##### Table of Contents





As filed with the Securities and
    Exchange Commission on June 29, 2011
    UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 20-F
  (Mark One)o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
    THE SECURITIES EXCHANGE ACT OF 1934orþ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31,
    2010oro

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

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934  Commission file number:
    000-51138
  GRAVITY CO., LTD.
 (Exact name of registrant as
    specified in its charter)
  N/A

The Republic of Korea(Translation of
    registrants name into English)

(Jurisdiction of incorporation
    or organization)       Nuritkum Square Business Tower
    15F, 1605 Sangam-Dong, Mapo-Gu,
 Seoul
    121-795,
    Korea
 (Address of principal executive
    offices)
      Heung Gon Kim
 Chief Financial
    Officer
 Nuritkum Square Business Tower
    15F, 1605 Sangam-Dong, Mapo-Gu, Seoul
    121-795,
    Korea
 Telephone:
    82-2-2132-7000
 Fax:
    82-2-2132-7070
 (Name, Telephone,
    E-mail
    and/or Facsimile number and Address of Company Contact
    Person)
      Securities registered or to be
    registered pursuant to Section 12(b) of the Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon stock, par value Won 500 per share*

The NASDAQ Global MarketAmerican depositary shares, each representing one-fourth of a
    share of common stock    *
    
    Not for trading, but only in
    connection with the listing of American depositary shares on the
    NASDAQ Global Market pursuant to the requirements of the
    Securities and Exchange Commission.  Securities registered or to be registered pursuant to
    Section 12(g) of the Act: None
  Securities for which there is a reporting obligation pursuant
    to Section 15(d) of the Act: None
    o þ
  o þ
  þ o
  Regulation S-T o o
  Rule 12b-2
  Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer þ     U.S. GAAP þ  International
    Financial Reporting Standards as used by the International
    Accounting Standards
    Board o  Other o
  o o
  Rule 12b-2 o þ




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TABLE OF
    CONTENTS
   
 PART I


6ITEM 1. IDENTITY OF DIRECTORS, SENIOR
    MANAGEMENT AND ADVISERS


6ITEM 2. OFFER STATISTICS AND EXPECTED
    TIMETABLE


6ITEM 3. KEY INFORMATION


6ITEM 3.A.


Selected Financial Data


6ITEM 3.B.


Capitalization and Indebtedness


8ITEM 3.C.


Reasons for the Offer and Use of Proceeds


8ITEM 3.D.


Risk Factors


8ITEM 4. INFORMATION ON THE COMPANY


27ITEM 4.A.


History and Development of the Company


27ITEM 4.B.


Business Overview


27ITEM 4.C.


Organizational Structure


68ITEM 4.D.


Property, Plants and Equipment


68ITEM 4A. UNRESOLVED STAFF COMMENTS


69ITEM 5. OPERATING AND FINANCIAL REVIEW
    AND PROSPECTS


69ITEM 5.A.


Operating Results


69ITEM 5.B.


Liquidity and Capital Resources


85ITEM 5.C.


Research and Development, Patents and Licenses,
    Etc.


87ITEM 5.D.


Trend Information


87ITEM 5.E.


Off-Balance Sheet Arrangements


87ITEM 5.F.


Contractual Obligations


88ITEM 5.G.


Safe Harbor


89ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND
    EMPLOYEES


89ITEM 6.A.


Directors and Senior Management


89ITEM 6.B.


Compensation


91ITEM 6.C.


Board Practices


91ITEM 6.D.


Employees


94ITEM 6.E.


Share Ownership


95ITEM 7. MAJOR SHAREHOLDERS AND RELATED
    PARTY TRANSACTIONS


96ITEM 7.A.


Major Shareholders


96ITEM 7.B.


Related Party Transactions


98ITEM 7.C.


Interests of Experts and Counsel


102ITEM 8. FINANCIAL INFORMATION


102ITEM 8.A.


Consolidated Statements and Other Financial
    Information


102ITEM 8.B.


Significant Changes


104ITEM 9. THE OFFER AND LISTING


104ITEM 9.A.


Offer and Listing Details


104ITEM 9.B.


Plan of Distribution


105ITEM 9.C.


Markets


105ITEM 9.D.


Selling Shareholders


105ITEM 9.E.


Dilution


105ITEM 9.F.


Expenses of the Issue


105 2




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ITEM 10. ADDITIONAL INFORMATION


105ITEM 10.A.


Share Capital


105ITEM 10.B.


Articles of Incorporation


106ITEM 10.C.


Material Contracts


111ITEM 10.D.


Exchange Controls


112ITEM 10.E.


Taxation


114ITEM 10.F.


Dividents and Paying Agents


124ITEM 10.G.


Statement by Experts


124ITEM 10.H.


Documents on Display


124ITEM 10.I.


Subsidiary Information


125ITEM 11. QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK


125ITEM 12. DESCRIPTION OF SECURITIES OTHER
    THAN EQUITY SECURITIES


126PART II


127ITEM 13. DEFAULTS, DIVIDEND ARREARAGES
    AND DELINQUENCIES


127ITEM 14. MATERIAL MODIFICATIONS TO THE
    RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS


127ITEM 15. CONTROLS AND PROCEDURES


127ITEM 16. RESERVED


128ITEM 16A. AUDIT COMMITTEE FINANCIAL
    EXPERT


128ITEM 16B. CODE OF ETHICS


129ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND
    SERVICES


129ITEM 16D. EXEMPTIONS FROM THE LISTING
    STANDARDS FOR AUDIT COMMITTEES


129ITEM 16E. PURCHASES OF EQUITY SECURITIES
    BY THE ISSUER AND AFFILIATED PURCHASERS


129ITEM 16F. CHANGE IN REGISTRANTS
    CERTIFYING ACCOUNTANT


129ITEM 16G. CORPORATE GOVERNANCE


129PART III


130ITEM 17. FINANCIAL STATEMENTS


130ITEM 18. FINANCIAL STATEMENTS


130ITEM 19. EXHIBITS


130EX-4.89EX-4.90EX-4.91EX-4.92EX-4.93EX-4.94EX-8.1EX-12.1EX-12.2EX-13.1EX-13.2   3




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CERTAIN
    DEFINED TERMS
  Form 20-F,
  
    ADRs are to the American depositary receipts that
    evidence our ADSs;
    ADSs are to our American depositary shares, each of
    which represents one-fourth of a share of our common stock;
    Government is to the government of The Republic of
    Korea;
    Gravity, the Company, we,
    us, our, or our company are
    to Gravity Co., Ltd. and except as otherwise indicated or
    required by context, our subsidiaries;
    Korea or the Republic are to The
    Republic of Korea;
    China or the PRC are to the
    Peoples Republic of China (excluding Taiwan, Hong Kong and
    Macau);
    Taiwan or the ROC are to Taiwan, the
    Republic of China;
    US$, U.S. dollars, US
    dollars, or Dollars are to the currency of the
    United States of America;
    Won, Korean Won, or
    W, are to the currency of The
    Republic of Korea;
    Chinese Yuan or CNY are to the currency
    of China;
    Japanese Yen or JPY are to the currency
    of Japan;
    NT dollar or NT$ are to the currency of
    Taiwan;
    Hong Kong dollar or HK$ are to the
    currency of Hong Kong; and
    Thai Baht or THB are to the currency of
    Thailand.      FORWARD-LOOKING
    STATEMENTS
      
    future prices of and demand for our products;
    future earnings and cash flow;
    estimated development and commercial launch schedule of our
    games in development;
    our ability to attract new customers and retain existing
    customers;
    the expected growth of the Korean and worldwide online gaming
    industry; 4




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
    the effect that economic, political or social conditions in
    Korea have on the revenue generated from our online game product
    and our results of operations;
    the effect that the current global financial crisis and global
    economic recession will or may have on our business prospects,
    financial condition and results of operations; and
    our future business development and prospects, results of
    operations and financial condition.   5




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##### Table of Contents



PART I  ITEM 1.
    IDENTITY
    OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS    ITEM 2.
    OFFER
    STATISTICS AND EXPECTED TIMETABLE    ITEM 3.
    KEY
    INFORMATION  ITEM 3.A.
    SELECTED
    FINANCIAL DATA    As of and for the Years Ended December 31,2006


2007


2008


2009


2010


2010(1)(Unaudited)(In millions of Won and thousands of US$, except share and
    per share data,operating data and percentage)Statements of operationsRevenues:Online games  subscription revenue

W
8,420


W
9,405


W
12,576


W
12,674


W
9,908


US$
9,030Online games  royalties and license fees


26,123



24,698



30,110



34,037



32,132



29,284Mobile games


3,840



4,063



6,882



7,882



9,188



8,374Character merchandising, animation and other revenue


2,580



2,063



3,602



2,810



1,134



1,034Total revenues


40,963



40,229



53,170



57,403



52,362



47,722Cost of revenues


17,746



19,479



27,772



21,170



20,873



19,023Gross profit


23,217



20,750



25,398



36,233



31,489



28,699Operating expenses:Selling, general and administrative


27,555



28,159



23,489



21,651



20,422



18,612Research and development


9,239



5,761



2,145



1,799



4,652



4,240Impairment losses on investments






8,619















Impairment losses on intangible assets






871







280



475



433Litigation charges


4,648



















Proceeds from a former chairman due to fraud


(4,947
)


















Gain in disposal of assets held for sale


(1,081
)


















Settlement cost of litigation














1,649







Operating income (loss)


(12,197
)


(22,660
)


(236
)


10,854



5,940



5,414Other income, net


2,265



3,441



6,030



2,108



2,322



2,115Income (loss) before income tax expenses and equity income
    (loss) on investments


(9,932
)


(19,219
)


5,794



12,962



8,262



7,529Income tax expenses


12,069



2,916



3,379



4,544



4,207



3,835Income (loss) before equity income (loss) on investments


(22,001
)


(22,135
)


2,415



8,418



4,055



3,694Equity loss on investments, net


(1,106
)


(1,026
)


(5,119
)


(1,424
)


(345
)


(314
)Income (loss) before cumulative effect of change in accounting
    principle


(23,107
)


(23,161
)


(2,704
)


6,994



3,710



3,380 6




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As of and for the Years Ended December 31,2006


2007


2008


2009


2010


2010(1)(Unaudited)(In millions of Won and thousands of US$, except share and
    per share data,operating data and percentage)Cumulative effect of change in accounting principle, net of tax


849



















Net income (loss)


(22,258
)


(23,161
)


(2,704
)


6,994



3,710



3,380LESS: Net income (loss) attributable to the non-controlling
    interest


7



40



69



77



(20
)


(18
)Net income (loss) attributable to Parent Company

W
(22,265
)

W
(23,201
)

W
(2,773
)

W
6,917


W
3,730


US$
3,398Earnings (loss) per share:Before cumulative effect of change in accounting principle

W
(3,326
)

W
(3,339
)

W
(399
)

W
995


W
537


US$
0.49Cumulative effect of change in accounting principle(2)


122



















Basic and diluted per share

W
(3,204
)

W
(3,339
)

W
(399
)

W
995


W
537


US$
0.49Basic and diluted per ADS(3)


(801
)


(835
)


(100
)


249



134



0.12Weighted average number of shares outstanding (basic and diluted)


6,948,900



6,948,900



6,948,900



6,948,900



6,948,900



6,948,900Balance sheet data:Cash and cash equivalents

W
35,314


W
53,588


W
53,168


W
51,333


W
44,122


US$
40,211Total current assets


88,203



72,667



72,550



82,899



76,343



69,577Property and equipment, net


8,472



7,195



5,226



2,837



2,672



2,435Total assets


122,561



96,921



95,935



102,438



125,490



114,368Total current liabilities


16,192



10,106



8,397



8,248



14,065



12,818Total liabilities


24,419



21,377



19,327



18,828



27,078



24,678Total parent company shareholders equity


98,113



75,476



76,471



83,396



87,416



79,668Non-controlling interest


29



68



137



214



10,996



10,022Total equity


98,142



75,544



76,608



83,610



98,412



89,690Selected operating data and financial ratios (unaudited):Gross profit margin(4)


56.7
%


51.6
%


47.8
%


63.1
%


60.1
%


60.1
%Operating profit margin(5)


(29.8
)


(56.3
)


(0.4
)


18.9



11.3



11.3Net profit margin(6)


(54.4
)


(57.7
)


(5.2
)


12.0



7.1



7.1     Notes:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,097.25 to US$1.00, the noon buying
    rate as quoted by the Federal Reserve Bank of New York in effect
    on March 31, 2011.(2)
    
    The Financial Accounting Standards Board, or FASB Accounting
    Standard Codification, or ASC 718, Compensation
     Stock Compensationwas adopted in 2006.(3)
    
    Each ADS represents one-fourth of a share of common stock.(4)
    
    Gross profit margin for each period is calculated by dividing
    gross profit by total net revenues for each period.(5)
    
    Operating profit margin for each period is calculated by
    dividing operating income by total net revenues for each period.(6)
    
    Net profit margin for each period is calculated by dividing net
    income by total net revenues for each period. 7




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Exchange
    Rate Information
    At End of

AveragePeriod

Period

Rate(1)

High

Low2006


930.0



950.1



1,002.9



913.72007


935.8



928.0



950.2



903.22008


1,262.0



1,105.8



1,507.9



935.22009


1,163.7



1,270.0



1,570.1



1,149.02010


1,130.6



1,158.7



1,253.2



1,104.0December


1,130.6



1,145.5



1,155.2



1,130.62011January


1,119.1



1,118.9



1,128.1



1,111.0February


1,123.7



1,117.4



1,130.6



1,100.9March


1,097.3



1,119.3



1,135.6



1,097.3April


1,068.4



1,083.0



1,091.8



1,068.4May


1,078.0



1,084.4



1,101.6



1,065.5June (through June 17, 2011)


1,085.8



1,082.3



1,091.2



1,076.2       Note:
  (1)
    
    The average rates for the annual periods were calculated based
    on the average noon buying rate on the last day of each month
    during the period. The average rates for the monthly periods
    were calculated based on the average noon buying rate of each
    day of the month.  ITEM 3.B.
    CAPITALIZATION
    AND INDEBTEDNESS    ITEM 3.C.
    REASONS
    FOR THE OFFER AND USE OF PROCEEDS    ITEM 3.D.
    RISK
    FACTORS  RISKS
    RELATING TO OUR BUSINESS
  We
    currently depend on one online game product, Ragnarok Online,
    for most of our revenues.
     8




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If we
    are unable to consistently and timely develop, acquire, license,
    launch, market or operate commercially successful online games
    in addition to Ragnarok Online, our business, financial
    condition and results of operations may be materially and
    adversely affected.
       9




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As we
    introduce new games, we face the risk that a significant number
    of users of our existing games may migrate to our new games
    without any net gains in the overall user base or overall total
    revenues.
      We
    depend on our overseas licensees for a substantial portion of
    our revenues and rely on them to distribute, market and operate
    our games, and comply with applicable laws and government
    regulations.
       10




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GungHo,
    the publisher of our games in Japan, our largest market in terms
    of revenues, is our majority shareholder, which gives them
    control of our board of directors.
    We
    operate in a highly competitive industry and compete against
    many large companies.
  and/or
 11




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Our
    investments in joint ventures or partnerships, or acquisitions
    of other companies related to development or service of online
    games may not be successful.
      We
    have experienced frequent turnover among our senior management
    team and key employees in the past. Some of our senior managers
    and key employees have limited experience in our industry, which
    could materially and negatively affect our business
    prospects.
   12




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If we
    fail to hire and retain skilled and experienced game developers
    or other key personnel to design and develop new online games
    and additional game features, we may be unable to achieve our
    business objectives.
    Undetected
    programming errors or flaws in our games could harm our
    reputation or decrease market acceptance of our games, which
    would materially and adversely affect our business prospects,
    reputation, financial condition and results of
    operations.
      Unexpected
    network interruptions, security breaches or computer virus
    attacks could harm our business and reputation.
    
    any breakdowns or system failures, including from fire, flood,
    earthquake, typhoon or other natural disasters, power loss or
    telecommunications failure, resulting in a sustained shutdown of
    all or a material portion of our servers;
    any disruption or failure in the national or international
    backbone telecommunications network, which would prevent users
    in certain countries in which our games are distributed from
    logging onto or playing our games for which the game servers are
    located in other countries; and
    any security breach caused by hacking, loss or corruption of
    data or malfunctions of software, hardware or other computer
    equipment, and the inadvertent transmission of computer viruses.  Hacking
   13




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Electronic
    embezzlement could lessen the popularity of our online games and
    adversely affect our reputation and our results of
    operations.
    Cheating
    by users of online games could lessen the popularity of our
    online games and adversely affect our reputation and our results
    of operations.
    Unauthorized
    use of our intellectual property by third parties, and the
    expenses incurred in protecting our intellectual property
    rights, may adversely affect our business.
     14




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We may
    be subject to claims with respect to the infringement of
    intellectual property rights of others, which could result in
    substantial costs and diversion of our financial and management
    resources.
     15




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We may
    not be able to successfully implement our growth and profit
    improvement strategies.
    
    distributing games developed in-house;
    publishing games acquired from or developed by third parties
    through licensing arrangements;
    offering our games in countries where we currently have little
    or no presence;
    optimizing our marketing and research and development
    expenditures;
    cross-selling our popular online games through other lines of
    businesses, such as mobile games, console games, animation and
    character merchandising; and
    pursuing joint ventures with game development and service
    companies.    We
    have limited business insurance coverage and any business
    interruption could have a material adverse effect on our
    business.
    Slow
    growth or contractions in the Internet café industry in
    Korea may affect our ability to target a core group of
    users.
  clean-up
 16




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The
    high cost to access the Internet in certain markets may impede
    our entry into new markets.
    Occurrence
    of widespread public health problems could adversely affect our
    business and results of operations.
      
    quarantines or closures of some of our offices which would
    severely disrupt our operations;
    the sickness or death of our officers and key employees; and
    closure of Internet cafés and other public areas where
    people access the Internet.    We may
    be required to take significant actions that are contrary to our
    business objectives in order to avoid being deemed an investment
    company as defined under the Investment Company Act of 1940, as
    amended.
       17




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Our
    status as a passive foreign investment company
    (PFIC) in 2010 and potentially other years could
    result in adverse U.S. tax consequences for you.
  .
  If we
    fail to achieve and maintain an effective system of internal
    controls over financial reporting, we may be unable to
    accurately report our financial results or do so on a timely
    basis or reduce our ability to prevent or detect fraud, and
    investor confidence and the market price of our ADSs may be
    adversely affected.
       18




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Rapid
    technological developments and changes in market environment may
    limit our ability to recover game development, acquisition or
    licensing costs and adversely affect our financial condition and
    results of operations due to impairment loss.
    We
    could suffer losses due to asset impairment
    charges.
    RISKS
    RELATING TO OUR REGULATORY ENVIRONMENT
  Our
    online operations and businesses are subject to regulation in
    certain of the countries in which our games are distributed,
    such as Korea, China, Taiwan, Japan and Thailand, the changes of
    which are difficult to predict, and the uncertainties in
    interpretation and enforcement of rules in such counties may
    limit the protections available to us.
    Korea
   19




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China
    Taiwan
      Thailand
    United
    States and Japan
   20




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Our
    online games may be subject to governmental restrictions or
    ratings systems, which could delay or prohibit the release of
    new games or reduce the existing and potential scope of our user
    base.
    Restrictions
    and controls on currency exchange in Korea and in certain
    countries in which our games are distributed may limit our
    ability to effectively utilize revenues generated in Won to fund
    our business activities outside Korea or expenditures
    denominated in foreign currencies, and may limit our ability to
    receive and remit revenues effectively.
      Adverse
    changes in the withholding tax rates in the countries from which
    we receive license fees and royalties could adversely affect our
    net income.
     21




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RISKS
    RELATING TO OUR MARKET ENVIRONMENT
  Our
    businesses may be adversely affected by developments affecting
    the economies of the countries in which our games are
    distributed.
      Fluctuations
    in exchange rates could result in foreign currency exchange
    losses.
        Increased
    tensions with North Korea could adversely affect us and the
    price of our ADSs.
   22




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Disruptions
    in Taiwans political environment could seriously harm our
    business and operations in Taiwan.
      RISKS
    RELATING TO OUR AMERICAN DEPOSITARY SHARES
  The
    public shareholders of our ADSs may have more difficulty
    protecting their interests than they would as shareholders of a
    U.S. corporation.
   23




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Any
    dividends paid on our common shares will be in Won and
    fluctuations in the exchange rate between the Won and the U.S.
    dollar may affect the amount received by you.
    Your
    ability to deposit or withdraw common shares underlying the ADSs
    into and from the depositary facility may be limited, which may
    adversely affect the value of your investment.
    
    the aggregate number of common shares we have consented to be
    deposited for the issuance of ADSs (including deposits in
    connection with offerings of ADSs and stock dividends or other
    distributions relating to ADSs); and
    the number of common shares on deposit with the custodian for
    the benefit of the depositary at the time of such proposed
    deposit,      You
    may not be able to exercise preemptive rights or participate in
    rights offerings and as a result, you may experience dilution in
    your ownership percentage in us.
   24




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
    through a general public offering;
    to the members of the employee stock ownership association;
    upon exercise of a stock option;
    in the form of depositary receipts;
    to induce foreign direct investment necessary for business in
    accordance with the Foreign Investment Promotion Act of Korea;
    for the purpose of raising funds on an emergency basis;
    to certain companies under an alliance arrangement; or
    by a public offering or to cause underwriters to underwrite new
    shares for the purpose of listing them on any stock exchange.    You
    will not be treated as our shareholder and you will not have
    shareholder rights such as the voting rights applicable to a
    holder of common shares.
    You
    would not be able to exercise dissent and appraisal rights
    unless you have withdrawn the underlying common shares from the
    depositary facility and become a holder of our common
    stock.
   25




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We may
    amend the deposit agreement and the American Depositary Receipts
    without your consent for any reason and, if you disagree, your
    option will be limited to selling the ADSs or withdrawing the
    underlying securities.
    You
    may be subject to Korean withholding tax.
  Korea-United Korea-United
  You
    may have difficulty bringing an original action or enforcing any
    judgment obtained outside Korea against us and our directors and
    officers who are not U.S. persons.
    The
    transfer, sale or availability for sale of substantial amounts
    of our ADSs could adversely affect their market
    price.
   26




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##### Table of Contents



ITEM 4.
    INFORMATION
    ON THE COMPANY  ITEM 4.A.
    HISTORY
    AND DEVELOPMENT OF THE COMPANY      121-795. (822) 2132-7000. http://www.gravity.co.kr.  Our
  ITEM 4.B.
    BUSINESS
    OVERVIEW  OVERVIEW
   27




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##### Table of Contents



28




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##### Table of Contents



Year Ended December 31,2008


2009


2010


2010(1)(In millions of Won and thousands of US$, except
    percentages)Online game revenues(2):Subscriptions:Korea

W
7,463



14.0
%

W
4,951



8.6
%

W
3,829



7.3
%

US$
3,490United States/Canada(3)


3,607



6.8



5,785



10.1



4,664



8.9



4,251Others(4)


1,506



2.9



1,938



3.4



1,415



2.7



1,289Royalties and license fees:Japan


23,353



43.9



28,089



48.9



24,761



47.3



22,567Taiwan/Hong Kong/Macau


2,210



4.1



1,827



3.2



2,864



5.5



2,610Brazil


971



1.8



1,057



1.8



1,079



2.1



983Others(3)(4)


3,576



6.7



3,064



5.4



3,428



6.5



3,124Subtotal


30,110



56.5



34,037



59.3



32,132



61.4



29,284Mobile game revenues


6,882



12.9



7,882



13.7



9,188



17.5



8,374Character merchandising and other revenues


3,602



6.9



2,810



4.9



1,134



2.2



1,034Total revenues

W
53,170



100.0
%

W
57,403



100.0
%

W
52,362



100.0
%

US$
47,722     Notes:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,097.25 to US$1.00, the noon buying
    rate as quoted by the Federal Reserve Bank of New York in effect
    on March 31, 2011.(2)
    
    Online game revenues include revenues from Ragnarok Online,
    R.O.S.E. Online, Requiem, Emil Chronicle Online, Canaan,
    Dragonica, Pucca Racing, Time N Tales and from two games offered
    through STYLIA, our casual online game portal site. Canaan was
    commercially launched in October 2010. The revenues from
    Dragonica in 2010 only include revenues arising after
    October 21, 2010 when we acquired Barunson Interactive,
    currently Gravity Games, the developer of Dragonica. We
    discontinued offering games through STYLIA, Time N Tales and
    Pucca Racing in September 2008, March 2009 and June 2010,
    respectively.(3)
    
    Subscription revenues in the United States and Canada, as shown
    on this table, also include subscription and other types of game
    revenues generated in other countries managed by Gravity
    Interactive. The license agreement for Ragnarok Online with
    Gravity Interactive was amended in January 2008 to include
    Australia and New Zealand as countries serviced by Gravity
    Interactive, and in September 2009 to include India as a country
    serviced by Gravity Interactive. Revenues generated in India
    prior to the respective amendment to the license agreement were
    shown as Online game revenues-Royalties and license fees-Others.
    The license agreement for Requiem with Gravity Interactive was
    amended in December 2009 to include the United Kingdom and 38
    other European countries serviced by Gravity Interactive.(4)
    
    Gravity CIS, our wholly-owned subsidiary in Russia was
    responsible for all aspects of Ragnarok Online and Requiem game
    operations in Russia, Armenia, Azerbaijan, Belarus, Estonia,
    Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova,
    Tajikistan, Turkmenistan, Ukraine and Uzbekistan only until
    June 15, 2010. After we entered into license agreements
    with Ingamba on June 16, 2010 to distribute Ragnarok Online
    and Requiem, the two games are serviced in the 15 countries by
    Ingamba. The revenues generated in the 15 countries until
    June 15, 2010 were shown as Online game
    revenues-subscription-Others and those after June 16, 2010
    were shown as Online game revenues-royalties and license
    fees-Others. 29




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##### Table of Contents



OUR
    PRODUCTS
    Massively
    multiplayer online role playing games (MMORPGs)
      Date of CommercialTitle

Description

Game Source

Launch/Testing(2)Ragnarok Online

Action adventure with 150 levels of skill upgrades, which
    features two-dimensional characters in three-dimensional
    backgrounds(1)

Developed in-house

Launched in August 2002Requiem

Three-dimensional action adventure

Developed in-house

Launched in October 2007Emil Chronicle Online

Three-dimensional action adventure

Licensed from third party developer

Launched in August 2007Dragonica (Dragon Saga)(3)

Three-dimensional action adventure

Originally licensed from third party developer and currently
    owned by us(4)

Launched in October 2010(5)R.O.S.E. Online

Three-dimensional action adventure with seven independent
    storylines

Originally licensed from third party developer; currently owned
    by us(6)

Launched in January 2005Canaan

Web browser-based casual

Licensed from third party developer

Launched in October 2010Eternal Destiny

Web browser-based casual

Licensed from third party developer

Currently expected to launch in the third quarter of 2011Ragnarok Online II

Three-dimensional sequel to Ragnarok Online

Being developed in-house by the Company

Open beta testing from May 2007 to August 2010, closed beta
    testing on the upgraded version from August 2010 to September
    2010 and a customer satisfaction test called R Care Test in
    January 2011. Currently expected to launch in the fourth quarter
    of 2011Da Ming Long Quan (Kun Woong Online)(7)

Two-dimensional action adventure

Licensed from third party developer

Currently expected to launch in the third quarter of 2011 30




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##### Table of Contents



Date of CommercialTitle

Description

Game Source

Launch/Testing(2)Weapons of the Gods

Three-dimensional action adventure

Licensed from third party developer

Currently expected to launch in the first quarter of 2012Finding Neverland Online

Three-dimensional casual action adventure

Licensed from third party developer

Not determinedEast Road (tentative title)

Three-dimensional action adventure

Being developed in-house(8)

Not determined     Notes:
  (1)
    
    A game with such features is generally referred to in the
    industry as a 2.5 dimensional game.(2)
    
    The actual date of commercial launch of games in each country is
    dependent on a variety of factors, including technical viability
    and durability, availability of in-house development capability,
    market conditions, beta testing results and availability of
    licensing partners in various jurisdictions, among others.(3)
    
    Dragonica is commercially offered in the United States and
    Canada under the name Dragon Saga.(4)
    
    We acquired an aggregate of 50.83% equity interest in Gravity
    Games, formerly known as Barunson Interactive, which developed
    Dragonica, on October 21, 2010.(5)
    
    Dragonica was initially launched in China in February 2009
    followed by 54 other countries and markets under license
    agreements between Gravity Games and local publishers before our
    acquisition of Gravity Games. We launched Dragonica in the
    United States and Canada on October 28, 2010.(6)
    
    We acquired an aggregate of 88.15% equity interest in
    TriggerSoft, which developed R.O.S.E. Online in April and May
    2005. TriggerSoft was liquidated in October 2007.(7)
    
    We intend to offer Da Ming Long Quan in Korea under the name Kun
    Woong Online.(8)
    
    East Road is being developed by Gravity Games.  Ragnarok
    Online
   31




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##### Table of Contents



Year Ended December 31,Revenue Type

Country

2008


2009


2010


2010(1)(In millions of Won and thousands of US$)Online game-subscription revenue

Korea

W
5,971


W
4,156


W
3,412


US$
3,110United States/Canada(2)


2,693



3,794



3,003



2,737Others(3)


1,198



1,046



944



861Subtotal


9,862



8,996



7,359



6,708Online game-royalties and license fees

Japan


23,326



28,089



24,637



22,453Taiwan/Hong Kong/Macau


1,706



1,452



2,167



1,975Brazil


971



1,057



1,079



983Thailand


679



819



719



656Philippines


699



707



689



628China


472



336



373



340Indonesia


322



362



214



195Europe


446



408



152



138Middle East/Africa






7



123



112Singapore/Malaysia


63



57



40



36Russia/CIS countries(3)










22



20India(2)


26











Chile


186











Vietnam


191











Subtotal


29,087



33,294



30,215



27,536Total

W
38,949


W
42,290


W
37,574


US$
34,244     Notes:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,097.25 to US$1.00, the noon buying
    rate as quoted by the Federal Reserve Bank of New York in effect
    on March 31, 2011.(2)
    
    Subscription revenues in the United States and Canada, as shown
    on this table, also include subscription and other types of game
    revenues generated in other countries managed by Gravity
    Interactive. Such revenues from other countries constitute a
    minor portion of the revenues recorded as subscription revenues
    from the United States and Canada. The license agreement for
    Ragnarok Online with Gravity Interactive was amended in January
    2008 to include Australia and New Zealand as countries serviced
    by Gravity Interactive, and in September 2009 to include India
    as a country serviced by Gravity Interactive. Revenues generated
    in India prior to the respective amendment to the license
    agreement were shown as Online game royalties and license fees.(3)
    
    Gravity CIS, our wholly-owned subsidiary in Russia, was
    responsible for all aspects of Ragnarok Online and Requiem game
    operations in Russia, Armenia, Azerbaijan, Belarus, Estonia,
    Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova,
    Tajikistan, Turkmenistan, Ukraine and Uzbekistan only until
    June 15, 2010. After we entered into a license agreement
    with Ingamba on June 16, 2010 to distribute Ragnarok
    Online, Ragnarok Online is serviced in the 15 countries by
    Ingamba. The revenues generated in the 15 countries until
    June 15, 2010 were shown as Online game
    revenues-subscription-Others and those after June 16, 2010
    were shown as Online game revenues-royalties and license
    fees-Russia/CIS countries. 32




---



##### Table of Contents



Taiwan/Hong Kong

Thailand

Japan

China

Korea

USA/CanadaPCU(1)

ACU(2)

PCU

ACU

PCU

ACU

PCU

ACU

PCU

ACU

PCU

ACU1Q 2008


36,429



29,893



63,316



25,942



61,800



24,674



8,609



4,469



6,785



3,219



4,334



2,4692Q 2008


34,747



26,364



14,996



9,709



57,348



22,908



7,393



3,856



10,146



3,518



4,288



2,3963Q 2008


40,574



27,097



22,850



12,687



57,515



22,401



6,979



3,273



9,192



4,357



3,700



2,1224Q 2008


30,128



21,292



30,455



20,707



59,470



24,109



5,342



2,476



6,306



3,052



4,661



2,3541Q 2009


27,686



20,351



28,761



22,628



58,171



24,554



5,942



2,861



6,127



3,211



4,908



3,1812Q 2009


27,616



20,678



47,679



36,445



57,387



23,038



5,378



2,571



6,975



2,641



5,093



3,3003Q 2009


37,066



23,599



47,310



31,636



54,671



21,331



6,351



3,162



7,610



3,525



5,634



3,7584Q 2009


27,803



19,274



31,883



24,603



59,800



21,817



4,877



2,247



6,949



3,319



5,128



3,3321Q 2010


29,089



22,437



31,042



24,253



52,585



20,232



5,447



2,529



6,502



3,091



4,933



3,2982Q 2010


30,542



25,087



30,760



23,643



48,113



18,547



4,933



2,478



4,427



2,367



5,476



4,1243Q 2010


32,409



25,522



35,426



28,630



61,322



22,631



7,158



3,599



5,001



1,939



5,307



3,6814Q 2010


120,781



71,580



34,910



15,508



55,089



20,905



5,853



2,861



15,232



4,487



5,502



3,3381Q 2011


119,473



90,670



25,073



17,569



43,869



17,983



5,221



2,699



16,064



6,403



4,692



3,176     Notes:
  (1)
    
    PCU, or peak concurrent users, represents the highest number of
    users of Ragnarok Online during the specified time period as
    recorded on the servers for the various countries.(2)
    
    ACU, or average concurrent users, represents the average number
    of concurrent users of Ragnarok Online during the specified time
    period as recorded on the servers for the various countries.(3)
    
    We believe that the number of users as measured by PCU or ACU
    (i) is reflective of our active user base and (ii) is
    correlated to revenues as revenues from an online game depend on
    the number of users as well as time spent playing the game.
    However, PCU and ACU are non-financial variables and the data
    presented has not been audited or reviewed. Other companies may
    determine PCU or ACU differently than we do.        
    players may assume an ongoing role, or alter-ego, of a
    particular game character, each with different strengths and
    weaknesses. In Ragnarok Online, the user starts as a
    novice and undergoes training in a specialized
    mapped game zone to become familiar with the game features. Once
    that stage is completed, the user can choose from six basic
    characters, each with a distinct combination of different traits;
    as each game character advances in challenge levels, the
    character can enter into a greater range of mapped game zones
    and develop into a more sophisticated game character in terms of
    game attributes and special powers;
    Ragnarok Online characters may visually express the users
    mood and emotions by using emotive icons that appear within a
    bubble above the characters heads. We believe that this
    feature significantly expands the interface for user interaction
    and elevates the level of social reality of the game; 33




---



##### Table of Contents




    game features may be traded or sold within the game, and game
    characters may simulate real-life experiences such as marriage,
    group fights and joining a guild. In addition, players may
    communicate with each other through in-game chatting or instant
    messaging;
    special events are held from time to time to stimulate community
    formations. For example, we periodically host fortress
    raids whereby players are encouraged to organize
    themselves into a team to compete against other teams to capture
    a fortress within a set time; and
    the game has no preordained ending and is designed to
    continuously evolve in terms of plots, mapped game zones and
    character attributes through enhancements from time to time.  dial-up
  Requiem
  user-to-user
     34




---



##### Table of Contents



Year Ended December 31,Revenue Type

Country

2008


2009


2010


2010(1)(In millions of Won and thousands of US$)Online game-subscription revenue

Korea

W
964


W
559


W
303


US$
276United States/Canada(2)


470



1,387



981



894Russia/CIS countries(3)


309



892



368



335Others










103



94Subtotal


1,743



2,838



1,755



1,599Online game-royalties and license fees

Russia/CIS countries(3)










72



65Taiwan/Hong Kong/Macau










355



323Subtotal










427



388Total

W
1,743


W
2,838


W
2,182


US$
1,987     Notes:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,097.25 to US$1.00, the noon buying
    rate as quoted by the Federal Reserve Bank of New York in effect
    on March 31, 2011.(2)
    
    Includes subscription and other types of game revenues generated
    in other countries serviced by Gravity Interactive, Switzerland,
    Norway, Denmark, Ireland, Spain, Sweden, the United Kingdom,
    Iceland, Finland, France, Germany, Greece, Austria, Belgium,
    Bulgaria, Cyprus, Czech Republic, Hungary, Italy, Luxembourg,
    Malta, Netherlands, Poland, Portugal, Romania, Slovakia,
    Slovenia, Albania, Andorra, Bosnia and Herzegovina,
    Liechtenstein, Monaco, Montenegro, San Marino, Serbia,
    Vatican City State, Croatia, Former Yugoslav Republic of
    Macedonia and Turkey. Such revenues from other countries
    constitute a minor portion of the revenues recorded as
    subscription revenues from the United States and Canada.(3)
    
    Gravity CIS, our wholly-owned subsidiary in Russia, was
    responsible for all aspects of Requiem game operations in
    Russia, Armenia, Azerbaijan, Belarus, Estonia, Georgia,
    Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Tajikistan,
    Turkmenistan, Ukraine and Uzbekistan only until June 15,
    2010. After we entered into a license agreement with Ingamba on
    June 16, 2010 to distribute Requiem, Requiem is serviced in
    the 15 countries by Ingamba. The revenues generated in the 15
    countries until June 15, 2010 were shown as Online game
    revenues-subscription-Russia/CIS countries and those after
    June 16, 2010 were shown as Online game revenues-royalties
    and license fees-Russia/CIS countries.  Emil
    Chronicle Online
   35




---



##### Table of Contents



Dragonica
    (Dragon Saga)
    R.O.S.E.
    Online
        Canaan
    Eternal
    Destiny
   36




---



##### Table of Contents



Ragnarok
    Online II
    Da
    Ming Long Quan (Kun Woong Online)
    Weapons
    of the Gods
    Finding
    Neverland Online
   37




---



##### Table of Contents



East
    Road (tentative title)
    Casual
    online games
    H.A.V.E.
    Online (Toy Wars)
    Pucca
    Racing
    Social
    network games
    Mobile
    games
     38




---



##### Table of Contents



Year Ended December 31,Country

2008


2009


2010


2010(1)(In millions of Won and thousands of US$, except
    percentages)Korea

W
4,573


W
4,931


W
5,274



57.4
%

US$
4,807Japan


2,309



2,951



3,913



42.6



3,566Others










1



0.0



1Total

W
6,882


W
7,882


W
9,188



100.0
%

US$
8,374     Note:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,097.25 to US$1.00, the noon buying
    rate as quoted by the Federal Reserve Bank of New York in effect
    on March 31, 2011.  Game-related
    products and services
  Game
    character merchandising
        Year Ended December 31,Country

2008


2009


2010


2010(1)(In millions of Won and thousands of US$, except
    percentages)Korea

W
101


W
119


W
4



0.8
%

US$
3Japan


975



798



512



97.7



467Taiwan/Hong Kong


17







8



1.5



7Total

W
1,093


W
917


W
524



100.0
%

US$
477     Note:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,097.25 to US$1.00, the noon buying
    rate as quoted by the Federal Reserve Bank of New York in effect
    on March 31, 2011.  Multiplatform
    and Internet protocol television games
     39




---



##### Table of Contents



Animation
  half-hour
  OUR
    MARKETS
      Year Ended December 31,Countries

2008


2009


2010


2010(1)(In millions of Won and thousands of US$, except
    percentages)Japan

W
27,037


W
31,991


W
29,186



55.7
%

US$
26,599Korea


14,009



11,544



9,737



18.6



8,874United States/Canada(2)


3,620



5,800



4,759



9.1



4,337Taiwan/Hong Kong/Macau


2,301



1,887



2,926



5.6



2,667Brazil


1,006



1,096



1,114



2.1



1,016Others


5,197



5,085



4,640



8.9



4,229Total

W
53,170


W
57,403


W
52,362



100.0
%

US$
47,722     Notes:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,097.25 to US$1.00, the noon buying
    rate as quoted by the Federal Reserve Bank of New York in effect
    on March 31, 2011.(2)
    
    Revenues in the United States and Canada, as shown on this
    table, also include subscription and other types of game
    revenues generated in other countries managed by Gravity
    Interactive. Such revenues from other countries constitute a
    minor portion of the revenues recorded as subscription revenues
    from the United States and Canada. The license agreement for
    Ragnarok Online with Gravity Interactive includes Australia, New
    Zealand and India as countries serviced by Gravity Interactive.
    The license agreement for Requiem with Gravity Interactive
    includes the United Kingdom and 38 other European countries
    serviced by Gravity Interactive. 40




---



##### Table of Contents



Korea
  up-to-date
  Overseas
    markets
      Date of

Date ofLicense

CommercialCountry

Licensee

Agreement

Launch

Date of ExpiryJapan

GungHo Online Entertainment, Inc.

July 2002

December 2002

September 2012Taiwan/Hong Kong/Macau

Game Flier International Corporation(1)

May 2002

October 2002

October 2011Thailand

AsiaSoft Corporation Public Co., Ltd.

June 2002

March 2003

March 2012China

Shengqu Information Technology (Shanghai) Co., Ltd.(2)

July 2005

May 2003

August 2011Singapore/Malaysia

Game Flier (Malaysia) Sdn. Bhd.(3)

May 2003

April 2004

October 2011Philippines

Level Up! Inc.

March 2003

September 2003

August 2012Indonesia

PT. Lyto Datarindo Fortuna

April 2004

November 2003

February 2012Brazil

Level Up! Interactive S.A.

August 2004

February 2005

March 2013Middle East and Africa(4)

Tahadi Games Ltd.

January 2009

December 2009

December 2012Russia and CIS countries(5)

Ingamba LLC(6)

June 2010

March 2007

June 2013     Notes:
  (1)
    
    Game Flier International Corporation is a subsidiary of
    Soft-World International Corporation, former licensee in Taiwan
    and Hong Kong.(2)
    
    Shengqu is a wholly-owned subsidiary of Shanda Games Limited.(3)
    
    Game Flier (Malaysia) Sdn. Bhd. is a wholly-owned subsidiary of
    Soft-World International Corporation. 41




---



##### Table of Contents



(4)
    
    Represents MMORPG operations in the United Arab Emirates, Saudi
    Arabia, Jordan, Kuwait, Syria, Bahrain, Qatar, Palestine, Oman,
    Lebanon, Libya, Sudan, Mauritania, Iraq, Yemen, Iran, Egypt,
    Algeria, Morocco and Tunisia. A single operator services in 20
    countries under one license agreement.(5)
    
    Represents MMORPG operations in Russia, Armenia, Azerbaijan,
    Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia,
    Lithuania, Moldova, Tajikistan, Turkmenistan, Ukraine and
    Uzbekistan. A single operator services in 15 countries under one
    license agreement.(6)
    
    We own a 25% of equity interest in Ingamba, a joint venture
    company for online game service in Russia.      
    an initial license fee for initial
    set-up
    costs, technical support and advisory services that we provide
    until commercial launch; and
    ongoing royalty payments based on a percentage of revenues
    generated from subscription of the game they service in the
    respective overseas markets.    PRICING
    STRUCTURE AND PAYMENT SYSTEM
    free-to-play
 42




---



##### Table of Contents



Korea
    Subscription-based
    fee model
    Hours(1)

Flat Fee per PC300 hours

W
69,300600 hours


138,6001,000 hours


231,0002,000 hours


462,000     Note:
  (1)
    
    Actual hours may vary depending on additional bonus hours we
    offer in proportion to hours purchased by the subscriber.  Micro-transaction
    model
    Japan
    Subscription-based
    fee model
   43




---



##### Table of Contents



Micro-transaction
    model
    Points

Retail Price(1)10,000 points


JPY 1,00021,000 points


2,00032,500 points


3,00055,000 points


5,000112,000 points


10,000     Note:
  (1)
    
    For your reference only, as of March 31, 2011, the noon
    buying rate of the Japanese Yens to U.S. dollars quoted by the
    Federal Reserve Bank of New York was JPY82.76 to US$1.00.  The
    United States and Canada
  and/or
  Micro-transaction
    model
    Points

Retail Price1,100 points

US$
10.001,650 points


15.002,875 points


25.004,600 points


40.006,000 points


50.009,000 points


75.0012,000 points


100.00   VIP
    Service fee model
    Days

Retail Price30 days

US$
7.0090 days


19.00180 days


33.50  44




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##### Table of Contents



Taiwan,
    Hong Kong and Macau
      Points(1) or Days

Retail Price(2)150 points

NT$
150350 points or 30 days


350400 points


400450 points


450500 points


5001,000 points


1,000     Points(1) or Days

Retail Price(3)50 points

HK$
14150 points


40300 points


80350 points or 30 days


93400 points


106450 points


1201,000 points


2651,150 points


3052,000 points


530     Notes:
  (1)
    
    Each time a user logs onto Ragnarok Online, 20 points are
    deducted. After a users playtime exceeds 12 hours,
    additional 20 points are deducted for every 12 hours of
    use. Users of NT$350 or HK$93 My Card may choose between 350
    points and 30 days.(2)
    
    For your reference only, as of March 31, 2011, the noon
    buying rate of NT dollars to U.S. dollars quoted by the Federal
    Reserve Bank of New York was NT$29.40 to US$1.00.(3)
    
    For your reference only, as of March 31, 2011, the noon
    buying rate of Hong Kong dollars to U.S. dollars quoted by the
    Federal Reserve Bank of New York was HK$7.775 to US$1.00.  Micro-transaction
    model
  free-to-play
 45




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##### Table of Contents



Thailand
    Subscription-based
    fee model
    Hours or Days

Points

Retail Price(1)5 hours


2,800



THB 2810 hours


5,500



5520 hours


8,900



8940 hours


15,900



15915 days


18,900



18920 days


24,500



245No limit within 30 days


34,900



34940 days


45,000



450No limit within 90 days


88,800



888     Note:
  (1)
    
    For your reference only, as of March 31, 2011, the noon
    buying rate of the Thai Bahts to U.S. dollars quoted by the
    Federal Reserve Bank of New York was THB30.24 to US$1.00.  Micro-transaction
    model
    China
      Points

Hours or Days

Retail Price(1)500 points


10 hours



CNY 51,000 points


25 hours



101,500 points


7 days



153,000 points


75 hours



304,500 points


30 days



45    46




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##### Table of Contents



Points

Hours or Days

Retail Price(1)3,000 points


75 hours



CNY304,500 points


30 days



45     Note:
  (1)
    
    For your reference only, as of March 31, 2011, the noon
    buying rate of Chinese Yuan to U.S. dollars quoted by the
    Federal Reserve Bank of New York was CNY6.5483 to US$1.00.  Micro-transaction
    model
  free-to-play
  GAME
    DEVELOPMENT AND PUBLISHING
  up-to-date and/or and/or
    In-house
    game development
    Publishing
    
    Preliminary screening.  Our preliminary
    screening process for a game usually includes preliminary review
    and testing of the game and discussions with the game developer
    on technological and operational aspects.
    In-depth examination, analysis and commercial
    negotiation.  Once a game passes the preliminary
    screening, we thoroughly review and test the game, conduct a
    cost analysis, develop operational and financial 47




---



##### Table of Contents



projections and formulate a preliminary game operating plan. We
    then begin commercial negotiations with the developer.  
    Game rating and regulatory registration and
    approval.  Once a license agreement to publish and
    distribute a game is signed, we submit an application to the
    Game Rating Board to obtain a game rating. This process
    generally takes approximately 15 days. We also typically
    register our intellectual property rights in Korea under our
    license agreements, such as copyright and trademark, with the
    relevant Korean government agency. Our overseas subsidiaries or
    licensees follow similar procedures in their respective markets
    where the games we license are commercially offered.
    Testing and marketing.  Once the required
    registration and approvals are obtained, we conduct closed beta
    testing and open beta testing of the new game and assist the
    licensor with the development of the game.    MARKETING
  word-of-mouth
         48




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GAME
    SUPPORT AND CUSTOMER SERVICE
        NETWORK
    AND TECHNOLOGY INFRASTRUCTURE
     49




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##### Table of Contents



on-site
    COMPETITION
    
    hire and retain creative personnel to develop games that appeal
    to our users;
    maintain an online game platform that is stable and is not prone
    to server shutdowns, connection problems or other technical
    difficulties;
    provide timely and responsive customer service; and
    establish payment systems that are secure and efficient.  Competition
    in Korea
     50




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Competition
    in overseas markets
    Competition
    from other game platforms
  users-to-users
     51




---



##### Table of Contents



INSURANCE
    INTELLECTUAL
    PROPERTY
        SEASONALITY
    LAWS AND
    REGULATIONS
    Korea
    The
    Act on Promotion of the Game Industry
   52




---



##### Table of Contents



No. 2007-4702
         53




---



##### Table of Contents



Article 11-4
 54




---



##### Table of Contents



The
    Telecommunications Business Act
      The
    Act on Consumer Protection for Transactions through Electronic
    Commerce
     55




---



##### Table of Contents



The
    Act on Promotion of Information and Communications Network
    Utilization and Information Protection, or Information
    Protection Act
        signing-up
  The
    Personal Information Protection Act
           56




---



##### Table of Contents



The
    Korean Civil Code and the Act on the Establishment and
    Management of the Korea Communications Commission
        Copyright
    Act and Computer Programs Protection Act, or Copyright
    Act
    Juvenile
    Protection Act
   57




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##### Table of Contents



The
    Special Tax Treatment Control Law
    Taiwan
    Consumer
    protection
   58




---



##### Table of Contents



Regulations
    of Internet content and game software
  and/or
  
    Depiction of homicide or other criminal offenses;
    Plot involving terror, bloodshed, cruelty, or perversion, which
    is presented in an intense manner; or
    Depiction of sexual acts or sexual obscenity, through action,
    image, language, text, dialogue or sound, yet which does not
    embarrass or disgust adults in general.      Internet
    café regulation
     59




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##### Table of Contents



and/or
  Privacy
    protection
  and/or
  Intellectual
    property
    Japan
    Protection
    of personal information
    Regulations
    on sound upbringing of minors
    Thailand
   60




---



##### Table of Contents



Registration
    of Internet cafés and online game operators
  e-business
  Regulation
    of business days and hours, and location and building structure
    of Internet cafés and game shops
   61




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Restriction
    on access by children
    Intellectual
    property
    China
    
    the Ministry of Industry and Information Technology;
    the Ministry of Culture;
    the General Administration of Press and Publication;
    the National Copyright Administration;
    the Ministry of Public Security; and
    the Bureau of State Secrecy.    Licenses
   62




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Regulation
    of Internet content
    Regulation
    of information security
      Import
    regulation
  and/or
 63




---



##### Table of Contents



Intellectual
    property rights
    Internet
    café and online game regulation
    Privacy
    protection
   64




---



##### Table of Contents



Regulation
    on information reporting
  and/or
    United
    States
  Game
    Ratings and Attempts to Regulate Access to
    Children
           65




---



##### Table of Contents



2010-11,
  Online
    Collection of Information from Children
        Protection
    of Personal Information
   66




---



##### Table of Contents



Privacy
    Policy Requirements
    Liability
    Arising from User Speech and Conduct
       67




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##### Table of Contents



ITEM 4.C.
    ORGANIZATIONAL
    STRUCTURE    
    Note:
  (1)
    
    Gravity Middle East & Africa FZ-LLC went into
    liquidation proceedings in the United Arab Emirates in September
    2008.  ITEM 4.D.
    PROPERTY,
    PLANTS AND EQUIPMENT    Korea
  121-795 Mapo-Gu, 121-795 Mapo-Gu, Seoul 121-795
  United
    States
   68




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##### Table of Contents



France
    ITEM 4A.
    UNRESOLVED
    STAFF COMMENTS    ITEM 5.
    OPERATING
    AND FINANCIAL REVIEW AND PROSPECTS  You should read the following discussion together with our
    consolidated financial statements and the related notes which
    appear elsewhere in this report. The following discussion is
    based on our consolidated financial statements, which have been
    prepared in accordance with U.S. GAAP. Our historic performance
    may not be indicative of our future results of operations and
    capital requirements and resources.
  ITEM 5.A.
    OPERATING
    RESULTS  OVERVIEW
       69




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The Special Tax
    Treatment Control Law
  Acquisitions
    of the investment in Barunson Interactive Corporation
      Revenues
    
    online games  subscription revenue;
    online games  royalties and license fees;
    mobile games; and
    character merchandising, animation and other revenue.  Online
    games  subscription revenue
    Online
    games  royalties and license fees
       70




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Mobile
    games revenue
    Character
    merchandising, animation and other revenue
        Year Ended December 31,Revenue Type

2008


2009


2010(In millions of Korean Won and percentages)Online games-subscription revenue

W
12,576



23.7
%

W
12,674



22.1
%

W
9,908



18.9
%Online games-royalties and license fees


30,110



56.6



34,037



59.3



32,132



61.4Mobile games


6,882



12.9



7,882



13.7



9,188



17.5Character merchandising, animation and other revenue


3,602



6.8



2,810



4.9



1,134



2.2Total

W
53,170



100.0
%

W
57,403



100.0
%

W
52,362



100.0
%   Cost of
    revenues
    
    operational expenses, server depreciation expenses, server
    maintenance costs and related personnel costs and amortization
    of development-related costs as described in ITEM 5.A.
    OPERATING RESULTS  CRITICAL ACCOUNTING
    POLICIES  Capitalized software development
    costs; and
    royalty payments to Mr. Myoung-Jin Lee, for the right to
    use the storyline and characters from his Ragnarok
    cartoon series used in our game Ragnarok Online. We paid
    Mr. Lee an initial license fee of Won 40 million
    and are required to pay royalties based on 1.0% or 1.5% of
    adjusted revenues (net of value-added taxes and certain other
    expenses) or 2.5%, 5% or 10% of net income generated from the
    use of the Ragnarok brand, depending on the type of revenues
    received from the operation or licensing of Ragnarok Online.   71




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##### Table of Contents



Selling,
    general and administrative expenses
    Research
    and development expenses
    Interest
    expense
    Foreign
    currency effects
        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
  Income
    tax expenses
    CRITICAL
    ACCOUNTING POLICIES
   72




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##### Table of Contents



Revenue
    recognition
    Revenue Recognition
  Allowances
    for doubtful accounts
      Capitalized
    software development costs
  Costs of Software to be Sold,
    Leased, or Marketed. product-by-product
  product-by-product
   73




---



##### Table of Contents



Impairment
    of goodwill and other intangible assets
    Intangibles  Goodwill and Other
             74




---



##### Table of Contents



Impairment
    of Investments
  other-than-temporary other-than-temporary other-than-temporary
  Fair
    value measurement on financial instruments
  Financial Instruments available-for-sale
    Income
    taxes
  Income Taxes
     75




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##### Table of Contents



Recent
    accounting pronouncements
  No. 2009-13, 2009-13, 
  2010-06, Fair Value Measurements and Disclosures 2010-06 2010-06 2010-06 2010-06
  2010-09, Subsequent Events
  2010-11, 
  2010-28, Intangibles  Goodwill and Other paragraph 350-20-35-30,
 76




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##### Table of Contents



2010-29, 2010-29 2010-29
  RESULTS
    OF OPERATIONS: 2010 COMPARED TO 2009
    Year Ended December 31,2009


2010


2010(1)


% Change(Unaudited)(In millions of Won and thousands of US$except for percentages)Revenues:Online games  subscription revenue

W
12,674


W
9,908


US$
9,030



(21.8
)%Online games  royalties and license fees


34,037



32,132



29,284



(5.6
)Mobile games


7,882



9,188



8,374



16.6Character merchandising, animation and other revenue


2,810



1,134



1,034



(59.6
)Total net revenue


57,403



52,362



47,722



(8.8
)Cost of revenue


21,170



20,873



19,023



(1.4
)Gross profit


36,233



31,489



28,699



(13.1
)Gross profit margin(2)


63.1
%


60.1
%


60.1
%Operating expenses:Selling, general and administrative


21,651



20,422



18,612



(5.7
)Research and development


1,799



4,652



4,240



158.6Impairment losses on intangible assets


280



475



433



69.6Settlement cost of litigation


1,649











N/MTotal operating expenses


25,379



25,549



23,285



0.7Operating income


10,854



5,940



5,414



(45.3
)Operating profit margin(3)


18.9
%


11.3
%


11.3
%Other income (expenses):Interest income


2,395



1,946



1,774



(18.7
)Interest expense


(41
)


(32
)


(29
)


(22.0
)Foreign currency income (losses), net


(225
)


96



87



N/MOthers, net


(21
)


312



283



N/MTotal net other income


2,108



2,322



2,115



10.2Income before income tax expenses and equity loss on investments


12,962



8,262



7,529



(36.3
)Income tax expenses


4,544



4,207



3,835



(7.4
)Income before equity loss on investments


8,418



4,055



3,694



(51.8
)Equity loss on investments, net(4)


(1,424
)


(345
)


(314
)


(75.8
) 77




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##### Table of Contents



Year Ended December 31,2009


2010


2010(1)


% Change(Unaudited)(In millions of Won and thousands of US$except for percentages)Net income


6,994



3,710



3,380



(47.0
)LESS: Net income (loss) attributable to the non-controlling
    interest(5)


77



(20
)


(18
)


N/MNet income attributable to parent company

W
6,917


W
3,730


US$
3,398



(46.1
)%   N/M = not meaningful
    Notes:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,097.25 to US$1.00, the noon
    buying rate as quoted by the Federal Reserve Bank of New York in
    effect on March 31, 2011.(2)
    
    Gross profit margin for each period is calculated by dividing
    gross profit by total net revenues for each period.(3)
    
    Operating profit margin for each period is calculated by
    dividing operating income by total net revenues for each period.(4)
    
    Represents the losses from our 16.39% equity investment in
    Online Game Revolution Fund No. 1 and the income from
    our 25% equity investment in Ingamba. These investments were
    accounted for using the equity method of accounting.(5)
    
    Represents the non-controlling interest in NeoCyon, a 96.11%
    held subsidiary acquired in December 2005 and Gravity Games,
    formerly Barunson Interactive, a 50.83% held subsidiary acquired
    in October 2010.  Revenues
    
    a 21.8% decrease in subscription revenue to
    Won 9,908 million (US$9,030 thousand) in 2010 from
    Won 12,674 million in 2009. This 21.8% decrease
    resulted primarily from the 22.7% decrease in the revenues in
    Korea to Won 3,829 million (US$3,490 thousand) in 2010
    from Won 4,951 million in 2009 resulting from
    decreased revenues from Ragnarok Online, Requiem and Emil
    Chronicle Online and the 19.4% decrease in the revenues from
    Ragnarok Online and Requiem in the United States and Canada to
    Won 4,664 million (US$4,251 thousand) in 2010 from
    Won 5,785 million in 2009 due mostly to the fact that
    Ragnarok Online has reached maturity in the markets;
    a 5.6% decrease in royalties and license fees to
    Won 32,132 million (US$29,284 thousand) in 2010 from
    Won 34,037 million in 2009, which primarily resulted
    from decreased revenues from Ragnarok Online in the Japanese
    market and the strengthening of the Korean Won by
    approximately 2.6% against the Japanese Yen from 2009 to 2010,
    though such decrease was partially offset by a 49.2% increase in
    the revenues from Ragnarok Online in Taiwan, Hong Kong and Macau
    driven by the introduction of a renewed version of the game in
    September 2010 in the region. Royalties and license fees from
    Ragnarok Online decreased to Won 30,215 million
    (US$27,536 thousand) in 2010 from Won 33,294 million
    in 2009 due mostly to the fact that Ragnarok Online has reached
    maturity in most of our principal markets; and
    a 59.6% decrease in character merchandising, animation and other
    revenue to Won 1,134 million (US$1,034 thousand)
    in 2010 from Won 2,810 million in 2009, which resulted
    primarily from a 69.2% decrease in sales of goods to
    Won 473 million (US$431 thousand) in 2010 from
    Won 1,535 million in 2009 and from a 42.9% decrease in
    character merchandising revenue to Won 524 million
    (US$477 thousand) in 2010 from Won 917 million in
    2009. 78




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##### Table of Contents




    a 16.6% increase in mobile game revenue to
    Won 9,188 million (US$8,374 thousand) in 2010 from
    Won 7,882 million in 2009. This 16.6% increase
    resulted primarily from revenues of NeoCyon, mainly due to the
    increase in sales of games embedded in mobile phones and royalty
    revenues from mobile games based on Ragnarok Online in the
    Japanese market.  Cost of
    revenues
    
    a 22.4% decrease in amortization on intangible assets to
    Won 2,048 million (US$1,866 thousand) in 2010 from
    Won 2,639 million in 2009 primarily resulting from
    development costs of Emil Chronicle Online and Requiem being
    fully amortized in July 2010 and September 2010, respectively.
    Amortization expense of development costs recorded was
    Won 1,549 million (US$1,412 thousand) in 2010 and
    Won 2,595 million in 2009; and
    a 68.6% decrease in cost of goods sold by NeoCyon to
    Won 286 million (US$261 thousand) in 2010 from
    Won 912 million in 2009. NeoCyon sells goods related
    to cell phones and decrease in sales of goods in 2010 led to
    decrease in cost of goods sold.    
    a 8.8% increase in salaries to Won 9,088 million
    (US$8,283 thousand) in 2010 from Won 8,353 million in
    2009 primarily resulting from increase in salaries for the
    headquarters and NeoCyon; and
    a 70.0% increase in outsourcing fees for the headquarters and
    NeoCyon to Won 2,339 million (US$2,132 thousand)
    in 2010 from Won 1,376 million in 2009.  Gross
    profit and gross profit margin
    Operating
    expenses
  Selling, general and administrative
    expenses.
  
    a 32.5% decrease in commission paid to
    Won 2,904 million (US$2,647 thousand) in 2010
    from Won 4,300 million in 2009 primarily resulting
    from recognition of a loss on the guarantee payment made for the
    development of Ice Age Online in 2009 due to the
    termination of our license agreement with 20th Century Fox
    Licensing & Merchandising, which did not occur in
    2010; and
    a 24.3% decrease in rent expenses to Won 1,522 million
    (US$1,387 thousand) in 2010 from Won 2,010 million in
    2009, which was mainly due to lower rent expense of office of
    Gravity Interactive in 2010 in connection with its relocation in
    October 2009.    
    a 63.0% increase in advertising expenses to
    Won 1,853 million (US$1,689 thousand) in 2010
    from Won 1,137 million in 2009, which mainly consisted
    of advertising expenses for Ragnarok Online in Japan, closed and
    open beta testing of Canaan in August 2010 and in September
    2010, and closed beta testing of H.A.V.E Online and War of Gods
    in November 2010; and
    a 181.2% increase in taxes and dues expenses to
    Won 925 million (US$843 thousand) in 2010 from
    Won 329 million in 2009 primarily resulting from a tax
    examination with respect to transfer pricing adjustments between
    the actual transaction price and the estimated arms length
    price. 79




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##### Table of Contents



Research and development expenses.
  Impairment loss on intangible assets.
  Settlement cost of litigation.
  Operating
    income and operating profit margin
    Net other
    income
    
    a gain of Won 335 million (US$305 thousand) in
    2010 on disposition of
    available-for-sale
    securities.  Income
    tax expenses
    Equity
    loss on investments
  Investment  Equity Method and Joint Ventures
 80




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##### Table of Contents



Non-controlling
    interest
    Net
    income attributable to parent company
    RESULTS
    OF OPERATIONS: 2009 COMPARED TO 2008
    Year Ended December 31,2008


2009


2009(1)


% Change(Unaudited)(In millions of Won and thousands of US$except for percentages)Revenues:Online games  subscription revenue

W
12,576


W
12,674


US$
11,204



0.8
%Online games  royalties and license fees


30,110



34,037



30,090



13.0Mobile games


6,882



7,882



6,968



14.5Character merchandising, animation and other revenue


3,602



2,810



2,484



(22.0
)Total net revenue


53,170



57,403



50,746



8.0Cost of revenue


27,772



21,170



18,715



(23.8
)Gross profit


25,398



36,233



32,031



42.7Gross profit margin(2)


47.8
%


63.1
%


63.1
%Operating expenses:Selling, general and administrative


23,489



21,651



19,140



(7.8
)Research and development


2,145



1,799



1,590



(16.1
)Impairment losses on intangible assets






280



248



N/MSettlement cost of litigation






1,649



1,458



N/MTotal operating expenses


25,634



25,379



22,436



(1.0
)Operating income (loss)


(236
)


10,854



9,595



N/MOperating profit margin(3)


(0.4
)%


18.9
%


18.9
%Other income (expenses):Interest income


2,857



2,395



2,117



(16.2
)Interest expense


(31
)


(41
)


(36
)


32.3Foreign currency income (losses), net


3,235



(225
)


(199
)


N/MOthers, net


(31
)


(21
)


(19
)


(32.3
)Total net other income


6,030



2,108



1,863



(65.0
) 81




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##### Table of Contents



Year Ended December 31,2008


2009


2009(1)


% Change(Unaudited)(In millions of Won and thousands of US$except for percentages)Income before income tax expenses and equity loss on investments


5,794



12,962



11,458



123.7Income tax expenses


3,379



4,544



4,017



34.5Income before equity loss on investments


2,415



8,418



7,441



248.6Equity loss on investments, net(4)


(5,119
)


(1,424
)


(1,259
)


(72.2
)Net income (loss)


(2,704
)


6,994



6,182



N/MLESS: Net income attributable to the non-controlling interest(5)


69



77



68



11.6Net income (loss) attributable to parent company

W
(2,773
)

W
6,917


US$
6,114



N/M
%   N/M = not meaningful
    Notes:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,131.2 to US$1.00, the noon buying
    rate as quoted by the Federal Reserve Bank of New York in effect
    on March 31, 2010.(2)
    
    Gross profit margin for each period is calculated by dividing
    gross profit by total net revenues for each period.(3)
    
    Operating profit margin for each period is calculated by
    dividing operating income by total net revenues for each period.(4)
    
    Represents the losses from our 16.39% equity investment in
    Online Game Revolution Fund No. 1. This investment in
    Online Game Revolution Fund No. 1 was accounted for using
    the equity method of accounting.(5)
    
    Represents the non-controlling interest in NeoCyon, a 96.11%
    held subsidiary acquired in December 2005.  Revenues
    
    a 0.8% increase in subscription revenue to
    Won 12,674 million (US$11,204 thousand) in 2009 from
    Won 12,576 million in 2008. This 0.8% increase
    resulted primarily from the 60.4% increase in the revenues in
    the United States and Canada to Won 5,785 million
    (US$5,114 thousand) in 2009 from Won 3,607 million in
    2008 resulting from the commercial launch of Requiem in June
    2008 and the increased revenues from micro-transactions mainly
    due to sales of certain game items of Ragnarok Online in 2009.
    Such increase in subscription revenues was partially offset by
    the 33.7% decrease in the revenues from Ragnarok Online,
    Requiem, Pucca Racing, Time N Tales and Emil Chronicle Online in
    Korea to Won 4,951 million (US$4,377 thousand) in
    2009 from Won 7,463 million in 2008;
    a 13.0% increase in royalties and license fees to Won
    34,037 million (US$30,090 thousand) in 2009 from Won
    30,110 million in 2008, which primarily resulted from the
    weakening of the Korean Won by approximately 26.4% against the
    Japanese Yen from 2008 to 2009. Royalties and license fees from
    Ragnarok Online increased to Won 33,294 million (US$29,432
    thousand) in 2009 from Won 29,087 million in
    2008; and
    a 14.5% increase in mobile games revenue to Won
    7,882 million (US$6,968 thousand) in 2009 from
    Won 6,882 million in 2008. This 14.5% increase
    resulted primarily from revenues of NeoCyon, mainly due to the
    increase in sales of games embedded in mobile phones and royalty
    revenues from mobile games based on Ragnarok Online in the
    Japanese market. 82




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
    a 22.0% decrease in character merchandising, animation and other
    revenue to Won 2,810 million (US$2,484 thousand)
    in 2009 from Won 3,602 million in 2008, which resulted
    primarily from a 16.1% decrease in character merchandising
    revenue to Won 917 million (US$811 thousand) in 2009
    from Won 1,093 million in 2008 and from a 19.4%
    decrease in sales of goods to Won 1,535 million
    (US$1,357 thousand) in 2009 from Won 1,905 million in 2008.  Cost of
    revenues
    
    a 42.1% decrease in amortization on intangible assets to
    Won 2,639 million (US$2,333 thousand) in 2009 from Won
    4,561 million in 2008 primarily resulting from fully
    completed amortization of intangible assets in December 2008,
    related to acquisition of NeoCyon in December 2005. Amortization
    expense of development costs recorded was
    Won 2,595 million (US$2,294 thousand) in 2009 and
    Won 2,595 million in 2008;
    a 19.7% decrease in salaries to Won 8,353 million
    (US$7,384 thousand) in 2009 from Won 10,403 million in
    2008 primarily resulting from decrease in salaries for the
    headquarters and decrease in salaries for the subsidiaries in
    the United States mainly due to the liquidation proceedings of
    L5 Games Inc. taking place since August 2008;
    a 28.9% decrease in service fees and license fees paid to
    Won 2,468 million (US$2,182 thousand) in 2009 from Won
    3,469 million in 2008 resulting from (i) a switch to
    an Internet Data Center charging lower service fee rate,
    (ii) lower royalty payments to GungHo, the licensor of Emil
    Chronicle Online as a result of the amendment of the license
    agreement in January 2009 and (iii) decrease in service
    fees paid to the provider of content delivery network service as
    a result of a decrease in the number of downloads by our users
    of the client-side software of our games; and
    a 44.3% decrease in cost of goods sold by NeoCyon to
    Won 912 million (US$806 thousand) in 2009 from Won
    1,637 million in 2008. NeoCyon sells goods related to cell
    phones and decrease in sales of goods in 2009 led to decrease in
    cost of goods sold.  Gross
    profit and gross profit margin
    Operating
    expenses
  Selling, general and administrative
    expenses.
  
    a 29.3% decrease in rent expenses to Won 2,010 million
    (US$1,777 thousand) in 2009 from Won 2,845 million in
    2008, which was mainly due to (i) higher rent expense in
    2008 as rent expenses were incurred in both the old and new
    office buildings for the period between February 1, 2008
    and March 16, 2008 in connection with the relocation of the
    headquarter office and (ii) rent expenses of Gravity Middle
    East & Africa FZ-LLC which ceased to exist in 2009 due
    to liquidation proceedings taking place since September
    2008; and
    a 32.1% decrease in severance benefit to Won 743 million
    (US$657 thousand) in 2009 from Won 1,094 million in
    2008, due to changes in benefit policies for the directors of a
    certain subsidiary in February 2008.    
    a loss of Won 975 million (US$862 thousand) on guarantee
    payment made for development of Ice Age Online, due to the
    low likelihood of recovery as we received a written notice of
    termination of the 83




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license agreement with 20th Century FOX Licensing &
    Merchandising, the trademark licensor of Ice Age, in November
    2009.  Research and development expenses.
  Impairment loss on intangible assets.
  Settlement cost of litigation.
  Operating
    income (loss) and operating profit margin
    Net other
    income
    
    a 107.0% decrease in foreign currency income to a loss of
    Won 225 million (US$199 thousand) in 2009 from a gain
    of Won 3,235 million in 2008 mainly resulting from the
    lower rate of depreciation of the Won against the Japanese Yen
    in 2009 compared to 2008.  Income
    tax expenses (benefit)
    Equity
    loss on investments
  Investment-Equity
    Method and Joint Ventures
 84




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Non-controlling
    interest
    Net
    income (loss) attributable to parent company
    ITEM 5.B.
    LIQUIDITY
    AND CAPITAL RESOURCES  Liquidity
    Year Ended December 31,2008


2009


2010


2010(1)(Unaudited)(In millions of Won and thousands of US$)Cash and cash equivalents at beginning of period

W
53,588


W
53,168


W
51,333


US$
46,783Net cash provided by operating activities


6,952



15,861



8,388



7,646Net cash used in investing activities


(9,028
)


(17,550
)


(15,873
)


(14,467
)Net cash provided by (used in) financing activities


(82
)


(55
)


275



250Effect of exchange rate changes on cash and cash equivalents


1,738



(91
)


(1
)


(1
)Net decrease in cash and cash equivalents


(420
)


(1,835
)


(7,211
)


(6,572
)Cash and cash equivalents at end of period

W
53,168


W
51,333


W
44,122


US$
40,211     Note:
  (1)
    
    For convenience only, the Won amounts are expressed in U.S.
    dollars at the rate of Won 1,097.25 to US$1.00, the noon
    buying rate as quoted by the Federal Reserve Bank of New York in
    effect on March 31, 2011.     85




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Cash flows from operating activities.
  Cash flows from investing activities.
  Cash flows from financing activities.
  Capital
    resources
     86




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ITEM 5.C.
    RESEARCH
    AND DEVELOPMENT, PATENTS AND LICENSES, ETC.    
    Strategy and planning overall game design and
    review of technical feasibility, market feasibility and the game
    development process;
    Graphics designing game characters and game
    environments, with the objective of optimizing the overall
    gaming experience;
    Server programming server design and
    development, handling interconnections, validation, security,
    character data and game process coordination and facilitating
    online communication among players; and
    Client programming enhancing the visual and
    sound experience and movement simulation of game characters.      ITEM 5.D.
    TREND
    INFORMATION    ITEM 5.E.
    OFF-BALANCE
    SHEET ARRANGEMENTS   87




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ITEM 5.F.
    CONTRACTUAL
    OBLIGATIONS    Payments Due by PeriodLess than





More thanTotal

1 Year

1-3 Years

3-5 Years

5 Years(In millions of Won)Long-term debt obligations

W



W



W



W



W
Capital lease obligations


502



203



299







Operating lease obligations


4,872



2,542



2,330







Purchase obligations


1,805



1,805











Accrued severance benefits


1,031















   Long-term debt obligations.
  Capital lease obligations.
  Operating lease obligations.
  Purchase Obligations.
 88




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Uncertain tax position. Income
    Taxes
  Accrued severance benefits. Compensation-Retirement Benefits
  Other
    Commitments and Liabilities
    ITEM 5.G.
    SAFE
    HARBOR    ITEM 6.
    DIRECTORS,
    SENIOR MANAGEMENT AND EMPLOYEES  ITEM 6.A.
    DIRECTORS
    AND SENIOR MANAGEMENT  121-795
  Name

Age

PositionHyun Chul Park


38


Chief Executive OfficerYoshinori Kitamura


43


Chairman of the Board of Directors and Chief Operating OfficerHeung Gon Kim


45


Chief Financial OfficerKazuki Morishita


37


Executive DirectorKazuya Sakai


46


Executive DirectorJong Gyu Hwang


41


Independent DirectorDoo Hyun Ryu


50


Independent DirectorJung Yoo


50


Independent Director   Hyun Chul Park
 89




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Yoshinori Kitamura
  Heung Gon Kim
  Kazuki Morishita
  Kazuya Sakai
  Jong Gyu Hwang E-Frontier,
 90




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Doo Hyun Ryu
  Jung Yoo
  ITEM 6.B.
    COMPENSATION        ITEM 6.C.
    BOARD
    PRACTICES  CORPORATE
    GOVERNANCE PRACTICES
   91




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##### Table of Contents




    Under Korean law, we are not required to have a board of
    directors which must be composed of a majority of independent
    directors. Our Board of Directors is currently composed of a
    total of 7 directors, three of whom are independent
    directors.
    Under Korean law, we are not required to have the director
    nomination committee and compensation committee composed solely
    of independent directors. Our director nomination committee and
    compensation committee are currently each composed of two
    non-independent directors and one independent director.
    Under Korean law, independent directors are not required to have
    regularly scheduled meetings at which only independent directors
    are present. Our audit committee, which is composed solely of
    three independent directors, generally holds meetings once a
    month whenever there are matters related to financial results of
    the Company, related party transactions or others.
    In lieu of the requirement that shareholder approval be obtained
    prior to an issuance of securities in connection with
    (i) the acquisition of the stock or assets of another
    corporation; (ii) equity-based compensation of officers,
    directors, employees or consults; (iii) a change of
    control; and (iv) private placements, as specified in
    NASDAQ Rule 5635, we require a resolution to be adopted at
    the general meeting of shareholders when necessary under Korean
    law, including, for example, if an issuance of securities is
    related to the acquisition of all of the business of another
    corporation or the acquisition of a part of the business of
    another corporation which significantly affects the Company.
    In lieu of the requirement that copies of an annual report be
    delivered to shareholders within a reasonable time following the
    filing of the annual report with the SEC, our business report
    prepared under Korean law, and financial statements prepared in
    accordance with Korean GAAP, are made available to shareholders
    one (1) week before the day of the general meeting of
    shareholders and presented to shareholders at the ordinary
    general meeting of shareholders. Moreover, such documents as
    well as our annual report on
    Form 20-F,
    once available, may be viewed at our principal or branch office
    by any of our shareholders making such a request and are also
    delivered to any shareholder making a request for delivery.
    Under Korean law, we are not required to prepare quarterly or
    interim reports. We furnish our quarterly financial statements
    prepared in accordance with U.S. GAAP on
    Form 6-K
    with the SEC.
    Under Korean law, we are not required to solicit proxies nor
    provide proxy statements in connection with any general meeting
    of shareholders. For shareholders holding only our common
    shares, we do not solicit proxies from nor provide proxy
    statements to such shareholders. For holders of our ADSs, our
    depositary, The Bank of New York Mellon, provides proxy
    statements to, and solicits proxies from, such holders, which
    proxies will be voted by the Korea Securities Depository on
    behalf of the holders at the general meeting of shareholders.
    Pursuant to an amendment to the Korean Commercial Code, which
    goes into effect on April 15, 2012, the following
    categories of individuals or entities will be required to make a
    disclosure to our board of directors and receive the approval of
    two-thirds of the incumbent directors before entering into a
    transaction with us:  (i)
    A director or major shareholder (a shareholder who owns 10% or
    more of the outstanding voting shares or has influence over
    major management decisions such as the appointment and removal
    of directors or auditors);(ii)
    A spouse, direct ancestor or direct descendant of a director or
    a major shareholder;(iii)
    A direct ancestor or direct descendant of a spouse of a director
    or a major shareholder;(iv)
    An entity, of which 50% or more of the voting power,
    individually or in the aggregate, is held by one or more
    individuals described in (i) through (iii), or any
    subsidiary of such entity; or(v)
    An entity, of which 50% or more of the voting power, in the
    aggregate, is held by the combination of one or more individuals
    described in (i) through (iii) and the entity
    described in (iv). 92




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
    Pursuant to the same amendment, a director may not usurp a
    business opportunity for its own or third-partys benefit,
    except upon the approval of two-thirds of the incumbent
    directors.  BOARD OF
    DIRECTORS
          COMMITTEES
    OF THE BOARD OF DIRECTORS
    
    the audit committee;
    the director nomination committee; and
    the compensation committee.  Audit
    committee
  Rule 10A-3(b)(1)
 93




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Director
    nomination committee
    Compensation
    committee
    ITEM 6.D.
    EMPLOYEES    December 31,

March 31,2008

2009

2010

2011Senior management


10



11



13



11Finance


14



19



18



19Marketing


53



56



50



55Game development and support


286



278



280



292Total


363



364



361



377         December 31,

March 31,2008

2009

2010

2011Gravity Interactive, Inc.


34



34



30



35Gravity Entertainment Corporation














Gravity EU SASU


7



6



7



8Gravity CIS, Inc.(1)


20
{2}


13
{2}


1



1Gravity Middle East & Africa FZ-LLC














NeoCyon, Inc.(1)


45



45



69
{2}


85
{3}Gravity Games Corporation(2)


N/A



N/A



68



73Total


106



98



175



202     Notes:
  (1)
    
    The number in {} is the number of employees (who are included in
    the total number) seconded from us. 94




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##### Table of Contents



(2)
    
    We acquired an aggregate of 50.83% equity interest in Gravity
    Games Corporation, formerly known as Barunson Interactive
    Corporation, in October 2010.          ITEM 6.E.
    SHARE
    OWNERSHIP    Stock
    option plan
    
    Stock options may be granted to our officers and employees who
    have contributed or are qualified to contribute to our
    establishment, management and technical innovation.
    Notwithstanding the foregoing, no stock options may be granted
    to any person who is (i) our largest shareholder,
    (ii) a holder of 10% or more of our shares outstanding,
    (iii) certain specially related persons of the person set
    forth in (i) and (ii) above, or (iv) a
    shareholder who would own 10% or more of our shares upon
    exercise of options granted under the stock option plan.
    Provided, however that, those who fall under the specially
    related persons upon becoming one of the officers of the
    concerned company (includes part-time officers of the affiliated
    company) shall be excluded from item (iii) above.
    Stock options may be granted by a special resolution of our
    shareholders with the aggregate number of shares issuable not to
    exceed 10% of the total number of our then issued and
    outstanding common shares.
    Upon exercise of stock options, we deliver our common shares or
    pay in cash the difference between the market price of our
    shares and the option exercise price.
    The number of officers and employees subject to grant of stock
    options shall not exceed 90% of the currently employed officers
    and employees, and the stock option granted to an officer or an
    employee shall not exceed 10% of the total issued and
    outstanding stocks. 95




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
    Stock options granted under the stock option plan, in case new
    shares are issued, has a minimum exercise price equal to the
    higher of (i) the market price of our shares calculated
    pursuant to the method under the Inheritance and Gift Tax Law
    and (ii) the par value of our shares, and in other cases,
    has a minimum exercise price equal to or higher than the market
    price of our shares calculated pursuant to the method under the
    Inheritance and Gift Tax Law.
    Stock options may be exercisable by a person who is granted a
    stock option and has served for the Company for two (2) or
    more years from the date of the resolution set forth above;
    provided, that stock options may be exercised by, or on behalf
    of, a person that dies, retires or resigns due to any cause not
    attributable to himself/herself before the two (2) years
    from the date of the resolution set forth above.
    Stock options can vest after two years from the stock option
    grant date and can be exercised up to five (5) years
    from the vesting date.
    Stock options may be cancelled by a resolution of our Board of
    Directors if (i) the officer or employee who holds the
    option voluntarily retires after being granted stock options,
    (ii) the officer or employee who holds the option causes
    material damage to us by willful misconduct or negligence,
    (iii) we are unable to deliver our shares or pay the
    prescribed amount due to bankruptcy or dissolution, or
    (iv) the occurrence of any cause for cancellation of stock
    options specified in the stock option agreement.    ITEM 7.
    MAJOR
    SHAREHOLDERS AND RELATED PARTY TRANSACTIONS  ITEM 7.A.
    MAJOR
    SHAREHOLDERS    Number ofShares

PercentageBeneficially

BeneficiallyName

Owned

OwnedGungHo Online Entertainment, Inc.(1)


4,121,739



59.3
%     Note:
  (1)
    
    On August 30, 2005, Jung Ryool Kim, our former controlling
    shareholder and Chairman, sold all of our shares that he and his
    family members owned to EZER Inc., or EZER, a Japanese company,
    pursuant to a stock purchase agreement by and among Jung Ryool
    Kim, Ji Young Kim, Young Joon Kim and Ji Yoon Kim, and EZER
    dated August 30, 2005. Pursuant to the share sale
    transaction, EZER became our largest shareholder. EZER, which
    was 100% owned by our former Chairman and Chief Executive
    Officer, Il Young Ryu, was the operator of an investment fund
    established pursuant to a contractual relationship known in
    Japan as a tokumei kumiai (TK
    Relationship) with Techno Groove, Inc., a Japanese company
    and wholly-owned subsidiary of Asian Groove, Inc., or Asian
    Groove, a Japanese company. The TK Relationship, which is
    governed by the Commercial Code of Japan, is used in Japan as a
    means of making and managing investments, and under the
    investment fund agreement for the TK Relationship (the TK
    Agreement), EZER acted as the operator of a fund,
    established in Japan under the name of Asian Star
    Fund, using the capital contribution made by Techno Groove
    as an investor in the fund. Asian Star Fund was established for
    the sole purpose of investing in our shares. 96




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According to Schedule 13/D filed by Techno Groove, among
    others, their investment in the Asian Star Fund was financed
    through a loan from Son Asset Management, LLC, formerly known as
    Son Asset Management Inc., or SAM, a Japanese company, in the
    amount of JPY40 billion. In exchange, Asian Groove, the
    parent company of Techno Groove, pledged all of its shares of
    GungHo Entertainment Online, Inc. in custody with Techno Groove,
    which in turn pledged these shares to SAM.Under the terms of the TK Agreement, EZER, as the operator of
    Asian Star Fund, had sole rights with respect to ownership and
    voting rights of common shares of companies invested in by Asian
    Star Fund. Asian Star Funds sole investment was in our
    shares. Techno Groove had no voting or investment power with
    respect to the securities held by Asian Star Fund. The term of
    the TK Agreement was for one year, subject to automatic one-year
    renewals, unless terminated by either party upon three months
    prior notice. Upon such termination, the assets of Asian Star
    Fund must be distributed to Techno Groove by EZER.On October 31, 2006, Techno Groove was merged into Asian
    Groove and on December 26, 2006, EZER acquired
    3,640,619 shares of our common stock from Asian Star Fund
    for JPY9,921,679,586. Asian Star Fund was automatically
    dissolved based on the TK Agreement on December 26, 2006
    because all of the shares were transferred outside of the fund.The acquisition of our common stock by EZER under the TK
    Agreement was financed by the issuance by EZER to SAM of EZER
    Series One Corporate Bond in the principal amount of
    JPY9,930,000,000 (the EZER Series One Corporate
    Bond).On October 19, 2007, EZER entered into an accord and
    satisfaction agreement (the Accord and Satisfaction
    Agreement) with SAM, whereby, EZER agreed to transfer to
    SAM 3,640,619 shares of our common stock in partial
    satisfaction of EZERs obligations under the EZER
    Series One Corporate Bond held by SAM, in an amount of
    JPY5,869,244,308 on the later to occur of
    (i) November 20, 2007, and (ii) the date the
    Korean Fair Trade Commission approved the transfer of such
    shares (the Closing Date) based upon the NASDAQ
    Official Closing Price of our common stock on the day prior to
    the Closing Date.On November 19, 2007, the Korean Fair Trade Commission
    approved the transfer of our common stock pursuant to the Accord
    and Satisfaction Agreement. As a result, on November 20,
    2007, EZER no longer held any of our shares.On February 13, 2008, Heartis Inc., or Heartis, a
    corporation organized under the laws of Japan, executed a stock
    purchase and sale agreement (the Purchase Agreement)
    with SAM pursuant to which SAM agreed to transfer
    3,640,619 shares of our common stock to Heartis. On
    February 29, 2008, Heartis paid to SAM JPY4,036,298,947, an
    amount equal to the 3,640,619 shares multiplied by the
    NASDAQ Official Closing Price of ADSs representing shares of our
    common stock on February 13, 2008 (US$2.56), multiplied by
    four ADSs (representing one share of our common stock), and
    further multiplied by the JPY/US$ telegraphic transfer middle
    rate on February 14, 2008, reported by Mizuho Corporate
    Bank, Ltd. (JPY108.27 per US$1.00), in exchange for delivery of
    our common stock. On the same date, 3,640,619 shares of our
    common stock were transferred to Heartis pursuant to the
    Purchase Agreement.In order to finance the transaction contemplated by the Purchase
    Agreement, Heartis executed a loan agreement (the Loan
    Agreement) with SAM on February 22, 2008. Under the
    Loan Agreement, on February 29, 2008 SAM loaned to Heartis
    JPY4,030,000,000, the principal of which Heartis shall repay no
    later than February 28, 2010. Heartis shall pay to SAM
    interest at a rate of 14.5% per annum. As collateral for the
    loan, Heartis agreed in the Loan Agreement to pledge to SAM
    24,308 shares of common stock of GungHo which shares were
    acquired by Heartis through a third party allotment on
    April 1, 2008 under a share subscription agreement (the
    Share Subscription Agreement) between Heartis and
    GungHo on February 14, 2008. Heartis provided the remainder
    of the consideration specified by the Purchase Agreement out of
    its working capital.GungHo is 18.54% held by Heartis and 14.50% by Asian Groove.
    Taizo Son, the Chairman of GungHo, controls Heartis through his
    100% ownership of the issued share capital of Inter Operations,
    which owns 100% of the issued share capital of Heartis. Taizo
    Son also controls Asian Groove by directly owning 33.3% of the
    issued share capital of Asian Groove and indirectly owning,
    through his ownership of Inter Operations, a further 33.3% of
    Asian Groove. Taizo Son also directly owns 0.33% of GungHo.
    Thus, Taizo Son directly and indirectly owns or controls 33.37%
    of the issued share capital of GungHo. 97




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On February 14, 2008, GungHo executed the Share
    Subscription Agreement with Heartis pursuant to which, on
    April 1, 2008, Heartis was to transfer
    3,640,619 shares of our common stock to GungHo as a
    contribution in kind for 24,308 newly issued shares of common
    stock of GungHo. The number of shares issued by GungHo was
    determined based on an aggregate valuation of the shares of
    JPY4,035,128,000.On April 1, 2008, the Share Subscription Agreement between
    Heartis and GungHo was consummated. As a result, the legal title
    to 3,640,619 shares of our common stock that Heartis held
    until such time was transferred to GungHo.On June 23, 2008, GungHo and LaGrange Capital Partners,
    L.P., or LaGrange, entered into a Stock Purchase Agreement (the
    LaGrange Stock Purchase Agreement), whereby GungHo
    purchased 1,378,166 ADSs representing 344,541.50 shares of
    our common stock held by LaGrange for an aggregate purchase
    price of US$2,067,249. The purchase price was paid out of
    GungHos own funds. The LaGrange Stock Purchase Agreement
    was consummated on June 23, 2008.On June 23, 2008, GungHo and LaGrange Capital Partners
    Offshore Fund, Ltd., or LaGrange Offshore, entered into a Stock
    Purchase Agreement (the LaGrange Offshore Stock Purchase
    Agreement), whereby GungHo purchased 424,051 ADSs
    representing 106,012.75 shares of our common stock held by
    LaGrange Offshore for an aggregate purchase price of
    US$636,076.50. The purchase price was paid out of GungHos
    own funds. The LaGrange Offshore Stock Purchase Agreement was
    consummated on June 23, 2008.On June 24, 2008, GungHo and Raffles Associates, L.P., or
    Raffles, entered into a Stock Purchase Agreement (the
    Raffles Stock Purchase Agreement), whereby GungHo
    purchased 122,261 ADSs representing 30,565.25 shares of our
    common stock held by Raffles for an aggregate purchase price of
    US$183,391.50. The purchase price was paid out of GungHos
    own funds. The Raffles Stock Purchase Agreement was consummated
    on June 24, 2008.We have in the ordinary course of business, entered into various
    contracts with GungHo. See ITEM 4.B. BUSINESS
    OVERVIEW  OUR MARKETS  Overseas
    markets and ITEM 10.C. MATERIAL CONTRACTS.    ITEM 7.B.
    RELATED
    PARTY TRANSACTIONS  Relationship
    with GungHo Online Entertainment, Inc.
     98




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##### Table of Contents



Relationship
    with SoftBank Corporation
      Relationship
    with Gravity Interactive, Inc.
     99




---



##### Table of Contents



Relationship
    with L5 Games Inc.
    Relationship
    with Gravity Entertainment Corporation and the Animation
    Production Committee
          Relationship
    with NeoCyon, Inc.
   100




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##### Table of Contents



Relationship
    with Gravity CIS Co., Ltd.
    Relationship
    with Gravity RUS Co., Ltd.
    Relationship
    with Gravity EU SASU
    Relationship
    with Gravity Middle East & Africa FZ-LLC
    Relationship
    with Gravity Games Corporation
   101




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##### Table of Contents



Relationship
    with Ingamba LLC
    ITEM 7.C.
    INTERESTS
    OF EXPERTS AND COUNSEL    ITEM 8.
    FINANCIAL
    INFORMATION  ITEM 8.A.
    CONSOLIDATED
    STATEMENTS AND OTHER FINANCIAL INFORMATION  FINANCIAL
    STATEMENTS
    LEGAL
    PROCEEDINGS
  Class
    action complaints
  No. 1:05-CV-4804-LAP Form F-1 30-day
  Other
    litigation matters
   102




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##### Table of Contents



Tax
    matters
    DIVIDEND
    POLICY
     103




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##### Table of Contents



ITEM 8.B.
    SIGNIFICANT
    CHANGES    ITEM 9.
    THE
    OFFER AND LISTING  ITEM 9.A.
    OFFER
    AND LISTING DETAILS  Common
    Stock
    American
    Depositary Shares
   104




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##### Table of Contents



Period

PriceHigh

Low(In US$)2006


9.88



4.802007


7.25



2.752008


3.50



0.362009


2.63



0.50First Quarter


0.90



0.50Second Quarter


1.22



0.64Third Quarter


2.63



1.00Fourth Quarter


2.08



1.322010


2.25



1.35First Quarter


2.10



1.56Second Quarter


2.25



1.44Third Quarter


1.62



1.35Fourth Quarter


1.89



1.37December


1.85



1.532011 (through June 17, 2011)


2.19



1.49First Quarter


2.19



1.64January


2.19



1.64February


2.09



1.80March


2.19



1.83April


2.11



1.70May


1.91



1.70June (through June 17, 2011)


1.78



1.49   ITEM 9.B.
    PLAN
    OF DISTRIBUTION    ITEM 9.C.
    MARKETS    ITEM 9.D.
    SELLING
    SHAREHOLDERS    ITEM 9.E.
    DILUTION    ITEM 9.F.
    EXPENSES
    OF THE ISSUE    ITEM 10.
    ADDITIONAL
    INFORMATION  ITEM 10.A.
    SHARE
    CAPITAL   105




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ITEM 10.B.
    ARTICLES OF
    INCORPORATION    General
        Dividends
             106




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##### Table of Contents



Distribution
    of free shares
    Preemptive
    rights and issuance of additional shares
      
    through a general public offering pursuant to a resolution of
    the Board of Directors of no more than 50% of the total number
    issued and outstanding shares;
    to the members of the employee stock ownership association;
    upon exercise of a stock option in accordance with our articles
    of incorporation;
    in the form of depositary receipts of no more than 50% of the
    total number issued and outstanding shares;
    to induce foreign direct investment necessary for business in
    accordance with the Foreign Investment Promotion Act of no more
    than 50% of the total number issued and outstanding shares;
    to domestic or overseas financial institutions, corporations or
    individuals for the purpose of raising funds on an emergency
    basis;
    to certain companies under an alliance arrangement with
    us; or
    by a public offering or to cause the underwriters to underwrite
    new shares for the purpose of listing them on any stock exchange
    of no more than 50% of the total number issued and outstanding
    shares.     107




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General
    meeting of shareholders
    
    as necessary;
    at the request of shareholders holding an aggregate of 3% or
    more of our outstanding shares; or
    at the request of our audit committee.        Voting
    rights
      
    amending our articles of incorporation;
    removing a director;
    effecting a capital reduction;
    effecting any dissolution, merger or consolidation with respect
    to us;
    transferring all or any significant part of our business; 108




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
    acquiring all of the business of any other company or a part of
    the business of any other company having a material effect on
    our business (the material effect qualifier will be
    applied to the acquisition of both the whole and partial
    business of any other company when the amendment to the Korean
    Commercial Code goes into effect on April 15, 2012);
    issuing new shares at a price below the par value; or
    any other matters for which such resolution is required under
    relevant law and regulations.        Rights of
    dissenting shareholders
    Register
    of shareholders and record dates
    and/or
 109




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Annual
    report
    Transfer
    of shares
        43-2
  Acquisition
    of our shares
       110




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Liquidation
    rights
    Other
    provisions
      ITEM 10.C.
    MATERIAL
    CONTRACTS  Form 20-F INFORMATION ON THE COMPANY
  First
    Amendment to Exclusive Ragnarok Online 2 Authorization to Use
    and Distribute Software Agreement dated June 2, 2010
    between Level Up! Interactive S.A. and
    Registrant
    First
    Amendment to Exclusive Ragnarok License and Distribution
    Agreement dated August 31, 2010 between Level Up! Inc.
    and Registrant
    Amendment
    to the Exclusive Ragnarok Online Software License Agreement
    dated September 1, 2010 between Shengqu Information
    Technology (Shanghai) Co., Ltd. and Registrant
    Third
    Amendment to Exclusive Ragnarok Software License Agreement dated
    October 16, 2010 between Gravity EU EASU and
    Registrant
   111




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Sixth
    Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated January 1, 2011 between
    Gravity Interactive, Inc. and Registrant
    First
    Amendment to the Exclusive Ragnarok Authorization and
    Distribution Agreement dated January 17, 2011 between
    Level Up! Interactive S.A. and Registrant
    ITEM 10.D.
    EXCHANGE
    CONTROLS  General
      Filing
    with the Korean government in connection with the issuance of
    American Depositary Shares
     112




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and/or
  Certificates
    of the shares must be kept in custody with an eligible
    custodian
      Restrictions
    on American Depositary Shares and shares
         113




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ITEM 10.E.
    TAXATION  KOREAN
    TAXATION
    Dividends
    on the shares or American Depositary Shares
         114




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Taxation
    of capital gains
         115




---



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Tax
    treaties
  Korea-United Korea-United Korea-United
 116




---



##### Table of Contents



Article 2-2 Article 98-5 Article 156-4
  Inheritance
    tax and gift tax
     117




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Securities
    transaction tax
        U.S.
    FEDERAL INCOME TAX CONSIDERATIONS
  Korea-United
  
    financial institutions;
    regulated investment companies;
    tax-exempt organizations; 118




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
    grantor trusts;
    certain former citizens or residents of the United States;
    insurance companies;
    dealers or traders in securities or currencies;
    persons liable for alternative minimum tax;
    persons (including traders in securities) using a
    mark-to-market
    method of accounting;
    persons that have a functional currency other than
    the U.S. dollar;
    persons that own (or are deemed to own) 10% or more (by voting
    power) of our common shares;
    persons who hold our common shares or ADSs as a hedge or as part
    of a straddle with another position, constructive sale,
    conversion transaction or other integrated transaction; or
    entities that are treated as partnerships for U.S. federal
    income tax purposes.  non-U.S. tax
  Persons considering the purchase, ownership or disposition of
    our ADSs or common shares should consult their own tax advisor
    concerning U.S. federal income tax consequences in light of
    their particular situation as well as any other tax consequences
    arising under the laws of any taxing jurisdiction. In
    particular, while we do not believe we were a passive foreign
    investment company in 2007, due to deterioration of the trading
    price of our ADSs and our holding of a significant amount of
    cash, short-term investments, and other passive assets, it is
    likely we were a passive foreign investment company in 2008
    through 2010, and there is a significant risk that we will
    continue to be one in 2011. See discussion under ITEM 10.E.
    TAXATION  U.S. FEDERAL INCOME TAX
    CONSIDERATIONS  Passive foreign investment
    companies.
    
    an individual citizen or resident of the United States;
    a corporation (or other entity treated as a corporation for
    U.S. federal income tax purposes) created or organized in
    or under the laws of the United States, any state thereof or the
    District of Columbia;
    an estate the income of which is subject to U.S. federal
    income taxation regardless of its source; or
    a trust that:  
    is subject to the primary supervision of a court within the
    United States and the control of one or more United States
    persons as described in section 7701(a)(30) of the
    Code; or
    has a valid election in effect under applicable
    U.S. Treasury regulations to be treated as a United States
    domestic trust.   119




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American
    Depositary Shares
    Passive
    foreign investment companies
    
    at least 75% of our gross income is passive income; or
    on average at least 50% of the value (determined on a quarterly
    basis) of our assets is attributable to assets that produce or
    are held for the production of passive income.          Taxation
    of dividends
   120




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If you
    hold our ADSs or common shares while we are a PFIC
    
    the excess distribution or gain will be allocated ratably over
    your holding period for our ADSs or common shares;
    the amount allocated to the current taxable year, and any
    taxable year prior to the first taxable year in which we were a
    PFIC, will be treated as ordinary income; and
    the amount allocated to each other year will be subject to tax
    at the highest tax rate in effect for that year and the interest
    charge generally applicable to underpayments of tax will be
    imposed on the resulting tax attributable to each such year.    mark-to-market mark-to-market mark-to-market mark-to-market
  mark-to-market mark-to-market
  mark-to-market mark-to-market mark-to-market
    If we
    are never a PFIC while you hold our ADSs or common
    shares
   121




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Korea-United
    
    have held our ADSs or common shares for less than a specified
    minimum period during which you are not protected from risk of
    loss; or
    are obligated to make payments related to the dividends;     122




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Taxation
    of capital gains
  If you
    hold our ADSs or common shares while we are a PFIC
  if you hold our ADSs or common shares
    while we are a PFIC
    mark-to-market mark-to-market mark-to-market
  If we
    are never a PFIC while you hold our ADSs or common
    shares
  non-U.S. tax 24-month
   123




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Information
    Reporting Regarding PFICs and Specified Foreign Financial
    Assets
    non-U.S. financial non-U.S. financial non-U.S. person, non-U.S. person, non-U.S. person.
    If you are a U.S. Holder, you are urged to consult with
    your own tax advisor regarding the application of the PFIC and
    specified foreign financial assets information reporting
    requirements and related statute of limitations tolling
    provisions with respect to the ADSs or our common shares.
  Information
    reporting and backup withholding
      ITEM 10.F.
    DIVIDENTS
    AND PAYING AGENTS    ITEM 10.G.
    STATEMENT
    BY EXPERTS    ITEM 10.H.
    DOCUMENTS
    ON DISPLAY  Form 20-F,
 124




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1-800-SEC-0330 http://www.sec.gov.
  ITEM 10.I.
    SUBSIDIARY
    INFORMATION    ITEM 11.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    Foreign
    currency risk
          Interest
    rate risk
   125




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Credit
    risk
      ITEM 12.
    DESCRIPTION
    OF SECURITIES OTHER THAN EQUITY SECURITIES  A.
    Debt
    Securities    B.
    Warrants
    and Rights    C.
    Other
    Securities    D.
    American
    Depositary Shares  Fees and
    Charges Our ADS holders May Have to Pay
    Persons depositing or withdrawing shares must pay:
    
    For:$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
    
     Issuance of ADSs, including issuances resulting from
    a distribution of shares or rights or other property Cancellation of ADSs for the purpose of withdrawal,
    including if the deposit agreement terminates$.02 (or less) per ADS
    
     Any cash distribution to ADS registered holdersA fee equivalent to the fee that would be payable if securities
    distributed to you had been shares and the shares had been
    deposited for issuance of ADSs
    
     Distribution of securities distributed to holders of
    deposited securities which are distributed by the depositary to
    ADS registered holders$.02 (or less) per ADSs per calendar year
    
     Depositary servicesRegistration or transfer fees
    
     Transfer and registration of shares on our share
    register to or from the name of the depositary or its agent when
    you deposit or withdraw shares 126




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Expenses of the depositary
    
     Cable, telex and facsimile transmissions (when
    expressly provided in the deposit agreement) Converting foreign currency to U.S. dollarsTaxes and other governmental charges the depositary or the
    custodian have to pay on any ADS or share underlying an ADS, for
    example, stock transfer taxes, stamp duty or withholding taxes
    
     As necessaryAny charges incurred by the depositary or its agents for
    servicing the deposited securities
    
     As necessary  Fees and
    Other Payments Made by the Depositary to Us
  out-of-pocket
     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  Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
 127




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Managements
    Annual Report on Internal Control over Financial
    Reporting
  Rules 13a-15(f) 15d-15(f)
        Changes
    in Internal Control over Financial Reporting
        ITEM 16.
    RESERVED  ITEM 16A.
    AUDIT
    COMMITTEE FINANCIAL EXPERT  Rule 10A-3
 128




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ITEM 16B.
    CODE
    OF ETHICS    ITEM 16C.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES    AggregateFeesBilled Duringthe YearEndedDecember 31,Type of Service

2009

2010

Nature of Services(In millionsof Won)Audit Fees


520



625


Audit service for the Company and its subsidiaries.Audit-Related Fees






10


Due diligence support.Tax Fees






All Other Fees






Total


520



635     ITEM 16D.
    EXEMPTIONS
    FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES    ITEM 16E.
    PURCHASES
    OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS    ITEM 16F.
    CHANGE
    IN REGISTRANTS CERTIFYING ACCOUNTANT    ITEM 16G.
    CORPORATE
    GOVERNANCE   129




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##### Table of Contents



PART III  ITEM 17.
    FINANCIAL
    STATEMENTS    ITEM 18.
    FINANCIAL
    STATEMENTS  EXHIBITS
  ITEM 19.
    EXHIBITS  Financial Statements filed as part of this annual
    report
    PageIndex to Financial Statements


F-1Report of Independent Registered Public Accounting Firm


F-2Consolidated Balance Sheets as of December 31, 2009 and 2010


F-3Consolidated Statements of Operations for the years ended
    December 31, 2008, 2009 and 2010


F-4Consolidated Statements of Changes in Equity for the years ended
    December 31, 2008, 2009 and 2010


F-5Consolidated Statements of Cash Flows for the years ended
    December 31, 2008, 2009 and 2010


F-6Notes to Consolidated Financial Statements


F-7   Exhibits filed as part of this annual report
  1
.1◊◊

Articles of Incorporation, amended as of June 12, 2009 (English
    translation)2
.1*

Form of Stock Certificate of Registrants common stock, par
    value Won 500 per share2
.1**

Form of Deposit Agreement among Registrant, The Bank of New York
    Mellon, formerly known as The Bank of New York, as depositary,
    and all holders and beneficial owners of American Depositary
    Shares evidenced by American Depositary Receipts, including the
    form of American depositary receipt**4
.1*

Agreement on the Development of Ragnarok Online, dated June 26,
    2000, between Myoung-Jin Lee and Registrant (translation in
    English)4
.2*

Agreement on the Exclusive License of Copyright Regarding
    Ragnarok Game Services, dated June 26, 2000, between Myoung-Jin
    Lee and Registrant (translation in English)4
.3*

Cooperation Agreement on Ragnarok Game Services, dated May 31,
    2002, between Myoung-Jin Lee and Registrant (translation in
    English)4
.4*

Agreement on Factual Matters, dated November 19, 2002, between
    Myoung-Jin Lee and Registrant (translation in English)4
.5*

Agreement on Ragnarok Game Services and Related Matters, dated
    January 22, 2003, between Myoung-Jin Lee and Registrant
    (translation in English)4
.6*

Agreement, dated June 3, 2003, between Myoung-Jin Lee and
    Registrant (translation in English)4
.7*

Agreement, dated October 27, 2004, between Myoung-Jin Lee and
    Registrant (translation in English)4
.8*

Investment Agreement, dated February 19, 2002, between Sunny YNK
    Inc. and Registrant (translation in English)4
.9*

Agreement, dated February 21, 2002, between Sunny YNK Inc. and
    Registrant (translation in English)4
.10

Share Purchase Agreement, dated May 3, 2005, between Mr. Moon
    Kyu Kim and Registrant (translation in English)4
.11*

Ragnarok License and Distribution Agreement, dated July 24,
    2002, between GungHo Online Entertainment, Inc. (formerly ONSALE
    Japan K.K.) (licensee in Japan) and Registrant 130




---



##### Table of Contents



4
.12*

Amendment to Ragnarok License and Distribution Agreement, dated
    September 23, 2004, between GungHo Online Entertainment, Inc.
    (licensee in Japan) and Registrant4
.13*

Ragnarok Exclusive License and Distribution Agreement, dated May
    20, 2002, between Soft-World International Corporation (licensee
    in Taiwan and Hong Kong) and Registrant4
.14*

Fourth Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated October 19, 2004, between
    Soft-World International Corporation (licensee in Taiwan and
    Hong Kong) and Registrant4
.15*

Exclusive Ragnarok License and Distribution Agreement, dated
    October 21, 2002, among Soft-World International Corporation,
    Value Central Corporation (licensee in China) and Registrant4
.16

Fourth Amendment to the Exclusive Ragnarok License and
    Distribution Agreement, dated May 18, 2005, among Soft-World
    International Corporation, Value Central Corporation (licensee
    in China) and Registrant4
.17*

Ragnarok License and Distribution Agreement, dated June 13,
    2002, between Asiasoft International Co., Ltd. (licensee in
    Thailand) and Registrant4
.18*

Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated October 27, 2004, between Asiasoft
    International Co., Ltd. (licensee in Thailand) and Registrant4
.19*

Exclusive Ragnarok License and Distribution Agreement, dated May
    12, 2003, among Soft-World International Corporation, Value
    Central Corporation (licensee in Malaysia and Singapore) and
    Registrant4
.20*

Exclusive Ragnarok License and Distribution Agreement, dated
    March 25, 2003, between Level Up! Inc. (licensee in the
    Philippines) and Registrant4
.21

Third Amendment to the Exclusive Ragnarok License and
    Distribution Agreement, dated February 18, 2005, between Level
    Up! Inc. (licensee in the Philippines) and Registrant4
.22*

Exclusive Ragnarok License and Distribution Agreement, dated
    April 2, 2004, between PT. Lyto Datarindo Fortuna (licensee in
    Indonesia) and Registrant4
.23*

Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated October 29, 2004, between PT. Lyto
    Datarindo Fortuna (licensee in Indonesia) and Registrant4
.24*

Exclusive Ragnarok Online License and Distribution Agreement,
    dated November 26, 2003, between Burda Holding International
    GmbH (licensee in Germany, Austria, Switzerland, Italy and
    Turkey) and Registrant4
.25*

Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated December 2, 2003, between
    Burda Holding International GmbH (licensee in Germany, Austria,
    Switzerland, Italy and Turkey) and Registrant4
.26*

Second Amendment to the Exclusive Ragnarok License and
    Distribution Agreement, dated November 18, 2004, between
    Burda Holding International GmbH (licensee in Germany, Austria,
    Switzerland, Italy and Turkey) and Registrant4
.27

Exclusive Ragnarok License and Distribution Agreement, dated
    July 16, 2004, between Ongamenet PTY Ltd. (licensee in Australia
    and New Zealand) and Registrant4
.28

Exclusive Ragnarok License and Distribution Agreement, dated
    August 15, 2004, between Level Up! Interactive SA (licensee in
    Brazil) and Registrant4
.29*

Exclusive Ragnarok Software License Agreement, dated May 24,
    2004, between Level Up Network India Pvt. Ltd. (licensee in
    India) and Registrant4
.30*

Lease Agreement, dated August 1, 2004, between Jung Ryool Kim
    and Registrant (translation in English)4
.31*

Equipment Sales Agreement, dated December 1, 2003, between
    Gravity Interactive, LLC and Registrant4
.32*

Service and Distribution of Earnings and Profit Agreement, dated
    April 1, 2003, between Gravity Interactive, LLC and Registrant4
.33*

Loan Agreement, dated January 1, 2004, between Gravity
    Entertainment Corporation, formerly RO Production Ltd., and
    Registrant (translation in English) 131




---



##### Table of Contents



4
.34*

Share (syusshi-mochiban) Assignment Agreement, dated October 25,
    2004, between GungHo Online Entertainment, Inc. and Registrant4
.35*

Joint Project Agreement for TV Animation Ragnarok,
    dated October 1, 2004, among Gravity Entertainment Corporation,
    formerly RO Production Ltd., GDH Co., Ltd., TV Tokyo Medianet
    Co., Ltd., Amuse Soft Entertainment Co., Ltd. and GNG
    Entertainment Inc (translation in English)4
.36*

Ragnarok Sales Agency Agreement, dated April 10, 2002, between
    Sunny YNK Inc. and Registrant (translation in English)4
.37

Lease Agreement, dated October 19, 2005, between Meritz Fire
    & Marine Insurance Co., Ltd. and Registrant4
.38

Real Estate Sale Agreement, dated May 22, 2006, between Yahoh
    Communication Ltd. and Registrant4
.39

Global Publishing Agreement, dated November 7, 2005, between
    Ndoors Corporation and Registrant4
.40

Global Publishing Agreement, dated November 15, 2005, between
    Sonnori Co., Ltd. and Registrant4
.41

Fourth Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated April 20, 2005 between Level
    Up! Inc. (licensee in Brazil) and Registrant4
.42

Fifth Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated March 22, 2006 between Level
    Up! Inc. (licensee in the Philippines) and Registrant4
.43

Exclusive Ragnarok Online Software License Agreement dated April
    9, 2006 between Game Flier (Malaysia) Sdn. Bhd. (licensee in
    Malaysia and Singapore) and Registrant4
.44

3rd Amendment to the Exclusive Ragnarok License and Distribution
    Agreement dated April 15, 2006 between Burda Holding
    International GmbH (licensee in Germany, Austria, Switzerland,
    Italy and Turkey) and Registrant4
.45

2nd Renewal of Ragnarok License and Distribution Agreement dated
    September 29, 2006 between GungHo Online Entertainment, Inc.
    (licensee in Japan) and Registrant4
.46

Agreement on Changes of the Global Publishing Contract dated
    October 9, 2006 between Ndoors Corporation (developer of
    Time N Tales) and Registrant4
.47

Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated October 22, 2006 between Soft-World
    International Corporation (licensee in Taiwan) and Registrant4
.48

Agreement on Changes of the Lease Contract dated January 8, 2007
    between Meritz Fire & Marine Insurance Co., Ltd. and
    Registrant4
.49◊

Exclusive Emil Chronicle Online License and Distribution
    Agreement dated August 1, 2007, between GameCyber Technology
    Ltd. (licensee in Taiwan and Hong Kong) and Registrant4
.50◊

First Amendment to the Ragnarok Online Software Agreement dated
    October 9, 2007, between Game Flier (Malaysia) Sdn. Bhd.
    (licensee in Singapore and Malaysia) and Registrant4
.51◊

Exclusive Ragnarok Online 2 License and Distribution Agreement
    dated October 15, 2007, between PT. Lyto Datarindo Fortuna
    (licensee in Indonesia) and Registrant4
.52◊

Amendment to the exclusive Ragnarok Online License and
    Distribution Agreement dated October 22, 2007, between
    Soft-World International Corporation (licensee in Taiwan and
    Hong Kong) and Registrant4
.53◊

Exclusive Requiem Online License and Distribution Agreement
    dated December 1, 2007, between Gravity CIS, Inc. and Registrant4
.54◊

Lease Agreement dated January 1, 2008, between Korea SW Industry
    Promotion Agency and Registrant4
.55◊

Second Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated January 1, 2008, between Gravity
    Interactive, Inc. and Gravity Co., Ltd.4
.56◊

Exclusive Ragnarok Online 2 Authorization to Use and Distribute
    Software Agreement dated January 21, 2008, between Level
    Up! Interactive S.A. (licensee in Brazil) and Registrant4
.57◊

First Amendment to the exclusive Emil Chronicle Online License
    and Distribution Agreement dated January 23, 2008, between
    GameCyber Technology Ltd. (licensee in Taiwan and Hong Kong) and
    Registrant4
.58◊

Exclusive Pucca Racing License and Distribution Agreement dated
    January 23, 2008, among Ini3 Digital Co., Ltd. (licensee in
    Thailand), Vooz Co., Ltd. (character licensor) and Registrant 132




---



##### Table of Contents



4
.59◊

Exclusive Requiem Online License and Distribution Agreement
    dated February 21, 2008, between Gravity Interactive, Inc. and
    Registrant4
.60◊

Sixth Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated February 27, 2008, between PT. Lyto
    Datarindo Fortuna (licensee in Indonesia) and Registrant4
.61◊◊

Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated March 4, 2008 between AsiaSoft
    Corporation Public Co., Ltd. (licensee in Thailand) and
    Registrant4
.62◊◊

Fourth Amendment to the Exclusive Ragnarok License and
    Distribution Agreement dated April 30, 2008, between Burda:ic
    GmbH (licensee in Germany, Austria, Switzerland, Italy and
    Turkey) and Registrant4
.63◊◊

Assignment of Agreement dated May 30, 2008, among Level Up!
    Network India Pvt. Ltd., Level Up! International Holdings Pte.
    Ltd. (licensees in India) and Registrant4
.64◊◊

First Amendment to the Exclusive Ragnarok Software License
    Agreement dated June 1, 2008, between Gravity EU SASU and
    Registrant4
.65◊◊

Exclusive Ragnarok Online License and Distribution Agreement
    dated July 2, 2008, between AsiaSoft Corporation Public Co.,
    Ltd. (licensee in Vietnam) and Registrant4
.66◊◊

First Amendment to the Exclusive Emil Chronicle Online License
    and Distribution Agreement dated July 4, 2008, between Infocomm
    Asia Holdings Pte. Ltd. and Registrant4
.67◊◊

Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated September 1, 2008, between
    Shengqu Information Technology (Shanghai) Co., Ltd. (licensee in
    China) and Registrant4
.68◊◊

Exclusive Ragnarok Online License and Distribution Agreement
    dated September 1, 2008, between Level Up! Inc. (licensee in the
    Philippines) and Registrant4
.69◊◊

Exclusive Emil Chronicle Online License and Distribution
    Agreement dated December 8, 2008, between Run Up Game
    Distribution and Development Sdn. Bhd. (licensee in Singapore
    and Malaysia) and Registrant4
.70◊◊

Third Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated January 1, 2009, between Gravity
    Interactive, Inc., and Registrant4
.71◊◊

Exclusive Ragnarok Online License and Distribution Agreement
    dated January 21, 2009, between Tahadi Games Ltd. (licensee in
    UAE and 19 other countries) and Registrant4
.72◊◊

Exclusive Emil Chronicle Online License and Distribution
    Agreement dated February 26, 2009, between PT. Wave Wahana
    Wisesa (licensee in Indonesia) and Registrant4
.73◊◊

Exclusive Ragnarok Authorization and Distribution Agreement
    dated March 2, 2009, between Level Up! Interactive S.A (licensee
    in Brazil) and Registrant4
.74◊◊

Seventh Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement, dated March 7, 2009, between Gravity
    CIS, Inc. and Registrant4
.75◊◊

Form of employment agreement with director and senior management.4
.76◊◊◊

Fourth Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated September 1, 2009 between Gravity
    Interactive, Inc. and Registrant4
.77◊◊◊

Amendment to the 2nd Renewal of Ragnarok License and
    Distribution Agreement dated September 29, 2009 between GungHo
    Online Entertainment, Inc. (licensee in Japan) and Registrant4
.78◊◊◊

Fifth Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated October 1, 2009 between Gravity
    Interactive, Inc. and Registrant4
.79◊◊◊

Second Amendment to the Ragnarok Online Software License
    Agreement dated October 9, 2009 between Game Flier (Malaysia)
    Sdn. Bhd. (licensee in Singapore and Malaysia) and Registrant4
.80◊◊◊

Ragnarok Online Exclusive Game License Agreement dated October
    22, 2009 between Game Flier International Corporation (licensee
    in Taiwan, Hong Kong and Macau) and Registrant4
.81◊◊◊

First Amendment to Exclusive Requiem Online License and
    Distribution Agreement dated December 1, 2009 between
    Gravity Interactive, Inc. and Registrant4
.82◊◊◊

Global Service Agreement dated December 1, 2009 between AsiaSoft
    Corporation Public Co., Ltd., (consignee in Thailand, Singapore,
    Vietnam and Malaysia) and Registrant 133




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##### Table of Contents



4
.83◊◊◊

Fifth Amendment to the Exclusive Ragnarok License and
    Distribution Agreement dated February 1, 2010 between Burda:ic
    GmbH (licensee in Germany, Austria, Switzerland, Italy and
    Turkey) and Registrant4
.84◊◊◊

Global Service Agreement dated February 2, 2010 between PT. Lyto
    Datarindo Fortuna (consignee in Indonesia) and Registrant4
.85◊◊◊

Ragnarok Online Game License Agreement dated February 27, 2010
    between PT. Lyto Datarindo Fortuna (licensee in Indonesia) and
    Registrant4
.86◊◊◊

Second Amendment to the Exclusive Requiem Online License and
    Distribution Agreement dated March 1, 2010 between Gravity
    Interactive, Inc. and Registrant4
.87◊◊◊

Exclusive Requiem Online License and Distribution Agreement
    dated March 2, 2010 between Game Flier International Corporation
    (licensee in Taiwan, Hong Kong and Macau) and Registrant4
.88◊◊◊

Exclusive Ragnarok Online License and Distribution Agreement
    dated March 5, 2010 between AsiaSoft Corporation Public Co.,
    Ltd., (licensee in Thailand) and Registrant4
.89

First Amendment to Exclusive Ragnarok Online 2 Authorization to
    Use and Distribute Software Agreement dated June 2, 2010 between
    Level Up! Interactive S.A. (licensee in Brazil) and Registrant4
.90

First Amendment to Exclusive Ragnarok License and Distribution
    Agreement dated August 31, 2010 between Level Up! Inc. (licensee
    in the Philippines) and Registrant4
.91

Amendment to the Exclusive Ragnarok Online Software License
    Agreement dated September 1, 2010 between Shengqu Information
    Technology (Shanghai) Co., Ltd. (licensee in China) and
    Registrant4
.92

Third Amendment to Exclusive Ragnarok Software License Agreement
    dated October 16, 2010 between Gravity EU EASU and Registrant4
.93

Sixth Amendment to the Exclusive Ragnarok Online License and
    Distribution Agreement dated January 1, 2011 between
    Gravity Interactive, Inc. and Registrant4
.94

First Amendment to the Exclusive Ragnarok Authorization and
    Distribution Agreement dated January 17, 2011 between Level
    Up! Interactive S.A. and Registrant8
.1

List of Registrants subsidiaries11
.1

Registrants Code of Ethics (amended)12
.1

CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 200212
.2

CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 200213
.1

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 200213
.2

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002     *
    
    Incorporated by reference to Registrants Registration
    Statement on Form F-1 (File No. 333-122159)**
    
    Incorporated by reference to Registrants Registration
    Statement on Form F-6 (File No. 333-122160)
    
    Previously filed as exhibits to our annual report on Form 20-F
    filed on June 30, 2005. (File No. 000-51138)
    
    Previously filed as exhibits to our annual report on Form 20-F
    filed on June 30, 2006. (File No. 000-51138)
    
    Previously filed as exhibits to our annual report on Form 20-F
    filed on June 29, 2007. (File No. 000-51138)◊
    
    Previously filed as exhibits to our annual report on Form 20-F
    filed on June 27, 2008. (File No. 000-51138)◊◊
    
    Previously filed as exhibits to our annual report on Form 20-F
    filed on June 30, 2009. (File No. 000-51138)◊◊◊
    
    Previously filed as exhibits to our annual report on Form 20-F
    filed on June 1, 2010. (File
    No. 000-51138) 134




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##### Table of Contents



SIGNATURES
  Form 20-F
    By:
    /s/  Heung
    Gon Kim   Title:
    Chief Financial Officer   135




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##### Table of Contents



INDEX TO
    FINANCIAL STATEMENTS  PageIndex to Financial Statements


F-1Report of Independent Registered Public
    Accounting Firm


F-2Consolidated Balance Sheets as of
    December 31, 2009 and 2010


F-3Consolidated Statements of Operations for the
    years ended December 31, 2008, 2009 and 2010


F-4Consolidated Statements of Changes in Equity for
    the years ended December 31, 2008, 2009 and 2010


F-5Consolidated Statements of Cash Flows for the
    years ended December 31, 2008, 2009 and 2010


F-6Notes to Consolidated Financial Statements


F-7  F-1




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM       
      F-2




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##### Table of Contents



GRAVITY
    CO., LTD.
  CONSOLIDATED BALANCE SHEETS
 December 31,
    2009 and 2010
  2009


2010


2010(Note 3)(Unaudited)(In millions of Korean Won and in thousands of US dollars
    except share and per share data)ASSETSCurrent assets:Cash and cash equivalents

W
51,333


W
44,122


$
40,211Short-term financial instruments


16,000



12,500



11,392Short-term
    available-for-sale
    investments (accounted for using fair value option)


4,973



5,000



4,557Accounts receivable, net (including related party balances of
    W2,377 and W2,947,
    respectively)


5,907



8,242



7,512Current portion of deferred income tax assets


375



857



781Other current assets (including related party balances of
    W41 and W179, respectively)


4,311



5,622



5,124Total current assets


82,899



76,343



69,577Property and equipment, net


2,837



2,672



2,435Leasehold and other deposits


1,496



1,711



1,559Capitalized software development cost


11,006



13,700



12,486Other intangible assets


239



20,140



18,355Goodwill


1,210



7,991



7,283Equity method investments


1,100



1,336



1,217Other non-current assets (including related party balances of
    W55 and W23, respectively)


1,651



1,597



1,456Total assets

W
102,438


W
125,490


$
114,368LIABILITIES AND EQUITYCurrent liabilities:Accounts payable (including related party balances of
    W507 and W1,147, respectively)

W
3,205


W
6,641


$
6,052Deferred revenue (including related party balances of
    W606 and W650, respectively)


3,750



5,611



5,114Other current liabilities


1,293



1,813



1,652Total current liabilities


8,248



14,065



12,818Long-term deferred revenue (including related party balances of
    W5,495 and W5,406,
    respectively)


9,658



8,993



8,196Accrued severance benefits


478



1,031



939Deferred income tax liabilities


272



2,600



2,370Other non-current liabilities


172



389



355Total liabilities


18,828



27,078



24,678Commitments and contingenciesParent Company Shareholders equity:Preferred shares, W500 par value,
    2,000,000 shares authorized, and no shares issued and
    outstanding at December 31, 2009 and 2010










Common shares, W500 par value,
    38,000,000 shares authorized, and 6,948,900 shares
    issued and outstanding at December 31, 2009 and 2010


3,474



3,474



3,167Additional paid-in capital


75,395



75,395



68,713Retained earnings


1,265



4,995



4,552Accumulated other comprehensive income


3,262



3,552



3,236Total parent company shareholders equity


83,396



87,416



79,668Non-controlling interest


214



10,996



10,022Total equity


83,610



98,412



89,690Total liabilities and equity

W
102,438


W
125,490


$
114,368    F-3




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##### Table of Contents



GRAVITY
    CO., LTD.
  CONSOLIDATED STATEMENTS OF OPERATIONS
 Years
    Ended December 31, 2008, 2009 and 2010
  2008


2009


2010


2010(Note 3)(Unaudited)(In millions of Korean Won and in thousands of US dollars
    except per share data)RevenueOnline games-subscription revenue

W
12,576


W
12,674


W
9,908


$
9,030Online games-royalties and license fees (including related party
    revenue of W23,326, W28,089
    and W24,636, respectively)


30,110



34,037



32,132



29,284Mobile games (including related party revenue of
    W2,309, W2,951 and
    W3,917, respectively)


6,882



7,882



9,188



8,374Character merchandising, animation and other revenue (including
    related party revenue of W1,089,
    W947 and W512, respectively)


3,602



2,810



1,134



1,034Total net revenue


53,170



57,403



52,362



47,722Cost of revenue (including related party cost of
    W483, W188 and
    W259, respectively)


27,772



21,170



20,873



19,023Gross profit


25,398



36,233



31,489



28,699Selling, general and administrative (including related party
    expenses of W121, W482 and
    W3,923, respectively)


23,489



21,651



20,422



18,612Research and development


2,145



1,799



4,652



4,240Impairment losses on intangible assets






280



475



433Settlement cost of litigation






1,649







Operating income (loss)


(236
)


10,854



5,940



5,414Other income (expenses)Interest income


2,857



2,395



1,946



1,774Interest expense


(31
)


(41
)


(32
)


(29
)Foreign currency income (loss), net


3,235



(225
)


96



87Others, net


(31
)


(21
)


312



283Income before income tax expenses and equity loss on investments


5,794



12,962



8,262



7,529Income tax expenses


3,379



4,544



4,207



3,835Income before equity loss on investments


2,415



8,418



4,055



3,694Equity loss on investments, net(1)


(5,119
)


(1,424
)


(345
)


(314
)Net income (loss)


(2,704
)


6,994



3,710



3,380Less: Net income (loss) attributable to the non-controlling
    interest


69



77



(20
)


(18
)Net income (loss) attributable to parent company

W
(2,773
)

W
6,917


W
3,730


$
3,398Earnings (loss) per share  basic and diluted:Net income attributable to parent company common shareholders

W
(399
)

W
995


W
537


$
0.49Weighted average number of shares outstandingBasic and diluted


6,948,900



6,948,900



6,948,900



6,948,900     (1)
    
    See Note 20 for transactions with related party.   F-4




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##### Table of Contents



GRAVITY
    CO., LTD.
  CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 Years
    Ended December 31, 2008, 2009 and 2010
  AccumulatedRetained


OtherNo. of





Additional


Earnings


Comprehensive


Non-ControllingCommon


Common


Paid-in


(Accumulated


Income


Interest inShares


Shares


Capital


Deficit)


(Loss)


Subsidiary


Total(In millions of Korean Won, except number of shares)Balance at January 1, 2008


6,948,900


W
3,474


W
75,126


W
(2,879
)

W
(245
)

W
68


W
75,544Amortization of deferred stockCompensation










121















121Comprehensive income (loss)Foreign currency translation adjustments


















3,647







3,647Net income (loss)














(2,773
)






69



(2,704
)Total comprehensive income


























943Balance at December 31, 2008


6,948,900



3,474



75,247



(5,652
)


3,402



137



76,608Amortization of deferred stockCompensation










148















148Comprehensive income (loss)Foreign currency translation adjustments


















(140
)






(140
)Net income














6,917







77



6,994Total comprehensive income


























6,854Balance at December 31, 2009


6,948,900



3,474



75,395



1,265



3,262



214



83,610Increase of non-controlling interest from acquisition of a new
    subsidiary






















10,802



10,802Comprehensive income (loss)Foreign currency translation adjustments


















290







290Net income (loss)














3,730







(20
)


3,710Total comprehensive income


























4,000Balance at December 31, 2010


6,948,900


W
3,474


W
75,395


W
4,995


W
3,552


W
10,996


W
98,412(Note 3) Unaudited
    (In thousands of US dollars, except number of shares)Balance at December 31, 2009


6,948,900


$
3,167


$
68,713


$
1,154


$
2,973


$
195


$
76,202Increase of non-controlling interest from acquisition of a new
    subsidiary






















9,845



9,845Comprehensive income (loss)Foreign currency translation adjustments


















263







263Net income (loss)














3,398







(18
)


3,380Total comprehensive income


























3,643Balance at December 31, 2010


6,948,900


$
3,167


$
68,713


$
4,552


$
3,236


$
10,022


$
89,690    F-5




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##### Table of Contents



GRAVITY
    CO., LTD.
  CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years
    Ended December 31, 2008, 2009 and 2010
  2008


2009


2010


2010(Note 3)(Unaudited)(In millions of Korean Won and in thousands of US dollars)Cash flows from operating activitiesNet income (loss)

W
(2,704
)

W
6,994


W
3,710


$
3,380Adjustments to reconcile net income (loss) to net cash provided
    by operating activitiesDepreciation and amortization


8,501



5,627



3,708



3,379Allowance for accounts receivable and other receivables


7



186



426



389Loss on impairment of intangible assets






280



475



433Loss on impairment of property and equipment


11











Provision for accrued severance benefits


885



436



234



213Stock compensation expense


121



148







Equity loss on investments, net


5,119



1,424



345



314Gain on disposition of
    available-for-sale
    investments










(335
)


(305
)Loss on foreign currency transactions


108



59



400



365Loss on disposition of property and equipment


84



3



108



98Others


55



(36
)


110



101Changes in operating assets and liabilities:Accounts receivable


(1,393
)


265



1,213



1,106Other assets


(57
)


971



(170
)


(154
)Accounts payable


(2,035
)


(602
)


(437
)


(398
)Accrued expenses


178



(165
)


(814
)


(742
)Deferred revenue


(849
)


1,440



(498
)


(454
)Income tax payable


310



(503
)


368



336Deferred income taxes


(714
)


86



(263
)


(240
)Payment of severance benefits


(616
)


(832
)


(91
)


(82
)Other liabilities


(59
)


80



(101
)


(93
)Net cash provided by operating activities

W
6,952


W
15,861


W
8,388


$
7,646Cash flows from investing activitiesDecrease (increase) in short-term financial instruments

W
1,585


W
(8,743
)

W
3,500


$
3,190Purchase of
    available-for-sale
    investments






(5,000
)


(5,000
)


(4,557
)Proceeds from disposal of
    available-for-sale
    investments










5,308



4,837Increase in short-term loans receivable










(1,249
)


(1,138
)Purchase of equity method investments


(6,054
)


(229
)


(495
)


(451
)Purchase of property and equipment


(2,217
)


(627
)


(1,449
)


(1,321
)Proceeds from disposal of property and equipment


390



11



45



41Purchase of intangible assets


(3,645
)


(2,746
)


(5,092
)


(4,640
)Cash paid for acquisition, net of cash acquired










(11,277
)


(10,278
)Payment of leasehold deposits


(614
)


(21
)


(74
)


(68
)Proceeds from leasehold deposits


1,769



4



31



28Others, net


(242
)


(199
)


(121
)


(110
)Net cash used in investing activities


(9,028
)


(17,550
)


(15,873
)


(14,467
)Cash flows from financing activitiesProceeds from borrowings


212



140



418



381Repayment of borrowings


(294
)


(195
)


(143
)


(131
)Net cash provided by (used in) financing activities


(82
)


(55
)


275



250Effect of exchange rate changes on cash and cash equivalents


1,738



(91
)


(1
)


(1
)Net decrease in cash and cash equivalents


(420
)


(1,835
)


(7,211
)


(6,572
)Cash and cash equivalentsBeginning of the year


53,588



53,168



51,333



46,783End of the year

W
53,168


W
51,333


W
44,122


$
40,211    F-6




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##### Table of Contents



GRAVITY
    CO., LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    Description
    of Business          2.
    Significant
    Accounting Policies  Basis
    of presentation
    Principles
    of consolidation
    Year ofYear of

Obtaining

PercentageSubsidiary

Establishment

Control

Ownership (%)Gravity Interactive, Inc.(*1)


2003



2003



100.00Gravity Entertainment Corp.


2003



2004



100.00NeoCyon, Inc.


2000



2005



96.11Gravity CIS Co., Ltd.(*2)


2005



2005



100.00Gravity EU SASU


2006



2006



100.00Gravity RUS Co., Ltd.(*2)


2007



2007



99.99Gravity Middle East & Africa FZ-LLC(*3)


2007



2007



100.00Barunson Interactive Corp.(*4)


2003



2010



50.83     (*1)
    
    In October 2007, Gravity Interactive, Inc. founded L5 Games
    Inc., as a wholly owned US-based subsidiary. L5 Games Inc.
    was liquidated in May 2010.(*2)
    
    In October 2007, the Company founded Gravity RUS Co., Ltd., a
    Russia-based subsidiary, and acquired 99.99% of the voting
    shares, and then transferred 100% of the voting shares of
    Gravity CIS Co., Ltd. to Gravity RUS Co., Ltd. in December 2007. F-7




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
   (*3)
    
    In May 2007, the Company founded Gravity Middle East &
    Africa FZ-LLC, a wholly owned United Arab Emirates-based
    subsidiary. Gravity Middle East & Africa FZ-LLC is in
    the process of liquidation as of December 31, 2010.(*4)
    
    In October 2010, the Company acquired 50.83% ownership of
    Barunson Interactive Corp. Based on the shareholders
    meeting held on March 28, 2011, Barunson Interactive Corp.
    changed its name to Gravity Games Corp.    Investment 
    Equity Method and Joint Ventures
    Use of
    estimates
    Risks
    and uncertainties
  Industry
    and revenue
     F-8




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    2008

2009

2010Accounts



Accounts



AccountsCountry

Licensee

Receivable

Revenues

Receivable

Revenues

Receivable

RevenuesJapan

GungHo Online
    Entertainment, Inc.


50
%


50
%


40
%


56
%


35
%


56
%   Concentrations
    of credit risk
    Revenue
    recognition
      Online
    games  subscription revenue
    Online
    games  royalties and license fees
        Mobile
    game revenue
   F-9




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Character
    merchandising, animation and other revenue
      Cash
    and cash equivalents
    Short-term
    financial instruments
    Short-term
    and long-term
    available-for-sale
    investments
  Financial Instruments available-for-sale
  available-for-sale available-for-sale Investments 
    Debt and Equity Securities available-for-sale
  Equity
    securities in non-public companies
      Allowance
    for doubtful accounts
   F-10




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Property
    and equipment
    Computer and equipment


4 yearsFurniture and fixtures


4 yearsSoftware


3 yearsVehicles


4 years       Accounting
    for the impairment of long-lived assets
    Property, Plant,
    and Equipment
  Capitalized
    software development costs
  Costs of
    Software to be Sold, Leased, or Marketed) product-by-product
   F-11




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  W W W W W
  product-by-product and/or
  W
  Research
    and development costs
    Goodwill
  Intangibles  Goodwill and Other
  Acquired
    in-process research and development technology
   F-12




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Advertising
  The Company expenses advertising costs as
    incurred. W W W
  Accrued
    severance benefits and pension plan
  Compensation-Retirement Benefits
    Foreign
    currency translation
  Foreign Currency Matters
  Foreign
    currency transactions
    Income
    taxes
  Income Taxes
    Income Taxes
 F-13




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Fair
    value of financial instruments
    Fair Value Measurements and
    Disclosures
  Accounting
    for stock-based compensation
      Earning
    (loss) per share
    Recent
    accounting pronouncements
  No. 2009-13, Revenue Recognition 
 F-14




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    2010-06, Fair Value Measurements and Disclosures 2010-06 2010-06 2010-06 2010-06
  2010-09, Subsequent Events  Subsequent Events
  2010-11, Derivatives and Hedging 
  2010-28, when to perform step 2 of the goodwill impairment test for
    reporting units with zero or negative carrying amounts (a
    consensus of the FASB Emerging Issues Task Force). Intangibles  Goodwill and Other paragraph 350-20-35-30,
  2010-29,
 F-15




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  2010-29 ASU 2010-29
  3.
    Convenience
    Translation into United States Dollar Amounts    4.
    Restricted
    Assets    5.
    Allowance
    for Accounts Receivable    2008


2009


2010(In millions of Korean Won)Balance at beginning of year

W
139


W
67


W
2Provision for allowances


47







5Reversal of previous provision






(65
)


Write-offs


(119
)






(2
)Balance at end of year

W
67


W
2


W
5  F-16




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  6.
    Available-for-sale
    Investments  available-for-sale
  GrossCost or


UnrealizedCarrying Value


Losses


Fair Value(In millions of Korean Won)As of December 31, 2009Current portion of
    available-for-sale:ELS fund (accounted for at fair value under ASC 825)

W
4,973


W



W
4,973Non-current portion of
    available-for-sale:Public bond


21



1



20W
4,994


W
1


W
4,993As of December 31, 2010Current portion of
    available-for-sale:ELS fund (accounted for at fair value under ASC 825)

W
5,000


W



W
5,000Non-current portion of
    available-for-sale:Public bond


21



1



20W
5,021


W
1


W
5,020   W W
  W available-for-sale W
  7.
    Acquisitions
    of the investment in Barunson Interactive Corp.  W
   F-17




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    W
    2010(In millions of Korean Won)Consideration cash

W
11,688Current assets

W
2,150Non-current assetsProperty and equipment


357Game product technology


11,856In-process research and development technology


8,503Other non-current assets


106Current liabilities


(460
)Non-current liabilities


(4,064
)Deferred income tax liabilities


(2,739
)Total identified net assets


15,709Non-controlling interest


(10,802
)Goodwill


6,781W
11,688   W W W
      
    Estimated future cash flows   F-18




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    
    Discount rate    W
        2009


2010(In millions of Korean Won except per share data)Revenue

W
60,689


W
57,930Net Income


5,093



3,446Basic earnings per share


733



496Diluted earnings per share


733



496   W W
  8.
    Equity
    Method Investment    2009


2010(In millions of Korean Won)Animation Production Committee

W



W
Online Game Revolution Fund No. 1


1,100



838Ingamba, LLC






498Total equity method investments

W
1,100


W
1,336  F-19




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    2008


2009


2010(In millions of Korean Won)Animation Production Committee

W



W



W
Online Game Revolution Fund No. 1


(5,119
)


(1,424
)


(358
)Ingamba, LLC










13Total equity loss on investments

W
(5,119
)

W
(1,424
)

W
(345
)   Animation
    Production Committee
  W
  Online
    Game Revolution Fund No. 1
  W W W W W Investment- Equity Method and Joint Ventures W W W
    Balance
    Sheets
  2009


2010(In millions of Korean Won)Current assets

W
3,423


W
4,296Noncurrent assets


9,491



1,863Total Assets


12,914



6,159Current liabilities


32



28Noncurrent liabilities


6,172



1,018Shareholders equity


6,710



5,113Percentage of ownership in equity investees


16.39
%


16.39
%Investment in equity investees at cost plus equity undistributed
    earnings since acquisition

W
1,100


W
838  F-20




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Statements
    of operations
  2008


2009


2010(In millions of Korean Won)Revenues

W
40


W
1,795


W
2,180Cost and expense


33,420



10,483



9,856Operating loss


33,380



8,688



7,676Other income, net










5,492Loss before income taxes


33,380



8,688



2,184Income tax expense










Net Loss


33,380



8,688



2,184Percentage of ownership in equity investees


16.39
%


16.39
%


16.39
%Equity in net loss of equity method investees

W
5,119


W
1,424


W
358     INGAMBA,
    LLC.
    9.
    Fair
    value of financial instruments  Fair Value Measurements and
    Disclosures
    available-for-sale
   F-21




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    (i)
    Cash and
    cash equivalents, short-term financial instruments, accounts
    receivable and accounts payable    (ii)
    Short-term
    available-for-sale
    investments with an embedded derivatives features    (iii)
    Long-term
    available-for-sale
    investments      
    Level 1 Quoted prices in active exchange
    markets involving identical assets or liabilities.
    Level 2 Inputs other than Level 1
    that are observable, either directly or indirectly, such as
    quoted prices for similar assets or liabilities; quoted prices
    in markets that are not active; or other inputs that are
    observable or can be corroborated by observable market data for
    substantially the full term of the assets or liabilities.
    Level 3 Unobservable inputs for the
    asset or liability, either directly or indirectly, and
    management assessments and inputs using a binomial lattice model
    as the valuation technique.   F-22




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Quoted


SignificantMarket Price


Other


Significantin Active


Observable


UnobservableMarket


Inputs


InputsDecember 31, 2010

(Level 1)


( Level 2)


( Level 3)


Total(In millions of Korean Won)Short term available for sale investments

W



W
5,000


W



W
5,000Long term available for sale investments (other non-current
    assets)


20











20Total available for sale investments

W
20


W
5,000


W



W
5,020   Quoted


SignificantMarket Price


Other


Significantin Active


Observable


UnobservableMarket


Inputs


InputsDecember 31, 2009

(Level 1)


( Level 2)


( Level 3)


Total(In millions of Korean Won)Short term available for sale investments

W



W
4,973


W



W
4,973Long term available for sale investments (other non-current
    assets)


20











20Total available for sale investments

W
20


W
4,973


W



W
4,993     10.
    Change of
    subsidiaries  Liquidation
    of L5 Games Inc.
    Acquisition
    of Barunson Interactive Corp.
   F-23




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  11.
    Property
    and Equipment, Net    2009


2010(In millions of Korean Won)Computer and equipment

W
12,236


W
11,608Furniture and fixtures


1,468



1,717Vehicles


83



92Capital lease assets


436



837Leasehold improvements


765



763Software externally-purchased


8,899



9,53423,887



24,551Less: accumulated depreciation


(21,050
)


(21,879
)W
2,837


W
2,672   W W W
  W
  12.
    Goodwill
    and other intangible asset    At December 31, 2009


At December 31, 2010Gross





Net


Gross





NetCarrying


Accumulated


Carrying


Carrying


Accumulated


CarryingAmount


Amortization


Amount


Amount


Amortization


Amount(In millions of Korean Won)Capitalized software development cost

W
17,203


W
(6,197
)

W
11,006


W
21,446


W
(7,746
)

W
13,700Acquired intangible assetsProduct technology


6,526



(6,526
)






18,382



(6,921
)


11,461IPR&D technology














8,503







8,503Goodwill


1,210







1,210



7,991







7,991Trademarks


418



(231
)


187



450



(281
)


169Others


133



(81
)


52



176



(169
)


7Total

W
25,490


W
(13,035
)

W
12,455


W
56,948


W
(15,117
)

W
41,831   W W Costs of Software to be Sold, Leased, or
    Marketed
  W W W
  W W
 F-24




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    2009


2010(In millions of Korean Won)Balance at beginning of the yearGoodwill

W
1,451


W
1,451Accumulated impairment losses






(241
)1,451



1,210Impairment losses


(241
)


Acquisition in the business combination






6,781Balance at end of the yearGoodwill


1,451



8,232Accumulated impairment losses


(241
)


(241
)W
1,210


W
7,991       W W
    (In millions of Korean Won)2011

W
3,5572012


8,3752013


8,3742014


7,2322015


3,411W
30,949  F-25




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  13.
    Accrued
    Severance Benefits    2008


2009


2010(In millions of Korean Won)Balance at beginning of year

W
715


W
926


W
478Acquisition of Barunson Interactive Corp.










427Provisions for severance benefits


885



436



234Severance payments


(616
)


(832
)


(91
)Terminated but not paid


(58
)


(52
)


(17
)Balance at end of year

W
926


W
478


W
1,031   W W W
  14.
    Commitments
    and Contingencies  Commitments
    sub-licensees.
    two-year-period.
 F-26




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
      2011

2012

2013Principal

Interest

Principal

Interest

Principal

Interest(In thousands of US dollars)Capital lease

$135

$43

$142

$24

$91

$5   W W W W
    2011

2012(In millions of Korean Won)Operating lease

W
2,542


W
2,330   W W
  W W W W
  Litigation
  W
  W
 F-27




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    W FZ-LLC W
  W W
  W W
    15.
    Shareholders
    Equity  W
   F-28




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  16.
    Stock
    Purchase Option Plan    Weighted


WeightedAverage


AverageNumber of


Exercise


RemainingStock


Price


ContractualOptions


per Share


LifeStock options outstanding as of January 1, 2008


69,637


W
46,400Options expired


15,548



45,431Options forfeited


22,994



48,367December 31, 2008


31,095


W
45,431Options expired


13,526



45,431Options forfeited


4,044



45,431December 31, 2009


13,525


W
45,431Options expired


13,525



45,431Stock options outstanding as of December 31, 2010





W




Vested and expected to vest as of December 31, 2010





W




Exercisable as of December 31, 2010





W




     W W
    17.
    Earning
    (Loss) Per Share    2008


2009


2010(In millions of Korean Won,except per share data)Net income (loss) available for common shareholders (A)

W
(2,773
)

W
6,917


W
3,730Weighted average outstanding shares of common shares (B)


6,948,900



6,948,900



6,948,900Earnings (Losses) per share Basic and diluted (A/B)

W
(399
)

W
995


W
537  F-29




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    18.
    Income
    Taxes    2008


2009


2010(In millions of Korean Won)Income (loss) before income taxesDomestic

W
13,075


W
15,044


W
10,395Foreign


(7,281
)


(2,082
)


(2,133
)5,794



12,962



8,262Current income taxesDomestic


4,274



4,477



4,458Foreign


(190
)


(19
)


124,084



4,458



4,470Deferred income taxesDomestic


(656
)


86



(263
)Foreign


(49
)






(705
)


86



(263
)Total income tax expenses

W
3,379


W
4,544


W
4,207     2009


2010(In millions of Korean Won)Deferred tax assetsAccrued expense

W
62


W
73Allowance for doubtful


127



360Depreciation and amortization


291



321Deferred revenue






1,124Provisions for severance benefits


95



196Unrealized foreign exchange losses


142



102Net operation loss carryforwards in subsidiaries


4,726



5,095Foreign tax credit carryforwards


20,451



19,356Tax credit carryforwards for research and human resource
    development


4,515



3,490Others


98



203Total deferred tax assets


30,507



30,320Less: Valuation allowance


(30,193
)


(28,643
)W
314


W
1,677 F-30




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  2009


2010(In millions of Korean Won)Deferred tax liabilitiesAccrued income

W
88


W
54Depreciation and amortization






220Intangible assets






3,137Unrealized foreign exchange gains






2Others


123



7Total deferred tax liabilities


211



3,420Net deferred tax assets (liabilities)

W
103


W
(1,743
)Reported asCurrent portion of deferred income tax assets

W
375


W
857Non-current deferred income tax liabilities

W
272


W
2,600       W W W W
  W W W
  W
 F-31




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  W
  W W
  W W W
      2008


2009


2010(In millions of Korean Won)Tax expense at Korean statutory tax rate (2008: 27.5%, 2009,
    2010: 24.2%)

W
1,593


W
3,137


W
1,999Income tax exemption










(67
)Foreign tax credit


(366
)


(427
)


(414
)Tax credit carryforwards for research and human resource
    development


(1,000
)


365



(585
)Foreign tax differential


(481
)


(254
)


(234
)Income not assessable for tax purpose


(31
)


(2
)


Expense not deductible for tax purpose


181



135



233Change in statutory tax rate


905



(261
)


(14
)Change in valuation allowances


3,309



454



(1,551
)Tax loss carryback


(195
)






Effect of change in foreign currency exchange rate


(546
)


199



124Expiration of unused foreign tax credit and unused net operating
    loss carryforwards


9



1,240



4,430Income tax penalties










133Others


1



(42
)


154Total income tax expense

W
3,379


W
4,544


W
4,207   Income Taxes
 F-32




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
      W W W W
    Balance at





Balance atBeginning of Year

Deduction

Increase

End of Year(In millions of Korean Won)2008Valuation allowance

W
26,431


W



W
3,309


W
29,7402009Valuation allowance


29,740







454



30,1942010Valuation allowance


30,194



1,551







28,643   19.
    Operations
    by Geographic Area    2008


2009


2010(In millions of Korean Won)Korea

W
14,009


W
11,544


W
9,737Japan


27,037



31,991



29,186Taiwan and Hong Kong


2,301



1,887



2,926United States


3,620



5,800



4,759Russia


1,078



1,298



647Brazil


1,006



1,096



1,114Thailand


989



1,150



936Other


3,130



2,637



3,057W
53,170


W
57,403


W
52,362    F-33




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  20.
    Related
    Party Transactions    2008

2009

2010(In millions of Korean Won)Sales to related parties

W
26,724


W
31,987


W
29,065Purchases from related parties


604



670



4,182Amounts due from related parties


3,358



2,473



3,149Amounts due to related parties


5,869



6,608



7,412       Investment
    in Online Game Revolution Fund No. 1
  W W W W W Investment- Equity Method and Joint Ventures, W W W
  W W W W
   F-34




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##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    21.
    Variable
    Interest Entity        W W
  W W
   F-35




---



##### Table of Contents



GRAVITY
    CO., LTD.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  22.
    Comprehensive
    Income    2008


2009


2010(In millions of Korean Won)Net income (loss)

W
(2,704
)

W
6,994


W
3,710Other comprehensive incomeEffect of foreign currency translation adjustments


3,647



(140
)


290Comprehensive income

W
943


W
6,854


W
4,000Controlling interest

W
874


W
6,777


W
4,020Non controlling interest

W
69


W
77


W
(20
)   23.
    Supplemental
    Cash Flow Information and Non-Cash Activities  2008

2009

2010(In millions of Korean Won)Supplemental cash flow informationCash paid during the year for income taxes

W
3,933


W
4,439


W
3,752Interest paid


31



41



32Supplemental non-cash activitiesReclassification of prepayment to leasehold deposits

W
586


W



W
Reclassification of leasehold deposits to other account
    receivable


409







Reclassification of long-term deferred revenue to deferred
    revenue


1,570



1,643



1,749Offset of long-term deferred revenue and accounts payable






876



1,161Reclassification of prepayment to intangible assets






86



92  F-36