Basis of consolidation
The consolidated financial statements include the financial statements of the Company, its
subsidiaries, and the VIEs for which the Company is the primary beneficiary. All subsidiaries are
wholly-owned by the Company, and the Company does not hold any investments accounted for under the
cost or equity method.
The Company has adopted FASB Interpretation No. 46R ("FIN 46R"), Consolidation of variable
interest entities – an interpretation of ARB No. 51, which requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties.
The Company began to consolidate the operating results of newly acquired subsidiaries and VIEs
as follows:
(a)
Brilliant, Wang You and Yuan Hang since June 2005;
(b)
Cosmos, Zhong Tong and Lian Fei since July 2005 and
(c)
Qimingxing since September 2005.
As of December 31, 2005, the aggregate accumulated profits of all VIEs were approximately $9.4
million and have been reflected in the consolidated financial statements.
(b) Cash and cash equivalents
The Group considers all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents are composed primarily of investments in
money market accounts stated at costs, plus accrued interest, which approximates fair value.
(c) Short-term investments
Short-term marketable securities are classified as available-for-sale and carried at estimated
fair value with unrealized gains and losses recorded as a component of accumulated other
comprehensive income. Management determines the appropriate classification of its short-term
investments and re-evaluates such determination at each balance sheet date.
(d) Accounts receivable
An allowance for doubtful debts is provided based on an ageing analysis of accounts receivable
balances, historical bad debt rates, repayment patterns, customer credit worthiness and industry
trend analysis. The Group also makes a specific allowance if there is strong evidence showing that
the receivable is likely to be irrecoverable. Accounts receivables in the balance sheet are stated
net of such allowance of $338,291 and $148,237 as of December 31, 2004 and 2005.
F-9
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
(e) Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated over their estimated useful lives on a straight-line
basis. As a result of experience, management considered that the original estimates on residual
value and useful life of property and equipment require revision. Effective from January 1, 2005,
the Group has changed its estimation on residual value and useful life of property and equipment.
The estimated residual value has been changed from 10% to zero. The estimated useful lives have
been changed as follows:
Old Estimation
New Estimation
Computer hardware/equipment
60 months
36-60 months
Office equipment
60 months
12-36 months
Leasehold improvements
the shorter of
their estimated
useful lives or the
lease term
the shorter of
their estimated
useful lives or the
lease term
No retrospective adjustment has been applied in the change of accounting estimation. The
changes increased the depreciation expense by $436,934 and reduced the income tax expense by
$123,976 for the year ended December 31, 2005.
Expenditures for repairs and maintenance are expensed as incurred. The gain or loss on
disposal of property and equipment, if any, is the difference between the net sales proceeds and
the carrying amount of the relevant assets, and is recognized in the statement of operations.
(f) Goodwill and intangible assets
Goodwill represents the excess of the purchase price over the fair value of the identifiable
assets and liabilities acquired as a result of the Company's acquisitions of interests in its
subsidiaries and variable interest entities. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142 "Goodwill and Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill
is no longer amortized, but tested for impairment upon first adoption and annually thereafter, or
more frequently if events or changes in circumstances indicate that it might be impaired. The
Company assess goodwill for impairment in accordance with SFAS 142. In December of each year, the
Company tests impairment of goodwill at the reporting unit level and recognizes impairment in the
event that the carrying value exceeds the fair value of each reporting unit.
The Company applies the criteria specified in SFAS No. 141 "Business Combinations" ("SFAS
141") to determine whether an intangible asset should be recognized separately from goodwill.
Intangible assets acquired through business acquisitions are recognized as assets separate from
goodwill if they satisfy either the "contractual-legal" or "separability" criterion. Per SFAS 142,
intangible assets with definite lives are amortized over their estimated useful life and reviewed
for impairment in accordance with Statement of Financial Accounting Standards No. 144 (note 5(g))
"Accounting for the Impairment or Disposal of Long-lived Assets" ("SFAS 144"). Intangible assets,
such as purchased technology, licenses, domain names, partnership, and non-compete agreements,
arising from the acquisitions of subsidiaries and variable interest entities are recognized and
measured at fair value upon acquisition. Intangible assets are amortized over their estimated
average useful lives from one to three years. The Company reviews the amortization methods and
estimated useful lives of intangible assets regularly.
F-10
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
(g) Impairment of long-lived assets and intangible assets
Long-lived assets and intangible assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company
assesses the recoverability of the long-lived assets and intangible assets (other than goodwill) by
comparing the carrying amount to the estimated future undiscounted cash flow associated with the
related assets. The Company recognizes impairment of long-lived assets and intangible assets in the
event that the net book value of such assets exceeds the estimated future undiscounted cash flow
attributable to such assets. The Company uses estimates and judgments in its impairment tests and
if different estimates or judgments had been utilized, the timing or the amount of the impairment
charges could be different. No impairment of long-lived assets and intangible assets was recognized
for any of the years presented.
(h) Revenue and cost of services recognition
Wireless value added services
The vast majority of the Group's revenues are derived from entertainment-oriented wireless
value-added services including Short Messaging Services ("SMS"), Multimedia Messaging Services
("MMS"), Wireless Application Protocol ("WAP"), Java
TM
("Java games"), Interactive Voice
Response Services ("IVR") and Ring Back ("RB") services (IVR and RB, collectively known as "Audio
Related Services") to phone users through various subsidiaries of China Mobile Communications
Corporation ("China Mobile"), China United Communications Corporation ("China Unicom"), China
Telecom Corporation and China Netcom Corporation (collectively the "Operators"). Fees for these
services are charged on a per message basis or on a monthly subscription basis, and vary according
to the type of products and services delivered.
The Group recognizes all revenues in the period in which the services are performed, provided
that persuasive evidence of a contractual arrangement exists, delivery has occurred, the sales
price is fixed or determinable, and collectibility is reasonably assured. A substantial portion of
the Group's revenue is recorded based on monthly statements received from provincial level
subsidiaries of the Operators. In certain instances, when a statement is not received within a
reasonable period of time, the Group is required to make an estimate of the revenues and cost of
services earned during the period covered by the statement. On a quarterly basis, the Group
evaluates its estimates based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. For the year ended December 31, 2005,
approximately 2% of the Group's revenues were estimated respectively.
The Group contracts with the Operators for the transmission of wireless value-added services
as well as for billing and collection services. The Group measures its revenues based on the total
amount paid by its customers, for which the Operators bill and collect on the Group's behalf. For
this billing and collection services, the Operators retain a fixed percentage fee, which is
reflected as a cost of services in the financial statements. In addition, for SMS and MMS services,
the Operators charge the Group a network usage fee based on a fixed per message rate multiplied by
the excess of messages sent over message received. These network usage fees are likewise retained
by the Operators, and are reflected as a cost of services in the financial statements. Network
usage fees charged to the Group are reduced for messages received by the Group because the
Operators separately charge the sender a fee for these transmissions. The Group has assessed its
relationship with the Operators and the terms of the fee arrangement under Emerging Issue Task
Force Issue No 99-19, and has concluded that reporting the gross amounts billed to its customers is
appropriate.
The Group licenses content from independent content providers. Certain of these agreements
determine the fees payable for content based on a percentage of revenues of the Group generated
from the use of the content. The Group records its revenues inclusive of fees to be paid to content
providers as the Group acts as the principal in these arrangements.
F-11
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
Casual Online Games Services
The Group currently provides its casual online game services through its subsidiaries,
Brilliant and Wang You, and VIE, Yuan Hang. The Group receives subscription fees from distributors
for the sales of game cards, in either physical or virtual form, with certain number of game points
incorporated in the cards. The corresponding revenue is recognized as the game points are consumed
by game players in games. Any sold out game cards which are not activated by users and activated
points which are not consumed in games constitute deferred revenue.
(i) Income and other taxes
The Group accounts for income tax using SFAS No. 109 "Accounting for Income Taxes," which
requires the asset and liability approach for financial accounting and reporting for income taxes.
Under this approach, deferred taxes are provided for the tax consequences of temporary differences
by applying enacted statutory rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities. The tax basis of
an asset or liability is the amount attributed to that asset or liability for tax purposes. The
effect on deferred taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax
assets if it is considered more likely than not that some portion of, or all of, the deferred tax
asset will not be realized. Shanghai Unilink and Qimingxing are currently considered small
businesses and are subject to a 2.4% tax on revenues and 4.8% on the difference between revenue and
cost of service, as defined for tax purposes.
The Group is also subject to business taxes (BT) of 3-5% on the provision of taxable services,
which includes services provided to customers and in certain instances to the variable interest
entities. All business taxes paid are accrued for as a reduction of revenues.
The Group charges software license fees to the variable interest entities which are subject to
value added tax ("VAT") at 17%. The Group is entitled to a tax refund equivalent to portion of VAT
expense in excess of 3%.
(j) Advertising expenses
Advertising expenses generally represents the cost of promotions to create or stimulate a
positive image of the Group or a desire to buy the Group's products and services, and are expensed
as incurred. Advertising expenses totaled approximately $938,750, $3,441,117 and $6,151,167 during
the years ended December 31, 2003, 2004 and 2005, respectively.
(k) Product development expenses
Product development expenses consist primarily of compensation and related costs for employees
associated with the development of the content of our products and development, enhancement to and
maintenance of related product technical platforms and customer databases.
The Group accounts for the cost of developing the content of our products in accordance with
FAS 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed"
and would capitalize, if criteria under FAS 86 were met, direct costs incurred during the
development phase and amortize on a straight-line basis over the estimated product life or on the
ratio of current revenues to total projected product revenue, which ever is greater.
The Group accounts for product development costs of technical platform and customer database
under SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use" and would capitalize, if criteria under SOP 98-1 were met, direct costs associated in
developing or obtaining internal-use computer software during the application development stage.
Cost incurred in the enhancement and maintenance of the Group's existing platforms and database are
charged to product development expense as incurred.
To date, the amount of costs qualifying for capitalization under FAS 86 and SOP98-1 has been
immaterial and as a result, all product development costs have been expensed as incurred.
F-12
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
(l) Stock-based compensation
The Group accounts for share-based employee compensation arrangements in accordance with APB
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations. In
general, compensation cost under APB No. 25 is recognized based on the difference, if any, between
the estimated fair value of the Group's ordinary shares on the measurement date and the amount an
employee must pay to acquire the shares. The measurement date is determined when the number of
shares and the exercise price are fixed. Total compensation cost as determined at the date of
option grant is recorded in shareholders' equity/(deficit) as additional paid-in capital with an
offsetting entry to deferred stock-based compensation. Deferred stock-based compensation is
amortized on a straight-line basis and charged to expense over the vesting period of the underlying
options. The Group accounts for stock-based arrangements issued to non-employees using the fair
value method, which recognizes compensation expense based on the fair value of the options using
the Black-Scholes option pricing model on the date of grant.
Other than the recognition of the full amount of the deferred compensation relating to that
portion of the options that would have become vested upon voluntarily termination of certain
executive officers as stated in note 2, the stock option amendment in October 2004 (detail stated
in note 2) also created a re-measurement under FIN44 "Accounts for Certain Transactions Involving
Stock Compensation". The incremental compensation arising from the re-measurement would be recorded
when the event of early terminations occurred or became probable. Our chief operating officer
("COO") and chief executive officer ("CEO"), resigned on January 3, 2006 and February 24, 2006
respectively (note 26), both officers have stock option plans covered by the amendment mentioned in
note 2. As a result, for the year ended December 31, 2005 the Company recorded an incremental
compensation expense of $776,411 under APB No.25, measured at the excess of the fair value of the
shares at the date of amendment over the original intrinsic value for accelerated options.
As required by SFAS No. 148, accounting for Stock-Based Compensation – Transition and
Disclosure – an amendment of FASB Statement No. 123, the following table shows the estimated effect
on net income and earnings per share if the Company had applied the fair value recognition
provision of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
For the year ended December 31,
2003
2004
2005
(Restated)
Net income
$
3,616,083
$
11,066,034
$
12,449,063
Add: Compensation
expense for employees
under APB No. 25
1,119,529
3,464,807
2,012,425
Less: Compensation
expense for employees
under fair value based
methods
(87,861
)
(1,183,519
)
(2,653,862
)
Pro forma net income
4,647,751
13,347,322
11,807,626
Accretion on Series B
convertible redeemable
preferred
shares
(143,936
)
(28,206
)
—
Amount allocated to
participating preferred
shareholders
(2,368,058
)
(958,473
)
—
Pro forma net income
attributable to ordinary
shareholders
$
2,135,757
$
12,360,643
$
11,807,626
Basic earning per share
— As reported
$
0.02
$
0.05
$
0.05
— Pro forma
$
0.02
$
0.06
$
0.05
Diluted earning per share
— As reported
$
0.02
$
0.04
$
0.05
— Pro forma
$
0.02
$
0.05
$
0.04
The Restatement reduces the pro forma net income for the year ended December 31, 2004 by
$82,400. The incremental compensation expense under fair value based methods as a result of the
acceleration was $1,112,467 for the year ended December 31, 2005.
F-13
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
We calculated the fair value of each option grant on the date of grant using the Black-Scholes
option pricing model. The following are the assumptions used for each respective period:
For the year ended December 31,
2003
2004
2005
Risk-free interest rate (%)
3.19
1.73-3.61
1.73-4.36
Expected life (years)(1)
5
2-5
2-6
Expected dividend yield (%)(2)
—
0
0
Volatility (%)
—
80
60
(1)
In the absence of sufficient historical data in the exercise behavior of our staff, the
Company decided for the short term to use the shortcut method which applies the mid point
of option life and average vesting period.
(2)
The Company used a 6-year period historical data of similar entities in the industry to
estimate expected stock price volatility used in the computation of stock based
compensation under the fair value method.
In December 2004, the FASB issued SFAS No. 123R, Shared Based Payment. This statement
establishes standards for the accounting for transactions in which an entity exchanges its equity
instruments for goods and services. It focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions (employee stock options). The
statement requires the measurement of the cost of employee services received in exchange for an
award of equity instruments (such as employee stock options) at the fair value on the grant date.
That cost will be recognized over the period during which an employee is required to provide
services in exchange for the award (the requisite service period). Beginning the first quarter of
2006, the Company will adopt the provisions of SFAS No.123R under modified prospective transaction
method using the Black-Scholes option pricing model. We estimate the stock option compensating
expense related to the unvested options at December 31, 2005 upon adoption of FAS123R to be $2
million to $2.5 million which would be recognized in 2006 and thereafter.
(m) Foreign currency translation
The Company's functional and reporting currency is the U.S. dollar ("US$"). The functional
currency of the Company's operating subsidiaries and consolidated variable interest entities in
China is the Renminbi ("RMB"). Transactions denominated in currencies other than RMB are translated
into RMB at the exchange rates quoted by the People's Bank of China (the "PBOC") prevailing at the
dates of the transactions. Gains and losses resulting from foreign currency transactions are
included in the consolidated statement of operations. Monetary assets and liabilities denominated
in foreign currencies are translated into RMB using the applicable exchange rates quoted by the
PBOC at the balance sheet dates. All such exchange gains and losses are included in the statement
of operations. All assets and liabilities of our subsidiaries and consolidated VIEs in China are
translated into US$ at the exchange rates in effect at the balance sheet date and revenues and
expenses are translated into US$ at the average exchange rates in effect during the reporting
periods. The exchange differences resulting from translating the PRC entity financial statements
into US$ are included in Accumulated Other Comprehensive Income which is a separate component of
shareholders' equity/(deficit) on the consolidated balance sheets.
(n) Comprehensive income
Comprehensive income is defined as the change in equity of the Group during a period from
transactions and other events and circumstances excluding transactions resulting from investments
by owners and distributions to owners. For this purpose, holders of redeemable convertible equity
securities are deemed to be owners. Accumulated other comprehensive income of the Group represents
the cumulative foreign currency translation adjustment and unrealized gain or loss on short term
investments.
F-14
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
(o) Earnings/(Loss) per share
In accordance with SFAS No. 128 "Computation of Earnings Per Share," basic earnings/(loss) per
share is computed by dividing net income/(loss) attributable to ordinary shareholders by the
weighted average number of ordinary shares outstanding during the period. Diluted earnings/(loss)
per share is calculated by dividing net income/(loss) by the weighted average number of ordinary
and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares
consist of the ordinary shares issuable upon the conversion of the convertible preferred shares
(using the if-converted method) and ordinary shares issuable upon the exercise of outstanding share
options (using the treasury stock method). Ordinary equivalent shares in the diluted
earnings/(loss) per share computation are excluded in net loss periods as their effect would be
anti-dilutive.
The Company has adopted the consensus reached in EITF 03-06, "Participating Securities and the
Two-Class Method under SFAS No. 128," which provides further guidance on the definition of
participating securities and requires the use of the two – class method in calculating earnings per
share for enterprises with participating securities. The Company determined that all its preferred
stock outstanding through March 31, 2004 qualified as participating securities.
(p) Segment reporting
The Group follows SFAS No. 131 "Disclosures about Segment of an Enterprise and Related
Information." The Group operates and manages its wireless value added service business and casual
game business as two separate segments. For the year ended 31 December 2005, the casual game
business was not material, accounts for 2% of the Group's total revenue. The Group generates its
revenues solely from phone users in China and accordingly, no geographical segments are presented.
6 Preferred shares
In connection with the reorganization in April of 2001, the Company capitalized 66,172 shares
of Series B redeemable convertible preferred share at an assigned value of $274,303 and 336,848
shares of Series A convertible preferred stock at an assigned value of $1,245,200. Simultaneous
with the reorganization, the Company issued warrants to purchase 110,287 shares of Series B
convertible preferred share with an exercise price of $0.01 per share, which were exercised on May
30, 2001. Subsequent to the reorganization, the Company issued an additional 34,980 shares of
Series A preferred share in 2001 for consideration of $9.85 per share, and an additional 3,555
shares of Series A preferred share in 2002 for consideration of $9.84 per share.
In April 2001, the Company issued 245,203 shares of Series C redeemable convertible preferred
share ("Series C") for consideration of $8.15 per share.
In July 2001, the Company issued 101,570 shares of Series D convertible preferred share
("Series D") for consideration of $9.84 per share.
In February 2002, the Company issued 101,570 shares of Series E redeemable convertible
preferred share ("Series E") for consideration of $9.84 per share.
Holders of the Company's preferred stock have various rights and preferences as follows:
Voting
Holders of preferred shares have voting rights equal to the voting rights to which the
ordinary share then issuable upon conversion of such preferred share are entitled.
F-15
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
Dividends
The holder of each preferred share is entitled to participate in dividends, when and if
declared by the Board of Directors. No dividends have been declared by the Board of Directors from
inception of the Company through December 31, 2003.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the
Group, or the sale of all or substantially all of its assets, holders of Series B, C, D and E
preferred shareholders, and Icon (a specified holder of Series A preferred share), each as a class,
shall receive $1,500,000, $2,000,000, $1,000,000, $999,997 and $750,000, respectively, after which
the remaining liquidation proceeds shall be distributed pro rata amongst all the shareholders,
including the Series A preferred shareholders other than Icon, in accordance with each
shareholders' respective shareholding percentages, with each preferred share participating as if
converted into ordinary shares.
Conversion
Each preferred share shall be convertible into one ordinary share, as such conversion may be
adjusted from time to time, including stock splits, in accordance with the conversion provisions in
the Company's Articles of Incorporation. Each preferred share shall be automatically converted into
such number of ordinary shares, as such conversion may be adjusted, upon (i) the closing of a
qualified initial public offering ("IPO"), or (ii) upon the terms and conditions as each may be
agreed between the Company and the holders of the relevant shares.
Mandatory redemption
The holders of Series B and Series C shares are entitled to redeem all of the outstanding
Series B and Series C shares on or after April 30, 2007. The holders of Series E shares are
entitled to redeem all of the outstanding Series E shares on or after September 3, 2007.
The redemption price for the original Series B shares capitalized upon spin-off is $1,500,000.
The redemption price for the Series B shares purchased upon exercise of the Series B warrants is
$1,100. Due to the insignificance of the redemption price, these Series B shares purchased upon the
exercise of Series B warrants are classified as convertible preferred shares in shareholders'
equity/(deficit). The redemption prices of the Series C and Series E shares are $2,000,000 and
$1,000,000, respectively. If on the redemption date the number of shares that may be legally
redeemed by the Group is less than the number of such shares to be redeemed, then the shares to be
redeemed shall be allocated to Series B redeemable preferred shareholders and Series C redeemable
preferred shareholders pro rata in accordance with each of its shareholding percentage at such
time, and the remaining shares that may not legally be redeemed shall be carried forward until the
Group has legally available funds for such redemption.
Each of the Company's preferred shares was converted into 100 ordinary shares upon the closing
of the Company's IPO process on March 4, 2004.
7 Business Combinations
The Group accounts for its business combinations using the purchase method of accounting. This
method requires that the acquisition cost to be allocated to the assets, including separate
identifiable tangible assets, and liabilities the Group acquired based on their estimated fair
values. The Company makes estimates and judgments in determining the fair value of the acquired
assets and liabilities based on independent appraisal reports as well as its experience with
similar assets and liabilities in similar industries. If different judgment or assumptions were
used, the amounts assigned to the individual acquired assets or liabilities could be materially
affected.
F-16
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
(a) Acquisition of Brilliant
In May 2005, the Company completed the acquisition of Brilliant Concept Investments Ltd.
("Brilliant"), a British Virgin Islands limited liability corporation. As a result of such
acquisition, Brilliant Group became a wholly-owned subsidiary of Linktone. Brilliant, through its
subsidiary Wang You and exclusive contractual arrangements with a local entity, Yuan Hang, is
engaged in providing online gaming services in the PRC. Brilliant, its subsidiary and affiliated
company are collectively known as Brilliant Group. As a result of acquisition, Yuan Hang became a
VIE of Linktone. The primary purposes of the acquisition was to complement and leverage Linktone's
core WVAS business as the Company builds a robust interactive entertainment community.
The aggregate purchase price is comprised of initial consideration and a contingent
consideration calculated on an earn out basis at 65% of 8 times of the Brilliant Group's net profit
for the year 2005. The initial consideration comprised of $3,141,374 cash to selling shareholders
and $238,016 legal and professional costs related to the acquisition. As of December 31, 2005,
the Company finalized the additional consideration related to the earn out period in the amount of
$5,709,644, which was recorded as additional goodwill in the year ended December 31, 2005.
The total purchase price of $9,089,034 was allocated as follows:
Cash
$
379,025
Other current assets
234,170
Fixed assets
97,143
Intangible assets
602,000
Current liabilities
(322,511
)
Goodwill
8,099,207
Purchase price
$
9,089,034
Amortizable intangible assets acquired, including customer list, technology, operation license
and agreements and non-compete agreements with certain Brilliant's executives, have an estimated
average useful life of approximately one year. The amortization expense of intangible assets for
the year ended December 31, 2005 was $387,146. As of December 31, 2005, total goodwill recorded for
the Brilliant acquisition was $8,099,207, representing the excess of the total purchase price over
the fair value of the net tangible and identifiable intangible assets acquired. Immediately after
the closing of the acquisition, the operating results of Brilliant Group were consolidated with
those of the Company starting from June 2005.
(b) Acquisition of Cosmos
In June 2005, the Company completed the acquisition of Cosmos, a leading privately-held
provider of WAP services to China Unicom. As a result of such acquisition, Cosmos became a VIE of
Linktone. Cosmos is wholly owned by two employees of Linktone. The primary purposes of the
acquisition were to strengthen the Company's overall WAP service portfolio and development
capabilities and increase its share in the 2.5 WVAS market.
The aggregate purchase price is comprised of an initial consideration and a contingent
consideration. The initial consideration is comprised of three elements: (a) $845,768 cash paid to
Cosmos for settling the loan owned by the selling shareholders to Cosmos (b) $230,307 cash paid to
selling shareholders for the net working capital of Cosmos as of May 31, 2005 and (c) approximately
$295,570 in legal and professional costs related to the acquisition. The contingent consideration
will be calculated on an earn out basis at approximately 3.8 times of Cosmos's net profit for the
period from May 1, 2005 to April 30, 2006. The contingent consideration is subject to a cap of $3.1
million. The Company has paid $604,120 (note 12) cash to shareholders as part of the advance
payment for the contingent consideration. In addition, the Company recorded an acquisition related
payable of $897,205 as of December 31,2005.
F-17
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
The initial purchase price of $1,371,645 was allocated as follows:
Cash
$
938,630
Other current assets
358,817
Fixed assets
34,307
Intangible assets
1,243,000
Current liabilities
(408,151
)
Goodwill
102,247
Acquisition related payable
(897,205
)
Purchase price
$
1,371,645
Amortizable intangible assets acquired, including technology, VASP license and agreements and
non-compete agreements with certain Cosmos executives, have an estimated average useful life of
approximately 3.3 years. The amortization expense of intangible assets for the year ended December
31, 2005 was $187,627. The prepayment and additional payment after deducting the acquisition
related payable will be recorded as goodwill. The operating results of Cosmos were consolidated
with those of the Company starting July 1, 2005 after the Company took effective control over the
operations of Cosmos.
(c) Acquisition of Zhong Tong
In June 2005, the Company completed the acquisition of Zhong Tong, a privately held provider
of SMS services to China Mobile. As a result of such acquisition, Zhong Tong became a VIE of
Linktone. Zhong Tong is wholly owned by two employees of Linktone. The primary purpose of the
acquisition was to provide a separate network access codes for the Company's specific project.
The aggregate purchase price was $1,715,923 and comprised of three elements: (a) $730,696 cash
to selling shareholders; (b) $966,592 cash paid to Zhong Tong for settling the loan owned by the
selling shareholders to Zhong Tong and (c) approximately $18,635 in legal and professional costs
related to the acquisition.
The purchase prices of $1,715,923 was allocated as follows:
Cash
$
1,029,137
Other current assets
165,847
Fixed assets
21,057
Intangible assets
230,436
Current liabilities
(227,909
)
Goodwill
497,355
Purchase price
$
1,715,923
Amortizable intangible assets acquired, including VASP license and agreements have an
estimated average useful life of approximately 3.3 years. The amortization expense of intangible
assets for the year ended December 31, 2005 was $34,922. As of December 31, 2005, total goodwill
recorded for the Zhong Tong acquisition was $497,355, representing the excess of the purchase price
over the fair value of the net tangible and identifiable intangible assets acquired. Immediately
after the closing of the acquisition, the operating results of Zhong Tong were consolidated with
those of the Company starting from July 2005.
(d) Acquisition of Lian Fei
In June 2005, the Company completed the acquisition of Lian Fei, a privately held provider of
MVAS services to China Mobile. As a result of such acquisition, Lian Fei became a VIE of Linktone.
Lian Fei is wholly owned by two employees of Linktone. The primary purpose of the acquisition was
to provide a separate network access code in order to increase the Company's market share in the
PRC WVAS market.
F-18
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
The aggregate purchase price was $2,025,395 and comprised of three elements: (a) $1,472,866
cash to selling shareholders; (b) $543,708 cash paid to Lian Fei for settling the loan owned by the
selling shareholders to Lian Fei and (c) approximately $8,821 in legal and professional costs
related to the acquisition.
The purchase prices of $2,025,395 was allocated as follows:
Cash
$
601,712
Other current assets
441,994
Intangible assets
283,284
Current liabilities
(286,833
)
Goodwill
985,238
Purchase price
$
2,025,395
Amortizable intangible assets acquired, including VASP license and agreements have an
estimated average useful life of 3.3 years. The amortization expense of intangible assets for the
year ended December 31, 2005 was $43,096. As of December 31, 2005, total goodwill recorded for the
Lian Fei acquisition was $985,238, representing the excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets acquired. Immediately after the
closing of the acquisition, the operating results of Lian Fei were consolidated with those of the
Company starting from July 2005.
(e) Acquisition of Qimingxing
In August 2005, the Company completed the acquisition of Qimingxing, a privately held provider
of MVAS services to China Mobile. As a result of such acquisition, Qimingxing became a VIE of
Linktone. Qimingxing is wholly owned by two employees of Linktone. The primary purpose of the
acquisition was to provide a separate network access code in order to increase it market share in
the PRC WVAS market.
The aggregate purchase price was $1,866,072 and comprised of three elements: (a) $747,052 cash
to selling shareholders; (b) $1,110,015 cash payable to Qimingxing for settling the loan owned by
the selling shareholders to Qimingxing and (c) approximately $9,005 in legal and professional costs
related to the acquisition.
The purchase prices of $1,866,072 was allocated as follows:
Cash
$
1,026
Other current assets
1,154,451
Intangible assets
233,764
Current liabilities
(10,341
)
Goodwill
487,172
Purchase price
$
1,866,072
Amortizable intangible assets acquired, including VASP license and agreements have an
estimated average useful life of approximately 3.3 years. The amortization expense of intangible
assets for the year ended December 31, 2005 was $23,841. As of December 31, 2005, total goodwill
recorded for the Qimingxing acquisition was $487,172, representing the excess of the purchase price
over the fair value of the net tangible and identifiable intangible assets acquired. Immediately
after the closing of the acquisition, the operating results of Qimingxing were consolidated with
those of the Company starting from September 2005.
F-19
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
The following table summarizes the goodwill arising from acquisitions:
Year ended December 31,
2004
2005
Brilliant
$
—
$
8,099,207
Cosmos
—
102,247
Zhong Tong
—
497,355
Lian Fei
—
985,238
Qimingxing
—
487,172
Total
$
—
$
10,171,219
In accordance with SFAS 142, goodwill is not amortized but is subject to annual impairment
assessment. The Company performed impairment tests relating to goodwill arising from the above
acquisitions and concluded there were no impairment as to the carrying value of the goodwill as of
December 31, 2005.
Based on an assessment on all the acquired companies' financial performance made by the Group
in 2005, only Brilliant Group is considered material to the Group. The following un-audited pro
forma financial information reflects the consolidated results of operations of the Group as if the
acquisition of Brilliant Group had taken place on January 1, 2005. The pro forma information
includes adjustment for amortization of intangible assets acquired. The pro forma financial
information is not necessarily indicative of the results of operations as it would have been had
the transaction been affected on the assumed date.
(Pro forma)
2005
(unaudited)
Net sales
$
73,918,603
Net income
12,306,063
Earning per basic share
0.05
Earning per dilutive share
0.04
Brilliant Group started to provide online games services from April 2004 and its revenue and
expenses for 2004 were not material to the Group. Given the insignificance of Brilliant Group's
financial results in 2004 and the minimal impact of any related purchase adjustments, the
management believes the presentation of the un-audited pro forma information with regards to a
summary of the results of operations of the Group assuming the acquisition of Brilliant Group had
occurred on January 1, 2004 is not necessary.
8 Cash and Cash equivalents
Year ended December 31,
2004
2005
Cash
$
53,235,397
$
24,527,083
Investment in money market accounts
10,178,232
11,725,595
Total
$
63,413,629
$
36,252,678
Interest income earned from the above cash and cash equivalents amounted to $734,372 and
$1,005,854 for the years ended December 31, 2004 and 2005 respectively.
9 Short term investments
The investment in marketable debt securities is classified as available for sale securities.
The Company invests in these securities with the intent to make such funds readily available for
operating or acquisition purposes and accordingly, classifies them as short term investments. All
the marketable debt securities are due within one year and the aggregate fair values of these
securities as of December 31, 2004 and December 31, 2005 were $14,860,365 and $41,580,530
respectively.
F-20
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
During the years ended December 31, 2004 and December 31, 2005, the Group recorded $64,678 and
$ 96,317 respectively of unrealized losses on its marketable debt securities as a component of
comprehensive income. The Company considers that the declines in value are not an other than
temporary impairment, because the declines in market value were attributable to changes in
interests rates, not credit quality and because the Company has the ability and intent to hold
these investments until maturity. Investments in available-for-sale debt securities at fair value
were as follows:
As of December 31, 2004
Accrued
Estimated fair
Cost
interest
Unrealized loss
value
Corporate bond and
notes
$
14,843,949
$
81,094
$
(64,678
)
$
14,860,365
As of December 31, 2005
Accrued
Estimated fair
Cost
interest
Unrealized loss
value
Government and
government agency
bonds
$
18,493,880
$
262,393
$
(21,410
)
$
18,734,863
Corporate bonds
21,110,705
570,742
(74,907
)
21,606,540
Time deposit
1,239,127
—
—
1,239,127
Total
$
40,843,712
$
833,135
$
(96,317
)
$
41,580,530
10 Accounts receivable, net
Year ended December 31,
2004
2005
Accounts receivable
$
10,783,826
$
16,093,899
Less: Allowance for doubtful accounts
(338,291
)
(148,237
)
10,445,535
15,945,662
Movement in allowance for doubtful accounts:
Balance at beginning of year
$
(161,478
)
$
(338,291
)
Reverse/ (charge) to expense
(176,813
)
190,054
Balance at end of year
$
(338,291
)
$
(148,237
)
11 Tax refund receivable
Year ended December 31,
2004
2005
Receivable related to invoiced revenue
$
1,994,621
$
1,361,630
Receivable related to un-invoiced revenue
602,546
769,498
Total
$
2,597,167
$
2,131,128
For the years ended December 31, 2004 and December 31, 2005, pursuant to various software
license agreements signed between Huitong, Linktone Internet, Weilan and Unilink, Huitong charged
Weilan and Unilink a total fee (based on invoiced revenue) of $18.4 million and $26.2 million
respectively for the use of its software products. For the year ended December 31, 2005, Linktone
Internet charged Weilan and Unilink a total fee (based on invoiced revenue) of $9.8 million for the
use of its software products. These fees are subject to a 17% VAT. Under applicable tax
regulations, Huitong and Linktone Internet are entitled to a tax refund equivalent to portion if
VAT expenses in excess of 3%.
For the year ended December 31, 2005, Huitong and Linktone Internet paid a total of $5.7
million ($3.4 million relates to year 2004) and $0.6 million respectively for the 17% VAT and
received a total of $4.5 million ($2.6 million
relates to year 2004) and $0.5 million tax refund respectively, representing the 14% VAT
expenses in excess of 3%.
F-21
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
In addition, as of December 31, 2005 Huitong and Linktone Internet accrued VAT refund
receivable and payable of $2.1 million and $2.6 million (note 17) respectively for the remaining
software license fees that they earned in 2005 (including $11.4 million relating to revenue
invoiced in 2005 and $6.4 million relating to revenue expected to invoice in 2006). Management
believes the full amount of $2.1 million is refundable.
12 Deposits and other receivables
Year ended December 31
2004
2005
Rental and other deposits
$
424,025
$
579,899
Staff advances
307,517
833,047
Convertible loan receivable
—
581,782
Prepayments to advertising suppliers, content and other providers
983,853
2,325,879
Prepayments for fixed assets
49,092
—
Prepayment for acquisition of VIE (note 7(b))
—
604,120
Restricted cash
1,123,184
122,868
Others
12,762
89,354
Total
$
2,900,433
$
5,136,949
Staff advances include advances to employees for settlement of investment related payables for
acquisition of VIEs. The settlement is expected to be made within a year. As of December 31, 2004
and December 31, 2005, such advances amounted to $nil and $433,694 respectively.
Convertible loan receivable relates to part of the drawdown of an interest free convertible
loan totaling $2,555,000, pursuant to senior secured convertible loan agreements, signed with 9
Sky International Ltd. and its related parties, Shanghai Yue Sheng Information Technology Co., Ltd.
and Shanghai Yin Zhi Yue Information Technology Co., Ltd. (collectively known as "9 Sky entities")
and the shareholders' representative of 9 Sky entities on October 12, 2005. These loans are
convertible into certain percentage of shares of the 9 Sky entities upon occurrence of certain
conditions within six months of October 12, 2005.
Restricted cash relates mainly to proceeds from exercise of stock options received on behalf
of employees. The related liability to employees is recorded in accrued liabilities and other
payables (note 18).
13 Components of revenue
The Group's revenue comprises SMS, 2.5G services including MMS, WAP and Java games, audio
related services including RB and IVR services, and casual games. Gross revenues for the years
ended December 31, 2003, 2004 and 2005 are as follows:
Year ended December 31,
2003
2004
2005
SMS
$
16,539,201
$
40,180,566
$
46,702,269
Audio related services
—
3,659,007
16,963,773
2.5G services
—
6,449,366
8,300,826
Casual games
—
—
1,374,995
Others
62,291
29,805
266,740
Total revenue
$
16,601,492
$
50,318,744
$
73,608,603
F-22
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
14 Concentrations
(a) Dependence on the Operators
The Group's revenue is mainly derived from cooperative arrangements with the Operators in
Mainland China. The Operators are entitled to a portion of the revenues earned from the
transmission of wireless short messages as well as for the billing and collection of service. If
the strategic relationship with either the Operators in the PRC is terminated or scaled-back, or if
the Operators alter the revenue sharing arrangements, the Group's wireless value-added service
business would be adversely affected.
Revenues earned from China Mobile for the years ended December 31, 2003, 2004 and 2005 are
approximately $14,667,344, $44,313,720 and $62,416,761, representing 88%, 88% and 85% of revenues,
respectively.
Amounts due from China Mobile as of December 31, 2003, 2004 and 2005 amounted to approximately
$2,907,553, $9,319,663 and $13,173,196, respectively, representing 82%, 89% and 82% of accounts
receivable, respectively.
(b) Credit risk
The Group depends on the billing system of the Operators to charge the mobile phone users
through mobile phone bills and collect payments from the users on behalf of the Group. The Group
generally does not require collateral for its accounts receivable. The Group has not experienced
any significant credit losses for any periods presented.
15 Property and equipment
Year ended December 31,
2004
2005
Computer hardware/equipment
$
1,266,944
$
2,983,058
Office equipment
761,170
1,002,484
Leasehold improvements
1,102,338
1,585,997
3,130,452
5,571,539
Less: Accumulated depreciation
(602,639
)
(2,006,093
)
Net book value
$
2,527,813
$
3,565,446
During the years ended December 31, 2003, 2004 and 2005, the depreciation charges amounted to
approximately $90,856, $429,516 and $1,419,609, respectively.
Upon retirement or disposal of fixed assets, the cost and related amount of accumulated
depreciation or amortization are eliminated from the asset and accumulated depreciation accounts,
respectively.
16 Intangible assets
Year ended December 31,
2004
2005
Intangible assets from acquisitions
$
—
$
2,592,484
Others
—
402,000
—
2,994,484
Less: Accumulated amortization
—
(760,299
)
Net book value
$
—
$
2,234,185
F-23
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
The following table summarizes the intangible assets acquired from Brilliant, Cosmos, Zhong
Tong, Lian Fei and Qimingxing:
(i) Brilliant
As of December 31,
2004
2005
Technology
$
—
$
180,000
Customer base
—
28,000
Licenses
—
95,000
Partnership and non-compete agreements
—
299,000
—
602,000
Less: accumulated amortization
—
(387,146
)
Net book value
$
—
$
214,854
(ii) Cosmos
As of December 31,
2004
2005
Technology
$
—
$
524,000
Licenses
—
64,000
Partnership and non-compete agreements
—
642,000
Domain names
—
13,000
—
1,243,000
Less: accumulated amortization
—
(187,627
)
Net book value
$
—
$
1,055,373
(iii) Zhong Tong
As of December 31,
2004
2005
Licenses
$
—
$
64,400
Partnership and non-compete agreements
—
159,370
Domain names
—
6,666
—
230,436
Less: accumulated amortization
—
(34,922
)
Net book value
$
—
$
195,514
(iv) Lian Fei
As of December 31,
2004
2005
Licenses
$
—
$
64,400
Partnership and non-compete agreements
—
206,370
Domain names
—
12,514
—
283,284
Less: accumulated amortization
—
(43,096
)
Net book value
$
—
$
240,188
F-24
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
(v) Qimingxing
As of December 31,
2004
2005
Licenses
$
—
$
64,400
Partnership and non-compete agreements
—
162,680
Domain names
—
6,684
—
233,764
Less: accumulated amortization
—
(23,841
)
Net book value
$
—
$
209,923
Based on the current amount of above intangible assets subject to amortization, the Company
estimated amortization expense for each of the succeeding three years is $817,646, $602,792 and
$495,414 for the years ended December 31, 2006, 2007 and 2008 respectively.
17 Taxes payable
Year ended December 31,
2004
2005
Value added taxes
$
3,419,283
$
2,625,588
Business tax
763,479
501,028
Enterprise income tax
630,667
2,465,238
Other taxes
265,538
306,928
Total
$
5,078,967
$
5,898,782
18 Accrued liabilities and other payables
Year ended December 31,
2004
2005
Payable for acquisition of subsidiary and VIEs
$
—
$
6,921,973
Accrued liabilities
2,105,266
3,321,904
Accrued payroll
585,538
293,989
Accrued welfare benefits
179,465
382,226
Option proceeds due to staff
929,213
122,868
Payable for purchase of fixed assets
158,168
272,575
Other payables
223,696
571,170
Total
$
4,181,346
$
11,886,705
19 Mainland China contribution plan and profit appropriation
Full time employees of the Company and its subsidiaries in the PRC participate in a
government-mandated multi-employer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits
are provided to employees. Chinese labor regulations require that the Company and its subsidiaries
accrue for these benefits based on certain percentages of the employees' salaries. The total
provision for such employee benefits was $188,762, $655,887 and $1,334,964, for the years ended
December 31, 2003, 2004 and 2005, respectively.
The Company is required to make contributions to the plan out of the amounts accrued for
medical and pension benefits to relevant local labor bureaus. The contributions for the years ended
December 31, 2003, 2004 and 2005 amounted to $150,818, $509,744 and $1,318,296, respectively. The
local labor bureaus are responsible for the medical benefits and the pension liability to be paid
to these employees. The Company has no further commitments beyond its monthly contribution.
F-25
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
The Company's subsidiaries and variable interest entities in the PRC must make appropriations
from after-tax profit to non-distributable reserve funds. Its subsidiaries, in accordance with the
laws on Enterprise with Foreign Investment of China, must make appropriations to a (i) general
reserve, (ii) enterprise expansion fund and (iii) staff bonus and welfare fund. The general reserve
fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at
each year-end) until such fund has reached 50% of the company's registered capital; the other fund
appropriations are at the company's discretion. The Company's VIEs, in accordance with the China
Company Laws, must make appropriations to a (i) statutory reserve fund, (ii) statutory public
welfare fund and (iii) discretionary surplus fund. The statutory reserve fund requires annual
appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end) until
such fund has reached 50% of the company's registered capital; the statutory public welfare fund
requires annual appropriations of at least 5~10% of after-tax profit (as determined under PRC GAAP
at each year-end); the other fund appropriation is at the company's discretion.
General reserve fund and statutory reserve fund can only be used for specific purposes, such
as setting off of accumulated losses, enterprise expansion or increasing the registered capital.
Statutory public welfare fund must be used for capital expenditures for the collective welfare of
employees. These funds are not transferable to the Company in the form of cash dividends, loans or
advances.
In respect of the years ended December 31,2004 and December 31, 2005,the Group had
appropriated after-tax profits of $1,031,760 and $476,016 respectively to the statutory reserve and
statutory public welfare funds; the Group made no appropriations to the enterprise expansion fund,
staff bonus and welfare fund and statutory surplus fund. As of December 31, 2004 and 2005, the
Group had appropriated $1,531,760 and $2,007,776 respectively to non-distributable reserve funds.
20 Income Taxes
Cayman Islands and British Virgin Islands
Under the current laws of the Cayman Islands and British Virgin Islands, Linktone and
Brilliant are not subject to tax on income or capital gain.
China
The Company's subsidiaries and VIEs are subject to Enterprise Income Taxes ("EIT) of the PRC
at a statutory rate which comprises national income tax and local income tax.
The statutory rate varies among the subsidiaries and VIEs as follows:
Linktone Consulting and Weilan
The applicable statutory rate is 33% which comprises 30% national income tax and 3% local
income tax.
Zhong Tong and Linktone Software
Since these entities are located in the economic development zones in coastal cities, they are
subject to a preferential statutory rate of 15% which comprises 15% national income tax and the
local income tax is nil.
Huitong and Linktone Internet
These entities qualify as foreign investment production enterprises and were established in a
coastal economic development zone in the old urban district , the applicable tax rate is 27% which
comprises 24% national income tax and 3% local income tax. In addition, they are entitled to a two
year tax EIT exemption followed by three years with a 50% reduction in the tax rate, commencing
from the first profitable year. Huitong was entitled to tax exemption in
2003 and 2004 and was at its first 50% reduction in tax rate year in 2005. Linktone Internet
was entitled to its first year of tax exemption in 2005.
F-26
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
Yuan Hang, Cosmos and Lian Fei
These entities qualify as high technology enterprises. Lian Fei and Cosmos are entitled to a
three year tax exemption followed by three years with a 50% reduction in the tax rate, commencing
from the first operating year. Yuan Hang is entitled to a two year exemption followed by three
years with a 50% reduction in the tax rate, commencing from the first profitable year. Lian Fei was
entitled to tax exemption from 2002 to 2004 and Cosmos was entitled to tax exemption from 2003 to
2005. Lian Fei was at its first 50% reduction tax rate in year 2005. Yuan Hang was entitled to tax
exemption in 2004 and 2005.
Unilink and Qimingxing are currently considered as small businesses and are subject to a tax
on revenue instead of income.
The provision for taxes on income consists of:
Year ended December 31,
2003
2004
2005
Current
$
—
$
(1,062,185
)
$
(2,420,655
)
Deferred
—
64,878
916,326
Total
$
—
$
(997,307
)
$
(1,504,329
)
Reconciliation of the difference between statutory tax rate and the effective tax rate:
The following is a reconciliation between statutory EIT rate and the Group's effective tax
rate:
Year ended December 31,
2003
2004
2005
(Restated)
Statutory EIT
rate
33
%
33
%
33
%
Effect of tax
holiday
(78
)%
(28
)%
(25
)%
Non-deductible
expenses incurred
outside the
PRC
7
%
5
%
4
%
Non-deductible
stock-based
compensation
10
%
9
%
5
%
Other
non-deductible
expenses/non-taxable
income
3
%
1
%
1
%
Change in valuation
allowance
25
%
(8
)%
(1
)%
Tax differential
from statutory rate
applicable to the
subsidiary
—
(4
)%
(5
)%
Adjustment to prior
year tax provision
—
—
(1
)%
Effective EIT rate
—
8
%
11
%
The aggregate dollar and per share effect of the tax holiday in 2003, 2004 and 2005 was
$2,812,536, $3,785,401 and $3,450,000, $0.03, $0.02 and $0.01 per share, respectively.
Other non-taxable income consists primarily of income at Unilink and Qimingxing that is
subject to a tax on revenue instead of income.
F-27
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
The Group's deferred tax assets and deferred tax liabilities at each balance sheet date are as
follows:
Year ended December 31,
2004
2005
Current deferred tax assets:
Establishment costs
$
74,562
$
53,176
Intangibles
—
21,074
Accruals and other liabilities
342,070
525,376
Net operating loss carry forwards
—
274,921
416,632
874,547
Less: Valuation allowance
—
(63,533
)
Net current deferred tax assets
$
416,632
$
811,014
Current deferred tax liabilities:
Accrued income
$
1,115,351
$
711,147
Intangibles
—
170,132
Net current deferred tax liabilities
$
1,115,351
$
881,279
Net operating loss carry forwards
$
1,214,182
$
570,545
Property, plant and equipment
—
243,414
Intangibles
—
100,000
Advertising expenses
—
393,964
Establishment costs
51,851
—
1,266,033
1,307,923
Valuation allowance
(502,436
)
(256,454
)
Long-term deferred tax assets
$
763,597
$
1,051,469
Movement of valuation allowance for deferred tax assets:
Balance at beginning of the year
$
(1,433,586
)
$
(502,436
)
Provision for the year
—
—
Recoveries of deferred tax assets
931,150
182,449
Balance at end of the year
$
(502,436
)
$
(319,987
)
Subject to the approval of the relevant tax authorities, Linktone Group had total tax loss
carryforwards of approximately $2.8 million as of December 31, 2005 for EIT purposes. Approximately
$0.02 million, $0.04 million, $2.3 million, $0.4 million and $0.03 million of such losses will
expire in 2006, 2007, 2008, 2009 and 2010 respectively. These tax loss carryforwards give rise to
potential deferred tax assets totaling $0.8 million. Under our current tax planning, we expect that
Linktone Group will generate enough taxable income and a portion of loss carry forwards will be
utilized before expiration. The Group reduced the valuation allowance based on our probability
assessment as of December 31, 2005.
21 Financial instruments
The carrying amount of the Group's cash and cash equivalents approximates their fair value due
to the short maturity of those instruments. The Group's short-term investments are carried at their
fair value. The carrying value of receivables and payables approximated their market values based
on their short-term maturities.
22 Capital structure
Paid-in capital represents the consolidated issued and registered capital of the Group.
On September 7, 2005, the Company's shareholders authorized the repurchase of up to $15
million worth of American Depositary Shares or ADSs. The Company entered into an agreement dated
December 15, 2005 with its broker to purchase ADSs from the open market based on prices range from
$8.0 to $11.25 for an aggregate of no more
than 750,000 ADSs or the equivalent of $3.5 million worth of ADSs. These ADSs will be
converted to shares, retired and no longer be issued and outstanding.
F-28
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
As of December 31, 2005, the Company repurchased 338,000 ADS for a total consideration of $3.4
million including brokerage commission and they were in the process of being retired.
23 Stock option plans
The Board of Directors has approved two stock option plans that provide for the issuance of up
to 45,946,024 ordinary shares. The plans provide for the grant to employees of incentive share
options within the meaning of Section 422 of the United States Internal Revenue Code and for grants
to employees, directors and consultants of non-statutory share options. The plans are administered
by the Board of Directors or a committee designated by the
Board.
Year ended December 31,
2003
2004
2005
Weighted
Weighted
Weighted
average
average
average
Options
exercise
Options
exercise
Options
exercise
outstanding
price
outstanding
price
Outstanding
price
Outstanding at beginning of period
14,668,900
$
0.08
31,900,300
$
0.10
35,235,090
$
0.30
Granted
21,338,100
$
0.11
9,639,900
$
1.07
8,380,500
$
0.78
Exercised
—
—
(3,717,990
)
$
0.08
(6,924,910
)
$
0.08
Forfeited/cancelled
(4,106,700
)
$
0.08
(2,587,120
)
$
1.04
(3,852,280
)
$
0.90
Outstanding at period end
31,900,300
$
0.10
35,235,090
$
0.30
32,838,400
$
0.40
Exercisable and vested at end of period
11,863,700
$
0.07
17,448,700
$
0.08
22,592,261
$
0.19
Weighted average fair value of options
granted during period
—
$
0.64
$
0.46
The following is additional information relating to options outstanding as of December
31, 2005:
Options outstanding as at December 31, 2005
Options exercisable as at December 31, 2005
Weighted average
Weighted
Weighted average
Weighted
remaining
average
remaining
average
Range of
Options
contractual life
exercise
Number
contractual life
exercise
exercise price
Outstanding
(years)
price
exercisable
(years)
price
$0.05 — $0.10
19,305,300
6.77
0.05
19,303,281
6.77
0.05
$0.74 — $0.995
8,002,830
9.03
0.76
1,097,122
8.04
0.76
$1.02 — $1.10
5,280,500
8.50
1.07
2,035,708
8.17
1.08
$1.37 — $1.40
249,770
8.32
1.38
156,150
8.26
1.39
32,838,400
7.61
0.40
22,592,261
6.97
0.19
The Company's option plans are fixed in nature, so the compensation expense under APB No. 25
has been measured at the excess, if any, of the fair value of the shares of the date of grant over
the intrinsic value.
In connection with the stock options granted during the years ended December 31, 2003, 2004
and 2005, the Company recognized deferred share-based compensation amounted to $5,811,354, $nil and
$nil, respectively. These amounts are being amortized over vesting periods of two to three years.
Stock-based compensation expense recognized during the years ended December 31, 2003, 2004 and 2005
amounted to $1,119,529, $3,464,807 (as restated) and $2,012,425, respectively.
As disclosed in notes (2) and (5) (l), the Company has restated its historical consolidated
financial statements for 2004 as a result of an error related to the accounting for stock option
caused by an amendment to the stock option grants to certain of our executive officers. The
restatement increases the stock compensation expense for 2004 by $1,444,000. In connection with
the amendment, in 2005, the Company also recorded an incremental compensation expense of $776,411
under APB No. 25 related to the acceleration of vesting that occurred following the resignation of
two executive officers in January and February 2006.
F-29
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
24 Commitments and contingencies
(a) Operating lease commitments
The Group rented offices under operating lease agreements. The net aggregate minimum future
lease payments under non-cancelable operating leases as of December 31, 2005 are as follows:
2006
$
1,498,556
2007
716,984
2008
457,074
2009
50,324
$
2,722,938
As of December 31, 2005, the Group had no operating lease commitments beyond February 2009.
For the year ended December 31, 2003, 2004 and 2005 the Group incurred rental expenses of
approximately $177,354, $925,280, and $1,439,903, respectively.
(b) Other commitments
Year ended December 31,
2004
2005
Advertisement
agreements with third
parties
$
1,223,391
$
2,384,236
(c) Mainland Chinese market macro-economic and regulatory and uncertainties
The Chinese market in which the Group operates poses certain macro-economic and regulatory
risks and uncertainties. These uncertainties extend to the ability of the Group to develop its
wireless internet business and to provide internet content in the PRC. Though the PRC has, since
1978, implemented a wide range of market-oriented economic reforms, continued reforms and progress
towards a full market-oriented economy are uncertain. In addition, the telecommunication,
information, and media industries remain highly regulated. Restrictions are currently in place or
are unclear regarding in what specific industry segments foreign owned entities, like the Group,
may operate. The Group's legal structure and scope of operations in the PRC could be subject to
restrictions which could result in severe limitations on the Group's ability to conduct business in
the PRC, and this could have a material adverse impact on the Group's financial position, results
of operations and cash flows.
(d) Other risks
The Group's sales, purchase and expense transactions are generally denominated in RMB and a
significant portion of the Group's assets and liabilities are denominated in RMB. The RMB is not
freely convertible into foreign currencies. In Mainland China, foreign exchange transactions are
required by law to be transacted only by authorized financial institutions at exchange rates set by
the People's Bank of China ("PBOC"). Remittances in currencies other than RMB by the Group in
Mainland China must be processed through the PBOC or other Mainland China foreign exchange
regulatory bodies and require certain supporting documentation in order to effect the remittance.
F-30
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
25 Earnings per share
The following table sets forth the computation of basic and diluted net earnings per share for
the periods indicated based on the requirements of EITF 03-06:
Year ended December 31,
2003
2004
2005
(Restated)
Numerator:
Net income for the year
$
3,616,083
$
11,066,034
$
12,449,063
Accretion for Series B Redeemable
Convertible Preferred Shares
(143,936
)
(28,206
)
—
Amount allocated to participating
preferred shareholders
(1,769,080
)
(794,307
)
—
Numerator for basic earnings per share
$
1,703,067
$
10,243,521
$
12,449,063
Numerator for diluted earnings per share
$
1,703,067
$
10,243,521
$
12,449,063
Denominator:
Denominator for basic earnings per share
— weighted-average ordinary shares
outstanding
97,390,000
224,569,476
257,020,040
Effect of dilutive option securities
12,166,852
23,511,650
18,365,539
Denominator for diluted earnings per share
109,556,852
248,081,126
275,385,579
Basic earnings per share
$
0.02
$
0.05
$
0.05
Diluted earnings per share
$
0.02
$
0.04
$
0.05
Prior to the Company's IPO in March 2004, the Company's Preferred Shares were not included in
the calculation of diluted earnings per share because of their antidilutive effects.
26 Subsequent events
On December 20, 2005, the Company entered into definitive agreements to acquire a 51% share of
Ojava Overseas Ltd, a British Virgin Islands limited liability Corporation ("Ojava Overseas"), and
an 80% share of Beijing Ojava Wuxian Co., Ltd. ("Ojava Wuxian"), a local entity in the PRC with
exclusive contractual arrangements with Ojava Overseas. Ojava Overseas and Ojava Wuxian are
collectively known as Ojava Group. Ojava Group is a leading mobile game developer and game
publisher in the PRC. According to the agreements, the initial payments consist of three elements:
(a) $1.8 million cash to shareholders of Ojava Overseas; (b) $1.6 million cash to Ojava Overseas
for subscription of additional shares issued and (c) $1 million paid to Ojava Wuxian for settling
the loan owned by shareholders to Ojava Wuxian. The Company also has an option to purchase the
remaining 49% interest in Ojava Overseas and 20% of interest in Ojava Wuxian based on Ojava's
achievement of agreed performance objectives in 2007 and 2008. The further payment is capped at
$7.84 million. The acquisition of 51% share in Ojava Overseas and 80% share in Ojava Wuxian was
completed in January 2006.
The Company's Chief Operating Officer, Michael Guangxin Li, Chief Executive Officer and
Executive Director, Raymond Yang, Chief Technology Officer, Xin Ye resigned on January 3, 2006,
February 24, 2006 and February 28, 2006 respectively.
On February 24, 2006, the Company's Board of Directors appointed Michael Guangxin Li as a
director. On April 3, 2006, the Company's Board of Directors appointed Michael Guangxin Li as the
Company's Chief Executive Officer.
The Company launched a cost and restructuring plan in late February as part of its efforts to
create a leaner and more efficient organization. The plan has been largely completed in early
April 2006.
F-31
Table of Contents
LINKTONE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. dollar, unless otherwise stated)
On March 27, 2006, the Company and the selling shareholders of Cosmos entered into an
agreement to modify the terms of the existing share purchase agreements. According to the new
agreement, the contingent consideration of $3.1 million will be paid on the basis of 3.8 times of
Cosmos's net profit for the period of 11 months from May 1, 2005 to March 31, 2006 because 3.8
times of Cosmos's net profit for the 11 months (12 months according to the existing share purchase
agreement) had already reached the $3.1 million cap (note 7(b)).
F-32