##### Table of Contents





SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
    
  Amendment No. 2
    To
 
   Form F-1
 REGISTRATION
    STATEMENT
 UNDER
 THE SECURITIES ACT OF
    1933
      Cloudary Corporation
 (Exact Name of Registrant as
    Specified in Its Charter)
 Not Applicable
 (Translation of
    Registrants name into English)
 Cayman Islands

7370

Not Applicable(State or Other Jurisdiction
    of
    Incorporation or Organization)

(Primary Standard Industrial
    Classification Code Number)

(I.R.S. Employer
    Identification Number)  35 Boxia Road
 Pudong New Area
 Shanghai 201203
 Peoples Republic of
    China
 (+86) 21-6187-0500
 (Address, Including Zip Code,
    and Telephone Number, Including Area Code, of Registrants
    Principal Executive Offices)
      Puglisi &
    Associates
 850 Library Avenue, Suite
    204
 P.O. Box 885, Newark, Delaware
    19715
 (Name, Address, Including Zip
    Code, and Telephone Number, Including Area Code, of Agent for
    Service)
      Copies to:
  James C. Lin, Esq.
    Davis Polk & Wardwell LLPc/o 18th Floor,
    The Hong Kong Club Building
    3A Chater Road
    Hong Kong
    (852)
    2533-3300

Leiming Chen, Esq.
    Simpson Thacher & Bartlett LLP
    35/F, ICBC Tower
    3 Garden Road
    Central, Hong Kong
    (852) 2514-7600       Approximate date of commencement of proposed sale to the
    public:
 o
 o
 o
 o
 CALCULATION
    OF REGISTRATION FEE
  Proposed Maximum


Amount ofTitle of Each Class of


Aggregate


RegistrationSecurities to be Registered


Offering Price(3)


Fee(4)Class B ordinary shares, par value US$0.01 per share(1)(2)


US$200,000,000


US$23,220  (1)
    American depositary shares issuable upon deposit of the
    Class B ordinary shares registered hereby will be
    registered pursuant to a separate registration statement on
    Form F-6
    (Registration
    No. 333-          ).
    Each American depositary share
    represents          
    Class B ordinary shares.(2)
    Includes (a) Class B ordinary shares represented by
    American depositary shares initially offered and sold outside
    the United States that may be resold from time to time in the
    United States either as part of their distribution or within
    40 days after the later of the effective date of this
    registration statement and the date the shares are first bona
    fide offered to the public, and (b) Class B ordinary
    shares represented by American depositary shares that are
    issuable upon the exercise of the underwriters option to
    purchase additional ADSs. These Class B ordinary shares are
    not being registered for the purposes of sales outside the
    United States.(3)
    Estimated solely for the purpose of computing the amount of
    registration fee in accordance with Rule 457(o) under the
    Securities Act of 1933, as amended.(4)
    Previously paid.  The Registrant hereby amends this Registration Statement on
    such date or dates as may be necessary to delay its effective
    date until the Registrant shall file a further amendment which
    specifically states that this Registration Statement shall
    thereafter become effective in accordance with Section 8(a)
    of the Securities Act of 1933, as amended, or until the
    Registration Statement shall become effective on such date as
    the Securities and Exchange Commission, acting pursuant to said
    Section 8(a), may determine.




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##### Table of Contents



The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities
in any jurisdiction where such offer or sale is not
permitted.


SUBJECT TO COMPLETION. DATED
    JUNE 30, 2011
 
  Preliminary Prospectus
  American Depositary
    Shares
  
 Cloudary Corporation
 Representing Class B
    Ordinary Shares
        one-for-one
    See Risk Factors beginning on page 14 to
    read about factors you should consider before buying our
    ADSs.
  Neither the Securities and Exchange Commission nor any other
    regulatory body has approved or disapproved of these securities
    or passed upon the accuracy or adequacy of this prospectus. Any
    representation to the contrary is a criminal offense.
 Per ADS

TotalPublic offering price

US$



US$Underwriting discount

US$



US$Proceeds, before expenses, to Cloudary Corporation

US$



US$Proceeds, before expenses, to the selling shareholder

US$



US$         BofA
    Merrill Lynch
    Goldman Sachs (Asia) L.L.C.




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    LEFT BLANK FOR GRAPHICS]
  i




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##### 



TABLE OF
    CONTENTS
   
 
 PageProspectus Summary


1The Offering


8Summary Consolidated Financial Data


11Risk Factors


14Special Note Regarding Forward-Looking
    Statements


51Our History and Corporate Structure


52Use of Proceeds


59Dividend Policy


60Capitalization


61Dilution


62Exchange Rate Information


64Enforceability of Civil Liabilities


65Selected Consolidated Financial Data


66Managements Discussion and Analysis of
    Financial Condition and Results of Operations


69Our Industry


104Business


109Regulation


124Management


136Principal and Selling Shareholders


142Related Party Transactions


144Description of Share Capital


148Description of American Depositary Shares


160Shares Eligible for Future Sale


170Taxation


172Underwriting


178Expenses Relating to This Offering


183Legal Matters


184Experts


184Where You Can Find Additional Information


185Index to Consolidated Financial Statements


F-1EX-10.3EX-23.1  
           Until ,
    2011 (the 25th day after the date of this prospectus), all
    dealers that buy, sell or trade ADSs, whether or not
    participating in this offering, may be required to deliver a
    prospectus. This is in addition to the obligation of dealers to
    deliver a prospectus when acting as underwriters and with
    respect to their unsold allotments or subscriptions.
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##### Table of Contents



PROSPECTUS
    SUMMARY
 
  This summary highlights selected information appearing
    elsewhere in this prospectus. This summary may not contain all
    of the information you should consider before investing in our
    ADSs. You should carefully read this prospectus, including our
    financial statements and related notes and the sections entitled
    Risk Factors and Managements Discussion
    and Analysis of Financial Condition and Results of
    Operations appearing elsewhere in this prospectus, and the
    registration statement of which this prospectus is a part in
    their entirety before investing in our ADSs, especially the
    risks of investing in our ADSs, which we discuss under
    Risk Factors. This prospectus contains statistical
    data extracted from two reports by iResearch Consulting Group,
    or iResearch, and Beijing Openbook Co., Ltd., or Openbook, each
    being an independent market research firm, which we commissioned
    for the purpose of providing information on Chinas online
    literature market and offline publishing market. All references
    to Openbook in this prospectus refer to the report issued by
    Openbook dated March 14, 2011. We,
    us, our company, and our
    refer to Cloudary Corporation, a Cayman Islands company,
    predecessor entities, subsidiaries and affiliated entities.
 
  Our
    Mission
    Overview
  third-party
  qidian
  work-in-progress,
  Dou Po Cang Qiong baidu.com The Desolation of the Ancient Path
    at Yangguan
 1




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##### Table of Contents



e-readers
   
   
  Industry
    Background
  Online
    Literature
  e-commerce
    
    Creation  Online literature platforms
    enable a large number of individuals to more easily create and
    publish content for a broad audience. They provide a more
    efficient and transparent forum for readers and online
    literature websites to discover and identify talented authors.
    Distribution  Online literary content can
    be distributed over the Internet and wireless networks. The
    proliferation of mobile connected devices, including
    smartphones, mobile tablets,
    e-readers
    and other mobile devices, makes it possible for online literary
    content to be distributed and accessed virtually anywhere,
    anytime.
 2




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##### Table of Contents




    Consumption  The interactive characteristics
    and community functions of online literature platforms make
    reading and writing a more engaging experience, where an
    increasing number of users search, read, comment on and share
    literary works and offer encouragement and support to their
    favorite authors.
    Monetization  After more than a decade of
    development, the online literature industry has developed a
    monetization model that covers online paid reading, wireless
    subscription, targeted advertising and copyright licensing to
    various entertainment industries.    Offline
    Publication
    Our
    Strengths
    
    Largest online Chinese literature community;
    Largest and popular original online literary content library;
    Multiple channels and methods to monetize content;
    Strong brand recognition; and
    Experienced management team with complementary skills in
    literature and online media.  Our
    Strategies
    
    Continue to attract, develop and retain promising and
    established authors and increase the breadth and depth of our
    content library;
    Further expand our user base and improve their experience;
    Continue to expand and diversify our revenue sources; and
    Expand internationally.  Risks and
    Uncertainties
    
    Our history of net losses and net operating cash outflows;
 3




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##### Table of Contents




    Our ability to protect the intellectual property of our literary
    content and to comply with the relevant rights of third parties;
    Our reliance on authors to provide online and offline literary
    content;
    Competition in the online and mobile literature industries in
    China;
    Our compliance with a complex set of laws, rules and regulations
    governing the Internet services and publishing business in
    China; and
    Our ability to manage our growth effectively and efficiently.  Corporate
    Structure and History
  qidian.com jjwxc.net hongxiu.com xs8.cn
 4




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##### Table of Contents



(1)
    
    Shanghai Hongwen is our
    consolidated affiliated entity established in China and each of
    Ms. Dongxu Wang and Mr. Mingfeng Chen owns 50% of the
    equity interest in Shanghai Hongwen. Ms. Dongxu Wang is an
    employee of Shanda Interactive and Mr. Mingfeng Chen is an
    employee of our company.(2)
    
    We do not consolidate Jinjiang but
    share in its profit or loss through our 50% equity interest in
    this entity.
 5




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6




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and/or
    Corporate
    Information
  (21) 6187-0500.
  http://www.cloudary.com.cn.
 7




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THE
    OFFERING  Total ADSs offered:by us
    
    ADSsby the selling shareholder
    
    ADSsTotal
    
    ADSsPrice per ADS
    
    We currently estimate that the initial public offering price
    will be between
    US$          
    and
    US$          
    per ADS.Option to purchase additional ADSs
    
    We and the selling shareholder have granted the underwriters an
    option, exercisable for 30 days from the date of this
    prospectus, to purchase an aggregate of
    additional          
    ADSs.Ordinary shares
    
    Our ordinary share capital consists of Class A and
    Class B ordinary shares. Holders of Class A ordinary
    shares and Class B ordinary shares have the same rights
    except for voting and conversion rights. Each Class A
    ordinary share shall be entitled to ten votes on all matters
    subject to shareholders vote, and each Class B
    ordinary share shall be entitled to one vote on all matters
    subject to shareholders vote. Each Class A ordinary
    share is convertible into one Class B ordinary share at any
    time by the holder thereof. Class B ordinary shares are not
    convertible into Class A ordinary shares under any
    circumstances.Series A preference shares
    
    Holders of
    Series A-1
    and
    Series A-2
    preference shares, or our Series A preference shares, have
    the same rights as holders of our ordinary shares, except for
    the rate of cash dividends. Each Series A preference share
    is convertible into one Class A ordinary share, subject to
    anti-dilution adjustments, at any time after the issuance date.
    Holders of the Series A preference shares are entitled to
    receive cash dividends at the rate of 2.09% in respect of
    Series A-1
    preference shares and of 2.40% in respect of
    Series A-2
    preference shares per annum prior and in preference to the
    shareholders of our ordinary shares and to participate pro rata
    in any dividend paid on our ordinary shares on an as-converted
    basis. Each Series A preference share is entitled to ten
    votes per share and shall have full voting rights and powers
    equal to those of the shareholders of Class A ordinary
    shares. See Description of Share Capital 
    History of Securities Issuances and Transfers 
    Series A Preference Shares on
    page           
    of this prospectus for a detailed discussion of the terms of our
    Series A preference shares. Immediately following the
    completion of this offering, Shanda Investment intends to
    convert all of the Series A preference shares it currently
    holds into our Class A ordinary shares on a one-for-one
    basis.The ADSs
    
    Each ADS
    represents          
    Class B ordinary shares, par value US$0.01 per share.The depositary will hold the Class B ordinary shares
    underlying your ADSs and you will have rights as provided in the
    deposit agreement.We do not expect to pay dividends in the foreseeable future. If,
    however, we declare dividends on our Class B ordinary
    shares, the depositary will pay you the cash dividends and other
    distributions it receives on our Class B ordinary shares,
    after deducting its fees and
 8




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##### Table of Contents



expenses in accordance with the terms set forth in the deposit
    agreement.You may surrender your ADSs to the depositary to be cancelled in
    exchange for Class B ordinary shares. The depositary will
    charge you fees for any cancellation.We may amend or terminate the deposit agreement without your
    consent. If you continue to hold your ADSs, you agree to be
    bound by the deposit agreement as amended.To better understand the terms of the ADSs, you should carefully
    read the Description of American Depositary Shares
    section of this prospectus. You should also read the deposit
    agreement, which is filed as an exhibit to the registration
    statement that includes this prospectus.ADSs outstanding immediately after this offering
    
    ADSs
    (or          
    ADSs if the underwriters exercise the option to purchase
    additional ADSs in full).Ordinary shares outstanding immediately after this offering
    
    ordinary shares
    (or          
    ordinary shares if the underwriters exercise the option to
    purchase additional ADSs in full), comprised of
    (i)           
    Class A ordinary shares, par value US$0.01 per share, and
    (ii)           
    Class B ordinary shares, par value US$0.01 per share
    (or          
    Class B ordinary shares if the underwriters exercise their
    over-allotment option in full).Use of proceeds
    
    We expect that we will receive net proceeds of approximately
    US$           million
    from this offering (after deducting underwriting discounts,
    commissions and estimated offering expenses payable by us). We
    anticipate using the net proceeds we receive from this offering
    to finance our business expansion, including for the purpose of
    content acquisitions, and sales and marketing initiatives,
    repayment of loans and borrowing and working capital as well as
    for general corporate purposes, including financing potential
    strategic acquisitions and investments. See Use of
    Proceeds for more information.We will not receive any of the proceeds from the sale of ADSs by
    the selling shareholder.Listing
    
    We have applied to have our ADSs listed on the New York Stock
    Exchange, or the NYSE.Proposed NYSE symbol
    
    READDepositary
    
    JPMorgan Chase Bank, N.A.Over-allotment option
    
    We and selling shareholder have granted to the underwriters an
    option, which is exercisable within 30 days from the date
    of this prospectus, to purchase up to an
    additional          
    ADSs.Lock-up
    
    We, our directors and executive officers, and our existing
    shareholder have agreed with the underwriters for a period of
    180 days after the date of this prospectus not to sell,
    transfer or otherwise dispose of, and not to announce an
    intention to sell, transfer or otherwise dispose of any of our
    ADSs or shares or securities convertible into or exercisable or
    exchangeable for our ADSs or shares. Furthermore, all of our
 9




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directors, executive officers and existing shareholder are
    restricted by our agreement with the depositary from depositing
    ordinary shares in our ADS program or having new ADSs issued
    during the same period. See Underwriting for more
    information.Reserved ADSs
    
    At our request, the underwriters have reserved for sale, at the
    initial public offering price, up to an aggregate
    of          
    ADSs, to our directors, officers, employees, business associates
    and related persons through a directed share program.Timing and settlement for ADSs
    
    The ADSs are expected to be delivered against payment on or
    about          ,
    2011. They will be deposited with a custodian for, and
    registered in the name of a nominee of, The Depository
    Trust Company, or DTC, in New York, New York. In general,
    beneficial interests in the ADSs will be shown on, and transfers
    of these beneficial interests will be effected through, records
    maintained by DTC and its direct and indirect participants.Risk factors
    
    See Risk Factors and other information included in
    this prospectus for a discussion of risks you should carefully
    consider before investing in the ADSs.    
    is based
    upon          
    ordinary shares (including outstanding Class A ordinary
    shares
    and          
    Class B ordinary shares issued in this offering) and 11,313,150
    Series A preference shares (including
    3,916,393 Series A-1
    preference shares and 7,396,757
    Series A-2
    preference shares) outstanding as of the date of this
    prospectus, which will be converted into our Class A ordinary
    shares on a one-for-one basis immediately after this offering;
    assumes that the underwriters do not exercise their
    over-allotment option to purchase additional ADSs;
    excludes 20,329,350 Class B ordinary shares issuable upon
    the exercise of stock options issued under our 2010 Equity
    Compensation Plan that are outstanding as of the date of this
    prospectus, at a weighted average exercise price of US$1.8 per
    share; and
    excludes 5,170,650 Class B ordinary shares reserved for
    future issuances under our 2010 Equity Compensation Plan.
 10




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SUMMARY
    CONSOLIDATED FINANCIAL DATA            Consolidated
    Statements of Operations Data:
  For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

RMB

RMB

US$

RMB

RMB

US$(in thousands, except for share and per share data)Net revenues:Online business


52,976



98,629



207,543



31,694



29,918



83,101



12,690Offline business






35,922



185,471



28,324



18,270



55,648



8,498Total net revenues


52,976



134,551



393,014



60,018



48,188



138,749



21,188Cost of revenues:Online business


(46,816
)


(85,459
)


(171,616
)


(26,208
)


(25,132
)


(54,183
)


(8,274
)Offline business






(22,533
)


(156,523
)


(23,903
)


(15,213
)


(44,110
)


(6,736
)Total cost of revenues


(46,816
)


(107,992
)


(328,139
)


(50,111
)


(40,345
)


(98,293
)


(15,010
)Gross profit


6,160



26,559



64,875



9,907



7,843



40,456



6,178Operating expenses:Product development


(467
)


(2,588
)


(6,024
)


(920
)


(575
)


(2,109
)


(322
)Sales and marketing


(20,045
)


(72,083
)


(69,765
)


(10,654
)


(13,153
)


(20,786
)


(3,174
)General and administrative


(10,612
)


(28,679
)


(62,169
)


(9,494
)


(11,298
)


(21,794
)


(3,328
)Total operating expenses


(31,124
)


(103,350
)


(137,958
)


(21,068
)


(25,026
)


(44,689
)


(6,824
)Gain on bargain purchase










7,398



1,130












 11




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For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

RMB

RMB

US$

RMB

RMB

US$(in thousands, except for share and per share data)Loss from operations


(24,964
)


(76,791
)


(65,685
)


(10,031
)


(17,183
)


(4,233
)


(646
)Interest income


2,172



870



1,805



276



233



1,066



163Interest expense to related parties










(3,155
)


(482
)






(1,130
)


(173
)Other income (expenses), net


636



(324
)


2,223



339



(123
)


15



2Loss before income tax benefit and equity in earning (loss) of
    affiliated company


(22,156
)


(76,245
)


(64,812
)


(9,898
)


(17,073
)


(4,282
)


(654
)Income tax benefit (expense)


(253
)


1,157



5,485



838



1,206



(521
)


(80
)Equity in earning (loss) of affiliated company


(95
)


585



2,849



435



574



1,113



170Net loss


(22,504
)


(74,503
)


(56,478
)


(8,625
)


(15,293
)


(3,690
)


(564
)Net loss attributable to non-controlling interests


398



1,078



11,684



1,785



2,046



3,217



491Net income attributable to redeemable non-controlling interests










(77
)


(12
)






(523
)


(79
)Net loss attributable to Cloudary Corporation


(22,106
)


(73,425
)


(44,871
)


(6,852
)


(13,247
)


(996
)


(152
)Series A preference shares redemption value accretion










(510
)


(78
)






(1,669
)


(255
)Net loss attributable to Cloudary Corporations ordinary
    shareholder


(22,106
)


(73,425
)


(45,381
)


(6,930
)


(13,247
)


(2,665
)


(407
)Net loss per share attributable to Cloudary Corporations
    ordinary shareholderBasic and diluted


(0.09
)


(0.29
)


(0.18
)


(0.03
)


(0.05
)


(0.01
)


(0.00
)Weighted average ordinary shares used in per share calculationBasic and diluted


250,000,000



250,000,000



250,000,000







250,000,000



250,000,000Pro forma basic and diluted loss per share attributable to
    Cloudary Corporations ordinary shareholders
    (unaudited)(1)










(0.17
)


(0.03
)






(0.00
)


(0.00
)Pro forma weighted average ordinary shares used in per share
    calculations
    (unaudited)(1) 

    Basic and diluted










261,313,150











261,313,150
 12




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Consolidated
    Balance Sheets Data:
  As of December 31,

As of March 31,

As of March 31,2008

2009

2010

2011

2011RMB

RMB

RMB

US$

RMB

US$

RMB

US$(in thousands)

Pro forma

Pro
    forma(2)Total current assets


111,753



228,924



493,083



75,299



494,143



75,461



494,143



75,461Total assets


140,234



331,332



813,936



124,297



814,404



124,369



814,404



124,369Total current liabilities


174,478



82,934



201,866



30,827



205,503



31,383



205,503



31,383Total liabilities


175,807



389,426



665,654



101,653



668,112



102,028



668,112



102,028Redeemable convertible preferred shares










149,574



22,842



149,043



22,761







Redeemable non-controlling interests










25,296



3,862



25,954



3,964



25,954



3,964Total Cloudary Corporation shareholders deficit


(37,390
)


(90,029
)


(116,409
)


(17,777
)


(116,289
)


(17,759
)


32,754



5,002Non-controlling interests


1,817



31,935



89,821



13,717



87,584



13,375



87,584



13,375Total shareholders deficit


(35,573
)


(58,094
)


(26,588
)


(4,060
)


(28,705
)


(4,384
)


120,338



18,377Total liabilities and shareholders deficit


140,234



331,332



813,936



124,297



814,404



124,369



814,404



124,369     (1)
    
    For a description of the pro forma
    adjustments used to calculate pro forma loss per share for the
    year ended December 31, 2010, see
    Note 27  Unaudited Pro Forma Loss Per
    Share for Conversion of Series A Preferred Shares to our
    consolidated financial statements included elsewhere in this
    prospectus.For a description of the pro forma
    adjustments used to calculate pro forma loss per share for the
    three months ended March 31, 2011, see Note
    21  Unaudited Pro Forma Balance Sheet and Loss Per
    Share for Conversion of Series A Preferred Shares to
    our unaudited condensed consolidated financial statements
    included elsewhere in this prospectus. 
  (2)
    
    Pro forma basis reflects the
    conversion of all outstanding Series A preference shares on
    a
    one-for-one
    basis into an aggregate of 11,313,150 Class A ordinary
    shares immediately following the completion of this offering. 
  Consolidated
    Statements of Cash Flow Data:
  For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

RMB

RMB

US$

RMB

RMB

US$(in thousands)Net cash used in operating activities


(5,220
)


(75,500
)


(99,795
)


(15,240
)


(50,259
)


(47,001
)


(7,178
)Net cash used in investing activities


(28,303
)


(118,494
)


(45,449
)


(6,941
)


(76,675
)


(11,514
)


(1,758
)Net cash provided by financing activities






300,000



305,641



46,675



100,000







Effect of exchange rate changes on cash


6



(6
)


(2,149
)


(328
)


(312
)


(141
)


(21
)Net increase/(decrease) in cash and cash equivalents


(33,517
)


106,000



158,248



24,166



(27,246
)


(58,656
)


(8,957
)Cash and cash equivalents at the beginning of year


68,875



35,358



141,358



21,587



141,358



299,606



45,753Cash and cash equivalents at the end of year


35,358



141,358



299,606



45,753



114,112



240,950



36,796
 13




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RISK
    FACTORS  Investing in our ADSs involves a high degree of risk. You
    should carefully consider the risks described below with all of
    the other information included in this prospectus before
    deciding to invest in our ADSs. If any of the following risks
    actually occur, they may materially harm our business, financial
    condition, results of operations and prospects. In this event,
    the market price of our ADSs could decline, and you could lose
    some or all of your investment.
  Risks
    Related to Our Business
  We
    incurred net losses and net operating cash outflows in 2008,
    2009, 2010 and the three months ended March 31, 2011 and
    may continue to incur losses and cash outflows in the
    future.
  third-party
    Our
    profitability depends significantly on our ability to control
    the copyright licensing cost relating to our online
    business.
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The
    online and mobile literature industries in China and user
    acceptance of our literary content may not grow as quickly as
    expected, which may adversely affect our revenues and business
    prospects.
      Our
    online and mobile literature businesses depend heavily on the
    market recognition and reputation of our brands, and any harm to
    our brands or failure to maintain and enhance our brand
    recognition may materially and adversely affect our business,
    financial condition and results of operations.
  qidian.com, rongshuxia.com, hongxiu.com
  
    our ability to maintain a convenient and reliable user
    experience as user preferences evolve and as we expand into new
    service categories and new business lines;
    our ability to increase brand awareness among existing and
    potential authors and advertisers through various means of
    marketing and promotional activities;
    our ability to adopt new technologies or adapt our websites and
    our systems to user requirements or emerging industry
    standards; and
    our ability to effectively control the quality of third-party
    merchants, including telecommunication operators, and to monitor
    service performance of such third parties as we continue to
    attract new authors and to integrate literary content sourcing
    and distribution channels through our platform.   15




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Our
    prospects and financial results may be adversely affected if we
    fail to attract, identify and retain authors who generate
    popular literary content on a scale sufficient to grow our
    business.
    Unauthorized
    use of our intellectual property by third parties, and the
    expenses incurred in protecting our intellectual property
    rights, may adversely affect our business and competitive
    position.
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We and
    our authors may be subject to intellectual property infringement
    or misappropriation claims by third parties, which may force us
    to incur substantial legal expenses and, if determined adversely
    against us or our authors, may materially disrupt our
    business.
     
  We are
    dependent upon the cooperation agreements with China Mobile for
    a significant portion of our revenues.
 
 
   
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We may
    be subject to potential disputes on certain provisions of the
    agreements we entered into to acquire some of our online or
    offline businesses, which could have a material adverse effect
    on our financial condition and results of
    operations.
 
  yzsc.com.cn rongshuxia.com, xxsy.net, readnovel.com, tingbook.com zubunet.com rongshuxia.com rongshuxia.com xxsy.net tingbook.com zubunet.com
 
  Rules on Mergers with
    and Acquisitions of Domestic Enterprises by Foreign
    Investors
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We
    generate revenues from online advertising. If we fail to retain
    existing advertisers or attract new advertisers to advertise on
    our websites or if we are unable to collect accounts receivable
    from the advertisers or advertising agencies in a timely manner,
    our financial condition, results of operations and prospects may
    be materially and adversely affected.
        Our
    business, financial condition, results of operations and cash
    flows may be materially and adversely affected if we are unable
    to efficiently manage our inventory and other risks with respect
    to our offline publishing business.
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Our
    online business is highly regulated in China. The lack of
    requisite licenses or permits applicable to our business and any
    changes in government policies or regulations may have a
    material and adverse impact on our business, financial condition
    and results of operations.
  tingbook.com tingbook.com
  qidian.com qidian.com and/or
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We
    rely on the publishing licenses of third-party publishers for
    our offline publications. If such
    third-party
    publishers cease to cooperate with us on commercially acceptable
    terms or at all, or if the PRC regulatory authorities find such
    cooperation arrangements to be in violation of PRC laws and
    regulations governing the publishing industry, our offline
    business will be materially and adversely
    affected.
    We
    operate in a highly competitive market, and our competitors may
    have various advantages, including the ability to draw upon a
    greater depth and breadth of resources than those available to
    us. Our failure to compete successfully in the market could have
    a material adverse effect on our business, financial condition
    and results of operations.
  zongheng.com 17k.com zhulang.com sina.com sohu.com qq.com.
   21




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Literary
    and other content displayed on our websites or published by us
    may be found objectionable by PRC regulatory authorities and may
    subject us to penalties and other administrative
    actions.
      We may
    be subject to, and may expend significant resources in defending
    against, government actions and civil suits based on the
    advertising content provided in our virtual advertising space;
    we may also be penalized by the governmental authority for such
    content.
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We may
    incur additional costs in order to comply with third-party
    rights or PRC laws and regulations governing the publishing
    industry, Internet access and the distribution of literary,
    advertising and other content over the Internet, which may
    materially and adversely affect our business, financial
    condition and results of operations.
        We may
    be subject to litigation and regulatory activity under the PRC
    Anti-Monopoly Law.
     23




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If we
    fail to successfully adopt new technologies or adapt our
    websites and systems to user and customer requirements or
    emerging industry standards, our business, prospects and
    financial results may be materially and adversely
    affected.
    The
    successful operation of our business and our growth depend upon
    the Internet infrastructure and telecommunication networks in
    China.
  e-book and/or
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The
    proper functioning of our websites is essential to our online
    literature business and any failure to maintain the satisfactory
    performance, security and integrity of such websites will
    materially and adversely affect our business, reputation,
    financial condition and results of operations.
        We
    depend on numerous service providers to provide services that
    are critical to our business, which exposes us to various risks
    that may materially and adversely affect our reputation,
    business, financial conditions and results of
    operations.
    Failure
    to protect confidential information of our online users and our
    network against security breaches could damage our reputation
    and brands and substantially harm our business, financial
    condition and results of operations.
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We
    rely on chain and online bookstores and wholesalers for the sale
    of our offline publications.
      Our
    offline business depends on third-party delivery companies to
    deliver our publications, and their failure to provide
    high-quality delivery services to chain bookstores and
    wholesalers may materially and adversely affect our revenues,
    costs, inventory and profitability.
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If we
    cannot successfully manage our growth, including our current
    strategies to provide application advertising services, to offer
    literary content on multiple media formats and devices and to
    further enhance our platform, our business, financial condition,
    result of operations and prospects could be materially and
    adversely affected.
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We may
    not be able to effectively identify or pursue target companies
    for acquisitions, and even if we complete such acquisitions, we
    may not be able to successfully integrate the target companies,
    which could have a material adverse effect on our business,
    financial condition, results of operations and
    prospects.
    
    difficulties in assimilating the operations, policies and
    personnel of the target company;
    potential loss of key business relationships and the reputations
    of the businesses we acquire;
    the possibility of incurring significant impairment losses
    related to goodwill and other intangible assets;
    uncertainty of entering into markets in which we have limited or
    no experience and in which competitors have stronger market
    positions;
    unsatisfactory performance of the businesses we acquire;
    issues not discovered in due diligence, which may include
    product quality issues or legal or financial
    contingencies; and
    responsibility for the liabilities associated with the
    businesses we acquire, including those which we may not
    anticipate.    We may
    need to record impairment charges to earnings if our acquisition
    goodwill, investments in affiliate companies or acquired
    intangible assets are determined to be impaired, which would
    adversely affect our results of operations.
    As a
    result of Shanda Investments ownership of our Class A
    ordinary shares, Shanda Investment will effectively control the
    outcome of shareholder actions in our company and may take
    actions that might not be beneficial to you as a holder of our
    ADSs.
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We are
    dependent on the continued service of our management team, and
    our business, financial condition and results of operations will
    suffer greatly if we lose their services.
      We may
    have conflicts of interest with Shanda Interactive. Because of
    Shanda Interactives controlling ownership interest in our
    company, we may not be able to resolve such conflicts on terms
    favorable to us.
    
    Our board members or executive officers may have conflicts of
    interest.  Mr. Tianqiao Chen, our chairman,
    currently also serves as the chairman, chief executive officer
    and president of Shanda Interactive. Ms. Qianqian Luo, our
    director, currently also serve as a non-executive director of
    Shanda Interactive. Mr. Chen also 29




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serves as a director of Shanda Games Limited and Ku6. As
    Mr. Chen is an executive officer of Shanda Interactive, he
    will need to devote most of his time to the daily operations of
    Shanda Interactive.  and/or
  In addition, under the laws of the Cayman Islands, each of our
    directors owes a fiduciary duty not to put himself or herself in
    a position where our interests conflict with his or her personal
    interest or his or her duty to a third party. Directors are
    responsible to our company and not, in the absence of special
    circumstances, to the shareholders. Should a director breach
    these duties, that director may be held liable for loss or
    damage to our company.
    Agreements with Shanda Interactive and its
    affiliates.  The various agreements that we
    entered into with Shanda Interactive and its affiliates may be
    less favorable to us than would be the case if they were
    negotiated with third parties. Moreover, Shanda Interactive may
    use its control over us to prevent us from bringing a legal
    claim against it in the event of a contractual breach,
    notwithstanding our contractual rights under the agreements and
    any other agreement we may enter into with Shanda Interactive
    and its affiliates from time to time.
    Potential competition with Shanda
    Interactive.  Shanda Interactive may engage in
    certain transactions or businesses that directly or indirectly
    compete with our online and mobile literature businesses. In
    particular, we rely on Shanda Networkings integrated
    platform services, including online billing and payment, user
    authentication, customer service, pre-paid card marketing and
    data support services. Shanda Networking may provide similar
    services to some of our competitors, which may have a material
    adverse effect on our business.
    Business opportunities.  Business opportunities
    may arise that both we and Shanda Interactive find attractive,
    and which would complement our respective businesses. Due to the
    controlling interest of Shanda Interactive and its leading
    market position and brand in China, we may not be able to pursue
    these business opportunities effectively if Shanda Interactive
    decides to take advantage of such opportunities itself.
    Developing business relationships with Shanda
    Interactives competitors.  So long as Shanda
    Interactive remains our controlling shareholder, we may be
    limited in our ability to do business with its competitors, such
    as other interactive entertainment media companies in China.    We may
    not be able to continue to receive the same level of support
    from Shanda Interactive.
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We may
    be subject to certain obligations, including non-competition
    obligations, under the agreements entered into between Shanda
    Interactive and Shanda Games Limited.
    We
    have limited insurance coverage, which could have a material
    adverse effect on our financial condition and results of
    operations.
    If we
    fail to maintain an effective system of internal control over
    financial reporting, our ability to accurately and timely report
    our financial results or prevent fraud may be materially and
    adversely affected, and investor confidence as well as the
    trading price of our ADSs may decline
    significantly.
  Form 20-F
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You
    may not be able to rely on our quarterly operating results as an
    indication of our future performance because our quarterly
    operating results may be subject to significant
    fluctuations.
    
    our ability to retain existing authors and readers, attract new
    aspiring authors and readers at a steady rate and maintain user
    satisfaction;
    the creation of new original literary works by our authors and
    the popularity of such literary works;
    technical difficulties, system downtime or Internet failures for
    our websites;
    the amount and timing of operating costs and capital
    expenditures relating to expansion of our business, operations
    and infrastructure;
    the adoption of new, or changes to existing, governmental
    regulations;
    economic conditions in general and specific to the online and
    mobile literature industries and to China; and
    lag time in receiving timely information from our channel
    partners in respect of our revenues.  quarter-to-quarter
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Risks
    Relating to Our Corporate Structure
  If the
    PRC government finds that the agreements that establish the
    structure for operating our business in China do not comply with
    its restrictions on foreign investment in Internet-based
    businesses, or if these regulations or the interpretation of
    existing regulations change in the future, we could be subject
    to severe penalties or be forced to relinquish our interests in
    those operations.
        
    revoking the business licenses or operating licenses of our PRC
    subsidiary or affiliated PRC entity and its subsidiaries;
    discontinuing or restricting our operations in China, including
    shutting down our servers or blocking our websites or
    discontinuing or placing restrictions or onerous conditions on
    our operations;
    confiscating our income or the income of our PRC subsidiary or
    affiliated PRC entity,
    requiring us to undergo a costly and disruptive restructuring
    such as forcing us to transfer our equity interest in Shengting
    to a domestic entity or invalidating the agreements that
    Shengting has entered into with Shanghai Hongwen and its
    shareholders;
    restricting or prohibiting our use of proceeds from this
    offering to finance our business and operations in
    China; and
    taking other regulatory or enforcement actions, including
    levying fines, that could be harmful to our business.   33




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We
    rely on contractual arrangements with our affiliated PRC entity
    and its shareholders for the operation of our business, which
    may not be as effective as direct ownership. If our affiliated
    PRC entity and its shareholders fail to perform their
    obligations under these contractual arrangements, we may have to
    resort to litigation to enforce our rights, which may be
    time-consuming, unpredictable, expensive and damaging to our
    operations and reputation.
      Shareholders
    of our affiliated PRC entity may potentially have a conflict of
    interest with us, and they may breach their contracts with us or
    cause such contracts to be amended in a manner contrary to the
    interest of our company.
    The
    contractual arrangements with our affiliated PRC entity may be
    reviewed by the PRC tax authorities for transfer pricing
    adjustments, which could increase our overall tax
    liability.
  PRC Enterprise Income Tax Law
 34




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If our
    affiliated PRC entity and its subsidiaries fail to obtain and
    maintain the requisite assets, licenses and approvals required
    for the publishing industry and Internet-based businesses in
    China, our business, financial condition and results of
    operations may be materially and adversely
    affected.
    Risks
    Related to Doing Business in China
  Our
    business, financial condition and results of operations could be
    materially and adversely affected by a severe and prolonged
    global economic downturn and a corresponding slowdown of the PRC
    economy.
    Changes
    in Chinas economic, political and social conditions could
    have a material adverse effect on our business, financial
    condition, results of operations and prospects.
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Uncertainties
    presented by the PRC legal system could limit the legal
    protections available to us and subject us to legal risks, which
    could have a material adverse effect on our business, financial
    condition and results of operations.
      Our
    business may be adversely affected by regulations and censorship
    of literary and other content distributed over the Internet or
    through our offline business in China.
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The
    enforcement of the PRC labor contract law may materially
    increase our costs and decrease our net income.
    Restrictions
    over currency conversion may limit our ability to utilize our
    revenues and financing proceeds effectively.
     37




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The
    approval of the China Securities Regulatory Commission, or the
    CSRC, may be required in connection with our corporate
    reorganization in 2008 and this offering, and the failure to
    obtain any required approval could have a material adverse
    effect on our business, operating results and reputation and
    trading price of our ADSs, and also create uncertainties for
    this offering.
  Rules on Mergers with and
    Acquisitions of Domestic Enterprises by Foreign Investors
     38




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The
    M&A Rules may make it more difficult for us to make future
    acquisitions or dispositions of our business operations or
    assets in China.
  change-of-control
  PRC
    regulations relating to the establishment of offshore special
    purpose companies by PRC residents may subject our PRC resident
    beneficial owners or our company to liabilities or penalties,
    limit our ability to contribute capital to our PRC subsidiary,
    limit our PRC subsidiarys ability to increase its
    registered capital or distribute profits to us, or otherwise
    materially and adversely affect us.
  Notice Concerning Foreign Exchange Controls on Domestic
    Residents Financing and Roundtrip Investment Through
    Offshore Special Purpose Vehicles
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Our
    holding company structure may restrict our ability to receive
    dividends or other payments from our PRC subsidiary and our
    affiliated PRC entity, which could restrict our ability to act
    in response to changing market conditions and to satisfy our
    liquidity requirements.
    PRC
    regulation of loans and direct investment by offshore holding
    companies to PRC entities may delay or prevent us from using our
    net proceeds from this offering to make loans or additional
    capital contributions to our PRC operating
    subsidiaries.
    Circular of
    Operation Issues Related to the Perfection of Administration of
    Payment-Related Settlement of FIEs Registered Capital from
    Foreign Exchange to Renminbi
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A
    failure to comply with PRC regulations regarding the
    registration of shares and share options held by our employees
    who are PRC domestic individuals may subject such employees or
    us to fines and legal or administrative sanctions.
  Implementation Rules of the Administrative
    Measures on Individual Foreign Exchange Processing Guidance on Foreign Exchange Administration of
    Domestic Individuals Participating in the Employee Stock
    Ownership Plans or Stock Option Plans of Overseas-Listed
    Companies
  We may
    be subject to PRC income tax on our worldwide income if we were
    considered a PRC resident enterprise under the New
    EIT Law.
  Implementation Regulations to
    the PRC Enterprise Income Tax Law de facto de facto Notice Regarding the Determination of Chinese-Controlled
    Offshore Incorporated Enterprises as PRC Tax Resident
    Enterprises on the Basis of De Facto Management Bodies de facto de facto
  We may
    be required to withhold PRC income tax on the dividends we pay
    you (if any), and any gain you realize on the transfer of our
    ordinary shares and ADSs may also be subject to PRC tax if we
    are treated as a PRC resident
    enterprise.
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The
    New EIT Law may affect the availability of preferential tax
    rates under the special tax arrangement between Hong Kong and
    mainland China on dividends and interest to be paid by our PRC
    subsidiary.
 
  Circular on How to Interpret and Recognize
    the Beneficial Owner in Tax Agreements
 
  The
    PRC tax authorities enhanced scrutiny of PRC enterprise
    income tax on offshore equity transfers may have a negative
    impact on your investment in our ADSs.
  Notice on
    Issues Concerning Process of Enterprise Income Tax in Enterprise
    Restructuring Business Notice Concerning the Strengthening
    of Enterprise Income Tax Administration with Respect to Equity
    Transfers by Non-resident Enterprises
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Fluctuations
    in the value of the Renminbi could result in foreign currency
    exchange losses.
      Risks
    Related to Our ADSs and Class B Ordinary Shares and This
    Offering
  There
    has been no public market for our ordinary shares or ADSs prior
    to this offering, and you might not be able to resell our ADSs
    at or above the price you paid, or at all.
    The
    market price for our ADSs may be volatile and may be materially
    and adversely affected by fluctuations of the U.S. and global
    securities markets.
    
    regulatory developments in our target markets affecting us, our
    users or our competitors;
    announcements regarding intellectual property rights litigation;
    actual or anticipated fluctuations in our quarterly operating
    results;
    changes in financial estimates by securities research analysts;
    changes in the economic performance or market valuations of our
    literary content;
    announcements by us or our competitors of acquisitions,
    strategic partnerships, joint ventures or capital commitments;
    addition or departure of our executive officers and key research
    personnel;
    fluctuations of exchange rates between Renminbi and
    U.S. dollar or other foreign currencies; 43




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
    release of
    lock-up or
    other transfer restrictions on our outstanding ADSs or ordinary
    shares or sales of additional ADSs; and
    general economic, political or social conditions in China.    As the
    initial public offering price is substantially higher than our
    net tangible book value per ADS, you will incur immediate and
    substantial dilution.
  Series A-1 Series A-2
  We may
    need additional capital, and the sale of additional ADSs or
    other equity securities could result in additional dilution to
    our shareholders and the incurrence of additional indebtedness
    could increase our debt service obligations.
    Future
    sales or issuances, or perceived future sales or issuances, of
    substantial amounts of our ordinary shares or ADSs could cause
    the price of our ADSs to decline significantly.
  180-day lock-up lock-up lock-up
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lock-up lock-up
  Your
    interest in our ADSs will be diluted as a result of share option
    grants or other arrangements which require us to issue
    additional shares.
    You
    might not have the same voting rights as the holders of our
    Class B ordinary shares and might not receive voting
    materials in time to be able to exercise your right to
    vote.
      
    we have failed to timely provide the depositary with our notice
    of meeting and related voting materials;
    we have instructed the depositary that we do not wish a
    discretionary proxy to be given;
    we have informed the depositary that there is substantial
    opposition as to a matter to be voted on at the meeting;
    a matter to be voted on at the meeting would have a material
    adverse impact on shareholders; or
    voting at the meeting is made by a show of hands.   45




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Your
    right as a holder of ADSs to participate in any future rights
    offerings may be limited, which may cause dilution to your
    holdings and they may not receive cash dividends if it is
    impractical to make them available to such
    holders.
      You
    may be subject to limitations on transfer of your
    ADSs.
    The
    voting rights of holders of ADSs are limited by the terms of the
    deposit agreement.
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We
    will be a controlled company within the meaning of
    the NYSE rules and, as a result, will rely on exemptions from
    certain corporate governance requirements that provide
    protection to shareholders of other companies, and we will also
    rely on the foreign private issuer exemption from most of the
    corporate governance requirements under the NYSE
    rules.
    
    that a majority of our board of directors consist of independent
    directors;
    that we have a corporate governance and nominating committee
    that is composed entirely of independent directors with a
    written charter addressing the committees purpose and
    responsibilities;
    that we have a compensation committee that is composed entirely
    of independent directors with a written charter addressing the
    committees purpose and responsibilities; and
    for an annual performance evaluation of the nominating and
    governance committee and the compensation committee.    Our
    multiple-class share structure with different voting rights
    could discourage others from pursuing any change of control
    transactions that holders of our Class B ordinary shares
    and ADSs may view as beneficial.
  Series A-1 Series A-2 Series A-1 Series A-2 Series A-1 Series A-2 Series A-1 Series A-2
   47




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There
    can be no assurance that we will not be a passive foreign
    investment company, or PFIC, for any taxable year, which could
    result in adverse U.S. federal income tax consequences to U.S.
    holders of our ADSs or Class B ordinary
    shares.
  non-U.S. corporation
    Our
    memorandum and articles of association contain anti-takeover
    provisions that could have a material adverse effect on the
    rights of holders of our ordinary shares and ADSs.
  change-of-control
    
    our memorandum and articles of association provides for a
    multiple-class share structure with disparate voting rights
    attached to the two classes of ordinary shares;
    our board of directors has the authority, without approval by
    the shareholders, to issue any unissued shares and determine the
    terms and conditions of such shares, including preferred,
    deferred or other special rights or restrictions with respect to
    dividend, voting and return of capital;
    the shareholders may by ordinary resolution appoint a candidate
    as director of the board to fill a casual vacancy or as an
    addition to the existing board;
    the chairman, a majority of our board of directors or
    shareholder(s) who hold(s) more than 25% of the voting rights of
    our company having requisitioned for an extraordinary
    shareholders meeting at least 21 days previously,
    have the right to convene an extraordinary shareholders
    meeting, and the agenda of such meeting will be set by a
    majority of the directors or the shareholder(s) who hold more
    than 25% of the voting rights of our company who request such
    meeting; and 48




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
    the amended and restated articles of association may be amended
    only by a resolution passed at a shareholders meeting by a
    majority of not less than two-thirds of the vote cast.  You
    may have difficulties in bringing an original action based on
    the U.S. securities law and enforcing judgments obtained
    against us in Cayman Island or China.
    We are
    a Cayman Islands company and, because judicial precedent
    regarding the rights of shareholders is more limited under
    Cayman Islands law, you may have less protection for your
    shareholder rights than you would under U.S. law.
 
   
      You
    might not receive distributions on our ordinary shares, or any
    value for them at all, if it is unlawful or impractical for us
    to make them available to you.
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SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS    
    our anticipated growth strategies, including our plan to pursue
    selective acquisitions or strategic alliances;
    our future business development, results of operations and
    financial condition;
    our ability to maintain and strengthen our position as a leading
    online literature operator in China;
    expected changes in our revenues and certain cost or expense
    items;
    competition from other online literature operators and off-line
    publishers and our ability to expand our user base;
    our ability to expand and diversify our revenue source;
    trends and competition in the online literature industry in
    China;
    the PRC government policies relating to the Internet, Internet
    content providers, including online literature operators;
    our ability to effectively protect our intellectual property
    rights and not infringe on the intellectual property rights of
    others; and
    general economic and business conditions in China and other
    countries or regions in which we operate.     51




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OUR
    HISTORY AND CORPORATE STRUCTURE  Our
    History
  qidian.com jjwxc.net hongxiu.com xs8.cn
              
    In June 2009, Shanghai Hongwen established Tianjin Jushi Wenhua
    Book Distribution Co., Ltd., or Jushi, which operates offline
    publishing and distribution businesses. Shanghai Hongwen
    currently holds a 79.32% equity interest in Jushi.
    In June 2009, Shanghai Hongwen acquired an additional equity
    interest through further capital contribution in Hong Xiu and
    increased our equity interest from 60% to 71%.
    In June 2009, Shanghai Hongwen acquired a 51% equity interest in
    Tianjin Huawen Tianxia Book Co., Ltd., or Huawen, one of the
    most influential private entities engaging in offline publishing
    businesses in China. 52




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
    In November 2009, Shanghai Hongwen acquired rongshuxia.comby setting up a new entity, Tianjin Rongshuxia Information
    Technology Co., Ltd., or Rongshuxia. Shanghai Hongwen currently
    holds a 51% equity interest in Rongshuxia.
    In March 2010, Shanghai Hongwen acquired the offline publishing
    and distribution business of Beijing Zhongzhi Bowen Book Co.,
    Ltd. by setting up a new entity, Tianjin Zhongzhi Bowen Book
    Co., Ltd., or Zhongzhi. Shanghai Hongwen currently holds a 51%
    equity interest in Zhongzhi.
    In March 2010, Shanghai Hongwen entered into a series of
    agreements to acquire a 70% equity interest in Suzhou Jingwei
    Network Technology Co., Ltd., or Suzhou Jingwei, which operates
    xxsy.net, a leading Chinese online literature website
    catering mainly to female readers. Pursuant to the acquisition
    agreements, the assets and business of Suzhou Jingwei were
    transferred to Xiaoxiang Shuyuan (Tianjin) Culture Development
    Co., Ltd., or Xiaoxiang Shuyuan, which is a new entity
    established by Shanghai Hongwen and the existing shareholders of
    Suzhou Jingwei in June 2010. Shanghai Hongwen currently holds a
    70% equity interest in Xiaoxiang Shuyuan.
    In May 2010, Shanghai Hongwen acquired readnovel.com,a
    leading Chinese online literature website catering mainly to
    younger readers, by setting up a new entity, Beijing Wangwen
    Xinyue Technology Co., Ltd., or Wangwen. Shanghai Hongwen
    currently holds a 55% equity interest in Wangwen.
    In June 2010, Shanghai Hongwen acquired tingbook.com, an
    online audio book platform, by setting up a new entity, Tianjin
    Shengda Tianfang Tingshu Information Technology Co., Ltd., or
    Tianfang Tingshu. Shanghai Hongwen currently holds a 60% equity
    interest in Tianfang Tingshu.
    In July 2010, Shanghai Hongwen entered into a series of
    agreements to acquire a 53.5% equity interest in Shanghai
    Cuilong Culture Communication Co., Ltd., or Shanghai Cuilong,
    which operates zubunet.com, a digital journal website.
    Pursuant to the acquisition agreements, the assets and business
    of Shanghai Cuilong were transferred in November 2010 to Tianjin
    Yueduwang Technology Co., Ltd., or Yueduwang, which is a new
    entity established by Shanghai Hongwen and the existing
    shareholders of Shanghai Cuilong. Shanghai Hongwen currently
    holds a 53.5% equity interest in Yueduwang.
    In March 2011, Shanghai Hongwen set up a new entity, Beijing
    Shanda New Classics Film & TV Culture Co., Ltd., or
    Shanda New Classics, to which we intend to license adaptation
    rights of the literary works on our websites to produce movie
    and television scripts. Shanghai Hongwen currently holds a 51%
    equity interest in Shanda New Classics.
    In May 2011, Shanghai Hongwen set up a new entity, Zhejiang
    Huayun Digital Technology Co., Ltd., or Huayun Digital, which
    distributes digital magazines and literary works on our websites
    to end users via cable television companies. Shanghai Hongwen
    currently holds a 61% equity interest in Huayun Digital.     53




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zubunet.com tingbook.com yzsc.com.cn
  
    qidian.com, which is operated by Xuanting. In this
    prospectus, unless the context otherwise requires, all operating
    data and information in respect of qidian.comare
    presented to include the operating data and information of its
    sister websites that are operated by Xuanting such as
    qdmm.com;
    readnovel.com, which is operated by Wangwen;
    hongxiu.com, which is operated by Hong Xiu;
    xs8.cn, which is also operated by Hong Xiu;
    xxsy.net, which is operated by Xiaoxiang Shuyuan; and
    rongshuxia.com, which is operated by Rongshuxia.  Our
    Corporate Structure
     54




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(1)
    
    Shanghai Hongwen is our
    consolidated affiliated entity established in China and each of
    Ms. Dongxu Wang and Mr. Mingfeng Chen owns 50% of the
    equity interest in Shanghai Hongwen. Ms. Dongxu Wang is an
    employee of Shanda Interactive and Mr. Mingfeng Chen is an
    employee of our company.(2)
    
    We do not consolidate Jinjiang but
    share in its profit or loss through our 50% equity interest in
    this entity. 55




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
    Loan Agreements.  Shengting entered into a loan
    agreement with each of the shareholders of Shanghai Hongwen,
    namely Ms. Dongxu Wang and Mr. Mingfeng Chen, in
    August 2008, which was amended and restated in February 2011 in
    connection with the increased capital of Shanghai Hongwen. Under
    these loan agreements, Shengting has granted an interest-free
    loan of RMB5.0 million to each of Ms. Dongxu Wang and
    Mr. Mingfeng Chen solely for their capital contributions to
    Shanghai Hongwen. The loans shall become 56




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payable when Shengting requests repayment. Shengting may request
    repayment of the loans with 30 days advance notice
    and may require the loans to be repaid in cash or in other
    forms, but the shareholders of Shanghai Hongwen may not repay
    all or any part of the loans without Shengtings prior
    written request.  
    Exclusive Call Option Agreement.  Shanghai
    Hongwen and its shareholders entered into an exclusive call
    option agreement with Shengting in 2008. Pursuant to this
    agreement, Shengting and any third party designated by it have
    the exclusive right to purchase from the shareholders of
    Shanghai Hongwen all or any part of their equity interests in
    Shanghai Hongwen at a purchase price equal to the lowest price
    permissible by the then-applicable PRC laws and regulations.
    Shengting may exercise such option at any time during the term
    of the agreement until it has acquired all equity interests of
    Shanghai Hongwen, subject to applicable PRC laws. Moreover,
    under the 2008 exclusive call option agreement, neither Shanghai
    Hongwen nor its shareholders may take actions that could
    materially affect Shanghai Hongwens assets, liabilities,
    operation, equity and other legal rights without the prior
    written approval of Shengting, including, without limitation,
    declaration and distribution of dividend and profit; sale,
    assignment, mortgage or disposition of, or encumbrances on,
    Shanghai Hongwens equity; merger or consolidation;
    acquisition of and investment in any third-party entities;
    creation, assumption, guarantee or incurrence of any
    indebtedness; entering into other materials contracts. The
    agreement is for an initial term of 20 years and renewable
    upon Shengtings request. The agreement was amended and
    restated in March 2011.
    Business Operation Agreement.  Shengting
    entered into a business operation agreement with Shanghai
    Hongwen and its shareholders in March 2011. Under this
    agreement, Shanghai Hongwen must designate the candidates
    nominated by Shengting to be the directors on its board of
    directors, and must appoint the persons recommended by Shengting
    to be its general manager, financial controller and other senior
    management. Moreover, Shenghai Hongwen agrees that it will not
    engage in any transactions that could materially affect its
    assets, liabilities, rights or operations without the prior
    consent of Shengting. Such transactions include incurrence or
    assumption of any indebtedness that are not in the ordinary
    course of business; sale or purchase of any assets or rights
    with values of more than RMB0.1 million; declaration of
    dividends or profit distribution; encumbrance on any of their
    assets or intellectual property rights in favor of a third
    party; or transfer of any rights or obligations under this
    agreement to a third party. The agreement is for an initial term
    of 20 years and renewable upon Shengtings request.
    Shengting may terminate the agreement at any time by providing
    30 days advance written notice to Shanghai Hongwen
    and to each of its shareholders. Neither Shanghai Hongwen nor
    any of its shareholders may terminate this agreement prior to
    its expiration date.
    Exclusive Technology Consulting and Service Framework
    Agreement.  Shengting and Shanghai Hongwen entered
    into an exclusive technology consulting and service framework
    agreement in March 2011. Under this agreement, Shanghai Hongwen
    and its affiliated companies agree to engage Shengting as its
    exclusive provider of technology consulting and services.
    Shanghai Hongwen will pay to Shengting service and consulting
    fees determined based on the nature and time of the services and
    the revenues of Shanghai Hongwen or its affiliated companies may
    earn thereunder. Shengting will exclusively own any intellectual
    property arising from the performance of this agreement. The
    agreement is for an initial term of 20 years and renewable
    upon Shengtings request. Shengting may terminate the
    agreement at any time by providing 30 days advance
    written notice to Shanghai Hongwen. Shanghai Hongwen may not
    terminate this agreement prior to its expiration date.
    Share Pledge Agreement.  The shareholders of
    Shanghai Hongwen entered into a share pledge agreement with
    Shengting in August 2008, which was amended and restated in
    March 2011. Under the share pledge agreement, the shareholders
    of Shanghai Hongwen pledged all of their equity interests in
    Shanghai Hongwen to Shengting as collateral for all of their
    payments due to Shengting and to secure performance of all
    obligations of Shanghai Hongwen and its shareholders under the
    above loan agreements, exclusive call option agreement,
    exclusive technology consulting and service framework agreement
    and the business operation agreement. The pledge shall remain
    effective until all obligations under such agreements have been
    fully performed. Shanghai Hongwen is prohibited from declaring
    any dividend or making any profit distribution during the term
    of the pledge. Without Shengtings prior written consent,
    neither shareholder of Shanghai Hongwen may transfer any equity
    interests in Shanghai Hongwen. If any event of default as
    provided for therein occurs, Shengting, as the pledgee, will be
    entitled to dispose of the pledged equity 57




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interests through transfer or assignment and use the proceeds to
    repay the loans or make other payments due under the above
    agreements.  
    Power of Attorney.  Each shareholder of
    Shanghai Hongwen executed an irrevocable power of attorney in
    March 2011 to appoint Shengting as the attorney-in-fact to act
    on his or her behalf on all matters pertaining to Shanghai
    Hongwen and to exercise all of his or her rights as a
    shareholder of Shanghai Hongwen, including the right to attend
    shareholders meetings, to exercise voting rights and to appoint
    directors, a general manager, financial controller and other
    senior management of Shanghai Hongwen. The power of attorney is
    irrevocable and continually valid as long as the principal is
    the shareholder of Shanghai Hongwen. These powers of attorney
    superseded the share entrustment agreement the parties executed
    in 2008, under which Ms. Dongxu Wang and Mr. Mingfeng
    Chen acknowledged that they are nominee shareholders of Shanghai
    Hongwen on behalf of Shengting.    and/or
   58




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USE OF
    PROCEEDS      
    approximately
    US$           million
    to finance our business expansion, including for the purposes of
    content acquisitions and sales and marketing initiatives;
    approximately
    US$           million
    to repay our loans and borrowings
    including          ; and
    the remaining amount to fund working capital as well as for
    other general corporate purposes, including financing potential
    strategic acquisitions and investments.       59




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DIVIDEND
    POLICY         60




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CAPITALIZATION    
    on an actual basis;
    on a pro forma basis to reflect the conversion of all
    Series A preference shares into 11,313,150 Class A
    ordinary shares immediately following the completion of this
    offering;
    on a pro forma as-adjusted basis to give effect to (i) the
    above, (ii) the issuance and sale
    of          
    Class B ordinary shares in the form of ADSs by us in this
    offering and (iii) the prepayment of outstanding loans in
    the amount of
    RMB           million
    using the proceeds of this offering, assuming an initial public
    offering price of
    US$          
    per ADS, the mid-point of the estimated range of the initial
    public offering price, after deducting estimated underwriting
    discounts and commissions and offering expenses payable by us
    and assuming no exercise of the underwriters option to
    purchase additional ADSs.    As of March 31, 2011Pro Forma asActual

Pro Forma

AdjustedUS$

US$

US$(in thousands)Debt:Long-Term Debt (unsecured)


66,612



66,612Series A preference sharesSeries A-1
    convertible preference shares (US$0.01 par value;
    3,916,393 shares authorized; 3,916,393 shares issued
    and outstanding)


7,869



Series A-2
    convertible preference shares (US$0.01 par value;
    7,396,757 shares authorized; 7,396,757 shares issued
    and outstanding)


14,892



Total Series A preference shares


22,761



Ordinary sharesClass A ordinary shares, par value US$0.01 per share,
    488,686,850 shares authorized; 250,000,000 shares
    issued and outstanding


2,543



2,656Class B ordinary shares, par value US$0.01 per share,
    500,000,000 shares
    authorized;           shares
    issued and outstanding on a pro forma
    basis;           shares
    issued and outstanding on a pro forma as-adjusted
    basis(1)






Additional paid-in
    capital(2)


3,480



26,127Accumulated other comprehensive income


661



661Accumulated deficits


(24,443
)


(24,443
)Total Cloudary Corporation shareholders equity (deficits)


(17,759
)


5,002Total Capitalization


71,614



71,614     (1)
    
    Excludes 20,329,350 Class B
    ordinary shares issuable upon the exercise of options
    outstanding as of March 31, 2011.(2)
    
    A US$1.00 increase (decrease) in
    the assumed initial public offering price of
    $          
    per ADS, the mid-point of the estimated range of the initial
    public offering price, would increase (decrease) each of
    additional paid-in capital, total shareholders equity and
    total capitalization by
    US$           million
    on an as adjusted basis, after deducting the estimated
    underwriting discounts and commissions, estimated offering
    expenses and placement fee payable by us and assuming no
    exercise of the underwriters option to purchase additional
    ADSs. 61




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DILUTION   
   
 
   
    Per Ordinary Share

Per ADSAssumed initial public offering price per Class B ordinary
    share

US$



US$Net tangible book value as of March 31, 2011Pro forma net tangible book valuePro forma as-adjusted net tangible book valueIncrease in pro forma as-adjusted net tangible book valueDilution in pro forma as-adjusted net tangible book value to new
    investors in this offering  62




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Ordinary Shares





Average Price per


Average PricePurchased


Total Consideration


Ordinary Share


per ADSNumber


Percent


Amount


PercentExisting shareholder







%

US$





%

US$



US$New investors









US$







US$



US$Total






100.0
%

US$




100.0
%

US$



US$        63




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EXCHANGE
    RATE INFORMATION      
 Exchange RatePeriod

Period End

Average(1)

High

Low(RMB per US$1.00)2006


7.8041



7.9579



7.8041



8.07022007


7.2946



7.5806



7.2946



7.81722008


6.8225



6.9193



6.7800



7.29462009


6.8259



6.8295



6.8176



6.84702010


6.6000



6.6703



6.6000



6.83302011January


6.6017



6.5964



6.5809



6.6364February


6.5713



6.5761



6.5520



6.5965March


6.5483



6.5645



6.5483



6.5743Three-month period ended March 31, 2011


6.5483



6.5783



6.5483



6.6364April


6.4900



6.5267



6.4900



6.5477May


6.4786



6.4965



6.4913



6.5073June (through June 24, 2011)


6.4737



6.4757



6.4628



6.4830  
    (1)
    
    Annual averages and averages for
    the three-month period ended March 31, 2011 were calculated
    by using the average of the exchange rates on the last day of
    each month during the relevant period. Monthly averages were
    calculated by using the average of the daily rates during the
    relevant month. 64




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ENFORCEABILITY
    OF CIVIL LIABILITIES            
    recognize or enforce judgments of United States courts obtained
    against us or our directors or officers predicated upon the
    civil liability provisions of the federal securities laws of the
    United States or any state in the United States; or
    entertain original actions brought in each respective
    jurisdiction against us or our directors or officers predicated
    upon the securities laws of the United States or any state in
    the United States.     65




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SELECTED
    CONSOLIDATED FINANCIAL DATA            Consolidated
    Statements of Operations Data:
  For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

RMB

RMB

US$

RMB

RMB

US$(in thousands, except for share and per share data)Net revenues:Online business


52,976



98,629



207,543



31,694



29,918



83,101



12,690Offline business






35,922



185,471



28,324



18,270



55,648



8,498Total net revenues


52,976



134,551



393,014



60,018



48,188



138,749



21,188Cost of revenues:Online business


(46,816
)


(85,459
)


(171,616
)


(26,208
)


(25,132
)


(54,183
)


(8,274
)Offline business






(22,533
)


(156,523
)


(23,903
)


(15,213
)


(44,110
)


(6,736
)Total cost of revenues


(46,816
)


(107,992
)


(328,139
)


(50,111
)


(40,345
)


(98,293
)


(15,010
)Gross profit


6,160



26,559



64,875



9,907



7,843



40,456



6,178Operating expenses:Product development


(467
)


(2,588
)


(6,024
)


(920
)


(575
)


(2,109
)


(322
)Sales and marketing


(20,045
)


(72,083
)


(69,765
)


(10,654
)


(13,153
)


(20,786
)


(3,174
)General and administrative


(10,612
)


(28,679
)


(62,169
)


(9,494
)


(11,298
)


(21,794
)


(3,328
)Total operating expenses


(31,124
)


(103,350
)


(137,958
)


(21,068
)


(25,026
)


(44,689
)


(6,824
)Gain on bargain purchase










7,398



1,130











 66




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For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

RMB

RMB

US$

RMB

RMB

US$(in thousands, except for share and per share data)Loss from operations


(24,964
)


(76,791
)


(65,685
)


(10,031
)


(17,183
)


(4,233
)


(646
)Interest income


2,172



870



1,805



276



233



1,066



163Interest expense to related parties










(3,155
)


(482
)






(1,130
)


(173
)Other income (expenses), net


636



(324
)


2,223



339



(123
)


15



2Loss before income tax benefit and equity in earning (loss) of
    affiliated company


(22,156
)


(76,245
)


(64,812
)


(9,898
)


(17,073
)


(4,282
)


(654
)Income tax benefit (expense)


(253
)


1,157



5,485



838



1,206



(521
)


(80
)Equity in earning (loss) of affiliated company


(95
)


585



2,849



435



574



1,113



170Net loss


(22,504
)


(74,503
)


(56,478
)


(8,625
)


(15,293
)


(3,690
)


(564
)Net loss attributable to non-controlling interests


398



1,078



11,684



1,785



2,046



3,217



491Net income attributable to redeemable non-controlling interests










(77
)


(12
)






(523
)


(79
)Net loss attributable to Cloudary Corporation


(22,106
)


(73,425
)


(44,871
)


(6,852
)


(13,247
)


(996
)


(152
)Series A preference shares redemption value accretion










(510
)


(78
)






(1,669
)


(255
)Net loss attributable to Cloudary Corporations ordinary
    shareholder


(22,106
)


(73,425
)


(45,381
)


(6,930
)


(13,247
)


(2,665
)


(407
)Net loss per share attributable to Cloudary Corporations
    ordinary shareholderBasic and diluted


(0.09
)


(0.29
)


(0.18
)


(0.03
)


(0.05
)


(0.01
)


(0.00
)Weighted average ordinary shares used in per share calculationBasic and diluted


250,000,000



250,000,000



250,000,000







250,000,000



250,000,000Pro forma basic and diluted loss per share attributable to
    Cloudary Corporations ordinary shareholders
    (unaudited)(1)










(0.17
)


(0.03
)






(0.00
)


(0.00
)Pro forma weighted average ordinary shares used in per share
    calculations
    (unaudited)(1) 

    Basic and diluted










261,313,150











261,313,150  67




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Consolidated
    Balance Sheets Data:
  As of December 31,

As of March 31,

As of March 31,2008

2009

2010

2011

2011RMB

RMB

RMB

US$

RMB

US$

RMB

US$(in thousands)

Pro forma

Pro
    forma(2)Total current assets


111,753



228,924



493,083



75,299



494,143



75,461



494,143



75,461Total assets


140,234



331,332



813,936



124,297



814,404



124,369



814,404



124,369Total current liabilities


174,478



82,934



201,866



30,827



205,503



31,383



205,503



31,383Total liabilities


175,807



389,426



665,654



101,653



668,112



102,028



668,112



102,028Redeemable convertible preferred shares










149,574



22,842



149,043



22,761







Redeemable non-controlling interests










25,296



3,862



25,954



3,964



25,954



3,964Total Cloudary Corporation shareholders deficit


(37,390
)


(90,029
)


(116,409
)


(17,777
)


(116,289
)


(17,759
)


32,754



5,002Non-controlling interests


1,817



31,935



89,821



13,717



87,584



13,375



87,584



13,375Total shareholders deficit


(35,573
)


(58,094
)


(26,588
)


(4,060
)


(28,705
)


(4,384
)


120,338



18,377Total liabilities and shareholders deficit


140,234



331,332



813,936



124,297



814,404



124,369



814,404



124,369     (1)
    
    For a description of the pro forma
    adjustments used to calculate pro forma loss per share for the
    year ended December 31, 2010, see
    Note 27  Unaudited Pro Forma Loss Per
    Share for Conversion of Series A Preferred Shares to our
    consolidated financial statements included elsewhere in this
    prospectus.For a description of the pro forma
    adjustments used to calculate pro forma loss per share for the
    three months ended March 31, 2011, see Note
    21  Unaudited Pro Forma Balance Sheet and Loss Per
    Share for Conversion of Series A Preferred Shares to
    our unaudited condensed consolidated financial statements
    included elsewhere in this prospectus. 
  (2)
    
    Pro forma basis reflects the
    conversion of all outstanding Series A preference shares on
    a one-for-one basis into an aggregate of 11,313,150 Class A
    ordinary shares immediately following the completion of this
    offering. 
  Consolidated
    Statements of Cash Flow Data:
  For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

RMB

RMB

US$

RMB

RMB

US$(in thousands)Net cash used in operating activities


(5,220
)


(75,500
)


(99,795
)


(15,240
)


(50,259
)


(47,001
)


(7,178
)Net cash used in investing activities


(28,303
)


(118,494
)


(45,449
)


(6,941
)


(76,675
)


(11,514
)


(1,758
)Net cash provided by financing activities






300,000



305,641



46,675



100,000







Effect of exchange rate changes on cash


6



(6
)


(2,149
)


(328
)


(312
)


(141
)


(21
)Net increase/(decrease) in cash and cash equivalents


(33,517
)


106,000



158,248



24,166



(27,246
)


(58,656
)


(8,957
)Cash and cash equivalents at the beginning of year


68,875



35,358



141,358



21,587



141,358



299,606



45,753Cash and cash equivalents at the end of year


35,358



141,358



299,606



45,753



114,112



240,950



36,796  68




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MANAGEMENTS
    DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS  You should read the following discussion and analysis of our
    financial condition and results of operations in conjunction
    with the section entitled Selected Consolidated Financial
    and Operating Data and our consolidated financial
    statements and the related notes included elsewhere in this
    prospectus. This discussion contains forward-looking statements
    that involve risks and uncertainties. Our actual results and the
    timing of selected events could differ materially from those
    anticipated in these forward-looking statements as a result of
    various factors, including those set forth under Risk
    Factors and elsewhere in this prospectus.
  Overview
  third-party
  qidian
  Dou Po Cang Qiong baidu.com The Desolation of the Ancient Path
    at Yangguan
  e-reader
  Factors
    Affecting Our Results of Operations
   69




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
    Expansion of Our User Base.  Our success in
    generating revenues, especially revenues from online paid users
    and advertising services, largely depends on our ability to
    maintain and expand the user base of our online community. The
    size and quality of our user base directly affects the
    effectiveness of our advertising services and our monetization
    potential. Our user base helps us attract aspiring authors and
    offer high quality content, which drive the online traffic and
    transactions originated from our content. Our net revenues from
    online advertising and online paid users have increased
    significantly from 2008 to 2010, largely due to the growth of
    our user base and corresponding ability to attract advertisers.
    Our registered users increased from 28.0 million as of
    December 31, 2008 to 38.0 million as of
    December 31, 2009 and from 72.1 million as of
    December 31, 2010 to 76.5 million as of March 31,
    2011.
    Conversion of Registered Users to Active Paying
    Users.  Further growth of our revenues generated
    from online paid users will depend upon our ability to convert
    our registered users into active paying users and increase the
    portion of active paying users among our registered users. Our
    net revenues from online paid users increased from
    RMB37.4 million in 2008 to RMB54.2 million in 2009 and
    to RMB103.6 million (US$15.8 million) in 2010,
    representing a growth of 45.0% and 91.3%, respectively. Such
    growth was primarily driven by the corresponding increase in the
    number of active paying users. We had in aggregate
    76.5 million registered users as of March 31, 2011,
    among which only 1.4% spent money in the first quarter of 2011.
    Given that only a small fraction of our registered users
    currently are active paying users, we believe significant growth
    potential in online paid users service exists.
    Offering of More Popular Content.  We derived a
    substantial majority of our net revenues directly from
    monetizing our literary content, including (i) charging
    users to view paid content on our websites and to use our
    community tools, (ii) revenue-sharing arrangements with
    other distribution channel providers, (iii) licensing
    certain content rights to gaming companies and television and
    film studios, and (iv) offline publishing. Our future
    growth depends significantly on our ability to source more
    popular content that appeals to our readers and other content
    users. Popular content enables us to deliver a differentiated
    and engaging experience for our users and readers and helps us
    generate additional content-based revenues.
    Effective Control of Copyright Licensing
    Cost.  Copyright licensing cost has historically
    accounted for the biggest portion of our online cost of revenues
    and accounted for 67.1%, 60.1%, 59.2% and 49.1% of our net
    online revenues in 2008, 2009, 2010 and the three months ended
    March 31, 2011, respectively. Our ability to effectively
    control copyright licensing cost has affected and will continue
    to affect significantly our gross profit and profitability. We
    acquire or license the copyrights of popular literary content
    either at a fixed price or through revenue-sharing arrangements
    with authors and third-party content providers. Due to the
    improving monetization prospects of original literary content,
    we expect to make more premium payments in order to retain
    popular authors. As a result, we expect our copyright licensing
    cost to increase on an absolute basis as we expand our literary
    content library. However, given our industry leading market
    share and the expanding content monetization channels available
    on our platform, we believe we have the ability to control the
    overall percentage of revenues that we will pay to our authors.
    Management of Offline Sales and Collection
    Cycle.  Our ability to effectively manage and
    shorten the selling and collection cycle for our offline
    business will significantly affect the sales and inventory risks
    for our offline business. Under the sales model that is
    generally adopted in the publishing business in China, we need
    to deliver books to chain and online bookstores and wholesalers
    with no or limited upfront payments and receive payments based
    on the sales orders confirmed by both parties. The wholesalers
    and bookstores are permitted to return unsold books to us. As a
    result, we have a relatively long selling and collection cycle,
    which generally ranges from three to eight months depending on
    the internal management of the bookstores or wholesalers, that
    requires us to make significant resource commitments prior to
    realizing revenues. Therefore, we face inventory risks in
    connection with the books that the bookstores or wholesalers are
    unable to sell. We must assess the marketability of our offline
    books in order to increase sales, shorten the selling cycles and
    reduce inventory risks.
    Relationship with Third-Party Channels.  We
    rely heavily on third-party channels to generate revenues from
    our wireless service and offline business. In 2008, 2009, 2010
    and the three months ended March 31, 70




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2011, approximately 2.6%, 31.0%, 62.6% and 63.8% of our net
    revenues were attributable to wireless service and offline
    business through third-party channels. Such percentage increased
    significantly from 2008 to 2009 primarily because we commenced
    our offline business in 2009. In 2010, our net revenues
    attributable to third-party channels further increased primarily
    due to the rapid growth of both our wireless service and offline
    businesses. We intend to increase our revenues by cooperating
    with these third-party channel providers. Particularly, we plan
    to continue to expand our distribution channels by strengthening
    our relationships with wireless carriers, third-party online
    portals, cable television companies, chain and online bookstores
    and wholesalers and manufacturers of personal computers, mobile
    phones, mobile tablets and
    e-readers.  Revenues
      For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

%

RMB

%

RMB

US$

%

RMB

%

RMB

US$

%(in thousands, except percentages)Online business:Online paid users


37,360



70.5



54,157



40.3



103,610



15,822



26.4



16,436



34.1



34,635



5,289



25.0Wireless service


1,392



2.6



5,763



4.3



60,415



9,226



15.4



4,981



10.3



32,867



5,019



23.7Online advertising


2,953



5.6



19,749



14.7



21,098



3,222



5.4



4,168



8.6



7,650



1,168



5.5Copyright licensing


6,342



12.0



12,424



9.2



17,620



2,691



4.5



3,437



7.1



5,423



828



3.9Others(1)


4,929



9.3



6,536



4.9



4,800



733



1.2



896



2.0



2,526



386



1.8Net online revenues


52,976



100.0



98,629



73.4



207,543



31,694



52.9



29,918



62.1



83,101



12,690



59.9Net offline
    revenues(2)










35,922



26.6



185,471



28,324



47.1



18,270



37.9



55,648



8,498



40.1Net revenues


52,976



100.0



134,551



100.0



393,014



60,018



100.0



48,188



100.0



138,749



21,188



100.0     (1)
    
    Primarily consists of revenues
    generated from revenue-sharing arrangement with third-party web
    game operators.(2)
    
    We started our offline publishing
    business in 2009.  Online
    Business
  Online
    Paid Users Service
      
    Number of active paying users.  Active
    paying user refers to a user who makes an online payment
    at least once, as shown from such users account, to access
    premium content or to purchase community tools on our websites
    in a given quarter. The aggregate number of active paying users
    for all of our six literature websites in a given quarter equals
    the sum of active paying users for each such six websites. As an
    individual may spend money on more than one of our websites, we
    may count such user more than once in such calculation. 71




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Our active paying users in the fourth quarter of 2008, 2009 and
    2010 increased from 340,149 to 420,645 and to 950,625,
    respectively, representing a CAGR of 67.2%. We had 505,254 and
    1.1 million active paying users in the first quarter of
    2010 and 2011, respectively.  
    Average net revenue per active paying
    user.  The average net revenue per active paying
    user reflects the average consumption of our literary content
    and community tools by each online paid user in a given quarter.
    The average net revenue per active paying user in the fourth
    quarter of 2008, 2009 and 2010 was RMB27.3, RMB30.5 and RMB34.8,
    respectively. The average net revenue per active paying user
    decreased to RMB31.9 in the first quarter of 2011 from RMB32.5
    in the first quarter of 2010.    Wireless
    Service
 
   
    
    Number of titles made available to mobile
    users.  As of March 31, 2010 and 2011, an
    aggregate of 12,139 and 23,315 titles, respectively, were
    available to mobile users. As of December 31, 2010, an
    aggregate of 23,020 titles were available to mobile users.
    Average net revenue per title.  The average net
    revenue per title reflects the average contribution to our net
    revenues in a given period by each title we offered to the
    wireless carriers. The average net revenue per title for our
    wireless service was RMB2,625 in 2010. The average net revenue
    per title increased to RMB1,410 in the first quarter of 2011
    from RMB410 in the first quarter of 2010 primarily because our
    titles attracted more readers on an average basis.  Online
    Advertising
        
    Number of advertisers.  The number of our
    online advertisers increased from 59 in 2008 to 122 in 2009 and
    to 147 in 2010, representing a CAGR of 57.8%. The number of
    advertisers that used our online advertising services decreased
    to 48 in the first quarter of 2011 from 55 in the first quarter
    of 2010, primarily because our 72




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advertising agencies focused their selling efforts on
    advertising clients that can contribute more revenues and did
    not renew the contracts with the advertisers who contributed
    lower revenues in 2010.  
    Average net revenue per advertiser.  The
    average net revenue per advertiser grew from RMB50,041 in 2008
    to RMB161,874 in 2009 and moved to RMB143,524 in 2010,
    representing a CAGR of 69.4%. The decrease in the average net
    revenue per advertiser from 2009 to 2010 was primarily due to
    the increase in the number of advertisers. In the first quarter
    of 2010 and 2011, the average net revenue per advertiser was
    RMB75,785 and RMB159,380, respectively.      Copyright
    Licensing
      
    Number of copyright licensing titles.  The
    number of copyright licensing titles increased from 101 in 2008
    to 201 in 2009 and to 314 in 2010, representing a CAGR of 76.3%.
    There were 48 and 162 copyright licensing titles that
    contributed to our revenues from copyright licensing in the
    first quarter of 2010 and 2011, respectively.
    Average price per copyright licensing
    title.  The average price per copyright licensing
    title was RMB62,793 in 2008, RMB61,809 in 2009 and RMB56,114 in
    2010. The average price per copyright licensing title was
    RMB71,596 and RMB33,476 in the first quarter of 2010 and 2011,
    respectively. The decrease in the average price per copyright
    licensing title from 2008 to 2010 and from the first quarter of
    2010 to the first quarter of 2011 was primarily because we
    licensed more titles to offline book publishers, for which we
    usually charge lower licensing fees compared to the fees we
    charge for the development of games, television series or movies.    Offline
    Business
     73




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
    Number of books we sell and collect payment
    for.  We sold and collected payment for
    3.5 million and 18.3 million books in 2009 and 2010,
    respectively. The number of books we sold and collected payment
    for increased to 6.0 million in the first quarter of 2011
    from 1.6 million in the first quarter of 2010;
    Retail prices for our books; and
    Rebates and discounts we offer to chain and online bookstores
    and wholesalers.      Cost of
    Revenues
    For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

%

RMB

%

RMB

US$

%

RMB

%

RMB

US$

%(in thousands, except percentages)Online businessNet online revenues


52,976



100.0



98,629



100.0



207,543



31,694



100.0



29,918



100.0



83,101



12,690



100.0Cost of revenuesCopyright licensing cost


35,537



67.1



59,238



60.1



122,831



18,758



59.2



16,546



55.3



40,773



6,227



49.1Salaries and benefits


6,633



12.5



15,434



15.6



26,009



3,972



12.5



5,808



19.4



7,381



1,127



8.9Platform fees


1,832



3.5



3,559



3.6



5,144



785



2.5



703



2.4



1,011



154



1.2Depreciation and amortization


1,395



2.6



2,525



2.6



5,445



832



2.6



673



2.2



1,420



217



1.7Others(1)


1,419



2.7



4,703



4.7



12,187



1,861



5.9



1,402



4.7



3,598



549



4.3Subtotal


46,816



88.4



85,459



86.6



171,616



26,208



82.7



25,132



84.0



54,183



8,274



65.2Offline
    business(2)Net offline revenues










35,922



100.0



185,471



28,324



100.0



18,270



100.0



55,648



8,498



100.0Cost of revenuesBook production cost










17,875



49.8



117,345



17,920



63.3



10,807



59.2



34,778



5,311



62.5Salaries and benefits










2,551



7.1



7,595



1,160



4.1



1,314



7.2



1,982



303



3.6Inventory write-down










324



0.9



25,548



3,901



13.8



2,511



13.7



5,609



856



10.1Depreciation and amortization










517



1.4



2,253



344



1.2



247



1.4



668



102



1.2Others(1)










1,266



3.5



3,782



578



2.0



334



1.8



1,073



164



1.9Subtotal










22,533



62.7



156,523



23,903



84.4



15,213



83.3



44,110



6,736



79.3Total cost of revenues


46,816







107,992







328,139



50,111







40,345







98,293



15,010     (1)
    
    Primarily consist of office, travel
    and communication expenses attributable to our online or offline
    professional editors.(2)
    
    We started our offline publishing
    business in 2009. 74




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Online
    Business
    Copyright Licensing Cost. revenue-sharing
  Salaries and Benefits.
  Platform Fees.
    Depreciation and Amortization.
  Offline
    Business
    Book Production Cost. third-party
  Salaries and Benefits.
  Inventory Write-Downs.
 75




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Depreciation and Amortization.
  Operating
    Expenses
    For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

%

RMB

%

RMB

US$

%

RMB

%

RMB

US$

%(in thousands, except percentages)Net revenues


52,976



100.0



134,551



100.0



393,014



60,018



100.0



48,188



100.0



138,749



21,188



100.0Operating expenses:Sales and marketing


20,045



37.9



72,083



53.6



69,765



10,654



17.8



13,153



27.3



20,786



3,174



15.0General and administrative


10,612



20.0



28,679



21.3



62,169



9,494



15.8



11,298



23.4



21,794



3,328



15.7Product development


467



0.9



2,588



1.9



6,024



920



1.5



575



1.2



2,109



322



1.5Total operating expenses


31,124



58.8



103,350



76.8



137,958



21,068



35.1



25,026



51.9



44,689



6,824



32.2   Sales and Marketing.
  General and Administrative.
    Product Development.
 76




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Income
    Taxes
  Cayman
    Islands
    Hong
    Kong
    PRC
  Enterprise Income Tax Law
  de facto
 
   
  Non-Controlling
    Interest
    Share-Based
    Compensation Expenses
   77




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
    no significant contingent liabilities, unusual contractual
    obligations or substantial commitments;
    no significant pending or threatened litigation involving us as
    of the valuation date;
    no violations of any regulations or laws by us;
    no redundant assets as of the valuation date other than those
    identified by the appraiser and disclosed;
    no significant change in our business model;
    management information is on a consolidated basis; and
    the book values of non-operating assets and total debt
    approximate their fair values.   78




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
    There was no significant change in the macroeconomic, regulatory
    environment and industry prospects during the
    less-than-two-month period;
    There was no significant change in our business or operations
    during the period; and
    Our financial performance in this period was consistent with the
    financial forecast made for December 1, 2010.    Options Granted in 2010

Options Granted in 2011Exercise price

US$
1.80


US$
1.80Fair value of ordinary shares

US$
1.80


US$
1.80Risk-free interest rates
    (%)(1)


1.897%-2.322%



1.800%-2.387%Expected dividend
    yield(2)


0%



Expected volatility
    (%)(3)


50%-55%



55%-60%Fair value per option at grant date

US$
0.76-US$0.85


US$
0.79-US$0.89     (1)
    
    The risk-free interest rate for
    periods within the contractual life of the share option is based
    on the U.S. Treasury yield curve in effect at the time of grant
    for a term consistent with the expected term of the awards.(2)
    
    The dividend yield was estimated
    based on our expected dividend policy over the expected term of
    the options. We have no history or expectation of paying
    dividends on our ordinary shares.(3)
    
    Expected volatility is estimated
    based on the historical volatility of comparable companies
    stocks and of our ordinary shares for a period equal to the
    expected term preceding the grant date.    Weighted-Average

Fair Value of

Weighted-AverageOptions

Exercise

Fair Value

Ordinary

Intrinsic Value

Type ofDate of Option Grant

Granted

Price

of Options

Shares

per Option

Valuation(US$)

(US$)

(US$)

(US$)December 1, 2010


11,000,750



1.80



0.81



1.80



0.0



RetrospectiveJanuary 27, 2011


9,328,600



1.80



0.84



1.80



0.0



RetrospectiveTotal


20,329,350  79




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Internal
    Control Over Financial Reporting
       80




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Critical
    Accounting Policies
      Consolidation
    of Variable Interest Entities
      Revenue
    Recognition
  Online
    Paid Users
   81




---



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third-party
    605-45
  Wireless
    Service
         82




---



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
    When we have timely access to the usage information
    (i.e. under the per-usage basis), in accordance with
    ASC 605, revenues are recognized in the period in which the
    service is performed provided that no significant obligation
    remains, collection of the receivable is reasonably assured and
    the amounts can be reliably estimated. Estimate of revenues is
    based on our analysis of usage information for the month
    provided by China Mobile, the contractual rates with China
    Mobile and any historical adjustments for discrepancies between
    internally estimated revenues and actual revenues subsequently
    confirmed by China Mobile. There were no significant true up
    adjustments between our analysis of usage information and the
    statements received during 2010.
    When we have no timely access to the usage information
    (i.e. under the monthly subscription basis), the criteria
    specified under ASC 605 are not met prior to our receiving
    the billing statements from China Mobile, as we cannot reliably
    determine the revenues earned in that period due to our limited
    relationship history with China Mobile and our lacking the
    information necessary to make a reliable estimate. Accordingly,
    revenues are recognized in the period in which the service is
    performed only if the billing statements for the related period
    have been received prior to the issuance of our financial
    statements. We have applied such policy on a consistent basis. 
   
 
   
 
   
  Revenue-Sharing
    Arrangements with Authors
  605-45
  Copyright
    Licensing
   83




---



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Online
    Advertising
    Offline
    Revenues
      first-in-first-out
    sub-distribution
 84




---



##### Table of Contents



605-50
  Property
    and Equipment and Intangible Assets
    Impairment
    of Goodwill and Long-Lived Assets
       85




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Income
    Taxes and Valuation Allowance
    740-10-25 Accounting for Uncertainty in Income Taxes 
    An interpretation of FASB Statement No. 109 740-10-25,
  Share-Based
    Compensation
    Accounting for stock-based compensation
 86




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Business
    Tax and Value-Added Tax
 
   
  Inventory
    Write-Downs
     
   
 87




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Results
    of Operations
  period-to-period
  For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

%

RMB

%

RMB

US$

%

RMB

%

RMB

US$

%(in thousands, except percentages)Net revenues:Online business


52,976



100.0



98,629



73.3



207,543



31,694



52.8



29,918



62.1



83,101



12,690



59.9Offline business










35,922



26.7



185,471



28,324



47.2



18,270



37.9



55,648



8,498



40.1Total net revenues


52,976



100.0



134,551



100.0



393,014



60,018



100.0



48,188



100.0



138,749



21,188



100.0Cost of revenues:Online business


(46,816
)


(88.4
)


(85,459
)


(63.5
)


(171,616
)


(26,208
)


(43.7
)


(25,132
)


(52.1
)


(54,183
)


(8,274
)


(39.1
)Offline business










(22,533
)


(16.8
)


(156,523
)


(23,903
)


(39.8
)


(15,213
)


(31.6
)


(44,110
)


(6,736
)


(31.7
)Total cost of revenues


(46,816
)


(88.4
)


(107,992
)


(80.3
)


(328,139
)


(50,111
)


(83.5
)


(40,345
)


(83.7
)


(98,293
)


(15,010
)


(70.8
)Gross profit:Online business


6,160



11.6



13,170



9.7



35,927



5,486



9.1



4,786



10.0



28,918



4,416



20.9Offline business










13,389



10.0



28,948



4,421



7.4



3,057



6.3



11,538



1,762



8.3Total gross profit


6,160



11.6



26,559



19.7



64,875



9,907



16.5



7,843



16.3



40,456



6,178



29.2Operating expenses:Sales and marketing


(20,045
)


(37.8
)


(72,083
)


(53.6
)


(69,765
)


(10,654
)


(17.8
)


(13,153
)


(27.3
)


(20,786
)


(3,174
)


(15.0
)General and administrative


(10,612
)


(20.0
)


(28,679
)


(21.3
)


(62,169
)


(9,494
)


(15.8
)


(11,298
)


(23.4
)


(21,794
)


(3,328
)


(15.7
)Product development


(467
)


(0.9
)


(2,588
)


(1.9
)


(6,024
)


(920
)


(1.5
)


(575
)


(1.2
)


(2,109
)


(322
)


(1.5
)Total operating expenses


(31,124
)


(58.7
)


(103,350
)


(76.8
)


(137,958
)


(21,068
)


(35.1
)


(25,026
)


(51.9
)


(44,689
)


(6,824
)


(32.2
)Gain on bargain purchase


















7,398



1,130



1.9



















Loss from operations


(24,964
)


(47.1
)


(76,791
)


(57.1
)


(65,685
)


(10,031
)


(16.7
)


(17,183
)


(35.7
)


(4,233
)


(646
)


(3.1
)Interest income


2,172



4.1



870



0.6



1,805



276



0.5



233



0.5



1,066



163



0.8Interest expenses


















(3,155
)


(482
)


(0.8
)










(1,130
)


(173
)


(0.8
)Other income (expenses)


636



1.2



(324
)


(0.2
)


2,223



339



0.6



(123
)


(0.3
)


15



2



Loss before income tax expenses and equity in earning of
    affiliated companies


(22,156
)


(41.8
)


(76,245
)


(56.7
)


(64,812
)


(9,898
)


(16.4
)


(17,073
)


(35.4
)


(4,282
)


(654
)


(3.1
)Income tax benefit (expenses)


(253
)


(0.5
)


1,157



0.9



5,485



838



1.4



1,206



2.5



(521
)


(80
)


(0.4
)Equity in earning (loss) of affiliated companies


(95
)


(0.2
)


585



0.4



2,849



435



0.7



574



1.2



1,113



170



0.8Net loss


(22,504
)


(42.5
)


(74,503
)


(55.4
)


(56,478
)


(8,625
)


(14.4
)


(15,293
)


(31.7
)


(3,690
)


(564
)


(2.7
)Net loss attributable to non-controlling interests


398



0.8



1,078



0.8



11,684



1,785



3.0



2,046



4.2



3,217



491



2.3Net income attributable to redeemable non-controlling interests


















(77
)


(12
)














(523
)


(79
)


(0.4
)Net loss attributable to Cloudary Corporation


(22,106
)


(41.7
)


(73,425
)


(54.6
)


(44,871
)


(6,852
)


(11.4
)


(13,247
)


(27.5
)


(996
)


(152
)


(0.7
)Series A preference shares redemption value accretion


















(510
)


(78
)


(0.1
)










(1,669
)


(255
)


(1.2
)Net loss attributable to Cloudary Corporations ordinary
    shareholder


(22,106
)


(41.7
)


(73,425
)


(54.6
)


(45,381
)


(6,930
)


(11.5
)


(13,247
)


(27.5
)


(2,665
)


(407
)


(1.9
)  88




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##### Table of Contents



Reportable
    Segments
    For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011Net

Gross

Gross

Net

Gross

Gross

Net

Gross

Gross

Net

Gross

Gross

Net

Gross

GrossRevenues

Profit

Margin

Revenues

Profit

Margin

Revenues

Profit

Margin

Revenues

Profit

Margin

Revenues

Profit

MarginRMB

RMB

%

RMB

RMB

%

RMB

RMB

%

RMB

RMB

%

RMB

RMB

%(in thousands, except percentages)Reportable Segments:Online business


52,976



6,160



11.6



100,051



14,592



14.6



215,694



45,317



21.0



30,345



4,921



16.2



84,188



29,815



35.4Offline business














35,922



12,048



33.5



185,471



19,574



10.6



18,270



2,922



16.0



55,648



10,641



19.1Elimination














(1,422
)


(81
)






(8,151
)


(16
)






(427
)










(1,087
)






Total


52,976



6,160



11.6



134,551



26,559



19.7



393,014



64,875



16.5



48,188



7,843



16.3



138,749



40,456



29.2   Three
    Months Ended March 31, 2011 Compared to Three Months Ended
    March 31, 2010
  Net Revenues.
  Online Business.Net revenues generated from
    our online business increased 177.8% to RMB83.1 million
    (US$12.7 million) in the first quarter of 2011 from
    RMB29.9 million in the first quarter of 2010, primarily due
    to the growth of revenues from wireless service and online paid
    users service.Net revenues from wireless service significantly increased to
    RMB32.9 million (US$5.0 million) in the first quarter
    of 2011 from RMB5.0 million in the first quarter of 2010 as
    a result of the increase in the number of titles made available
    to China Mobile and rapid growth of total fees paid by mobile
    users to access our literary content through China Mobiles
    wireless network. The number of titles made available to China
    Mobiles users increased to 23,315 titles in the first
    quarter of 2011 from 12,139 titles in the first quarter of 2010.Net revenues from online paid users increased 110.7% to
    RMB34.6 million (US$5.3 million) in the first quarter
    of 2011 from RMB16.4 million in the first quarter of 2010,
    primarily due to growth of our active paying users which was
    achieved primarily through organic growth of our existing online
    business as we continued to offer more paid content that appeal
    to readers and, to a lesser extent, by acquiring new websites in
    2010.Our active paying users grew 115% to 1.1 million active
    paying users in the first quarter of 2011 from 0.5 million
    active paying users in the first quarter of 2010. 
  Net revenues from our websites grew by 60.9% from the first
    quarter of 2010 to the same period of 2011, representing 55% of
    the growth of our net online revenues. The acquisition of
    several of our websites in 2010 contributed to the remaining
    growth. 
 
  Offline Business.Net revenues generated from
    our offline business increased significantly to
    RMB55.6 million (US$8.5 million) in the first quarter
    of 2011 from RMB18.3 million in the first quarter of 2010,
    primarily due to the acquisition of Beijing Zhongzhi Bowen Book
    Co., Ltd., or Zhongzhi, in 2010. Net revenues from our existing
    two offline companies, Tianjin Jushi Wenhua Book Distribution
    Co., Ltd., or Jushi, and Tianjin Huawen Tianxia Book Co., Ltd.,
    or Huawen, grew by 62.3% from the first quarter of 2010 to the
    same period of 2011 because we successfully marketed more titles
    in the first quarter of 2011, contributing to 30.4% of the 
 89




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##### Table of Contents



growth of our net offline revenues in the same period. Zhongzhi
    contributed to the remaining 69.6% of the growth of our net
    offline revenues.  Cost of Revenues.
  Online Business.Cost of revenues relating to
    our online business increased 113.9% to RMB54.2 million
    (US$8.3 million) in the first quarter of 2011 from
    RMB25.1 million in the first quarter of 2010, primarily due
    to the significant increase in copyright licensing costs.
    Copyright licensing costs increased to RMB40.8 million
    (US$6.2 million) in the first quarter of 2011 from
    RMB16.5 million in the first quarter of 2010 as a result of
    the overall increase in payments to authors under the
    revenue-sharing agreements.To a lesser extent, the increase in our online cost of revenues
    reflected the increased salaries and benefits for our online
    professional editors to RMB7.4 million
    (US$1.1 million) in the first quarter of 2011 from
    RMB5.8 million in the first quarter of 2010, primarily due
    to the expansion of our online professional editor team. We had
    149 online professional editors as of March 31, 2011
    compared to 97 online professional editors as of
    March 31, 2010.Offline Business.Cost of revenues relating to
    our offline business increased 189.9% to RMB44.1 million
    (US$6.7 million) in the first quarter of 2011 from
    RMB15.2 million in the same period of 2010, primarily due
    to increases in book production cost and inventory write-downs.Book production cost significantly increased to
    RMB34.8 million (US$5.3 million) in the first quarter
    of 2011 from RMB10.8 million in the same period of 2010,
    primarily driven by the increase in the sales volume of our
    offline books, which grew significantly from 1.6 million
    books to 6.0 million books.Inventory write-downs increased to RMB5.6 million
    (US$0.9 million) in the first quarter of 2011 from
    RMB2.5 million in the first quarter of 2010, reflecting the
    increase in inventory balance in line with the expansion of our
    offline books.  Gross Profit and Gross Margin.
  Online Business.Gross profit for our online
    business significantly increased to RMB28.9 million
    (US$4.4 million) in the first quarter of 2011 from
    RMB4.8 million in the first quarter of 2010. Gross margin
    for our online business increased to 34.8% from 16.0% during the
    same period primarily due to the decreases in copyright
    licensing cost and salaries and benefits as percentages of our
    total online revenues.  
    Offline Business.Gross profit for our offline
    business significantly increased to RMB11.5 million
    (US$1.8 million) in the first quarter of 2011 from
    RMB3.1 million in the first quarter of 2010. Gross margin
    for our offline business increased to 20.7% from 16.7% during
    the same period primarily due to the higher gross margin of our
    newly acquired offline company Zhongzhi, which typically
    publishes books that have been commissioned by our editorial
    staff based on market demand and which have lower book
    production costs.  Operating Expenses.
  
    Sales and Marketing.Sales and marketing
    expenses increased 58.0% to RMB20.8 million
    (US$3.2 million) in the first quarter of 2011 from
    RMB13.2 million in the first quarter of 2010, primarily due
    to a RMB4.0 million (US$0.6 million) increase in
    shipping and handling expenses associated with our offline book
    distribution in line with the increase in the sales volumes of
    our offline books and the increase in salaries and employee
    benefits arising from increased headcount of our sales and
    marketing team, which was partially offset by a
    RMB2.3 million (US$0.4 million) decrease in
    advertising and marketing costs because we reduced the
    advertising activities in connection with the promotion of our
    brand name in the first 90




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quarter of 2011. As a percentage of our net revenues, sales and
    marketing expenses decreased to 15.0% in the first quarter of
    2011 from 27.3% in the first quarter of 2010.  
    General and Administrative.General and
    administrative expenses increased 92.9% to RMB21.8 million
    (US$3.3 million) in the first quarter of 2011 from
    RMB11.3 million in the first quarter of 2010, reflecting
    (i) a RMB3.6 million (US$0.6 million) increase in
    professional and other expenses including audit, valuation and
    other professional services fees in connection with this
    offering, (ii) an expense of RMB2.6 million
    (US$0.4 million) incurred in the first quarter of 2011
    because we recognized a portion of the acquisition consideration
    for certain of our acquired entities as compensation to the
    selling shareholders for their continued employment with us
    after the acquisition, and (iii) a RMB2.5 million
    (US$0.4 million) increase in salaries and employee benefits
    arising from increased headcount of our administrative staff
    team. As a percentage of our net revenues, general and
    administrative expenses decreased to 15.7% in the first quarter
    of 2011 from 23.4% in the first quarter of 2010.
    Product Development.Product development
    expenses significantly increased to RMB2.1 million
    (US$0.3 million) in the first quarter of 2011 from RMB0.6
    million in the first quarter of 2010, primarily due to increases
    in salaries, employee benefits and other headcount-related
    expenses and office expenses as we hired additional product
    development staff and devoted more resources to the development
    of our websites and services.  Interest Income.
  Interest Expenses.
  Other Income (Expenses), Net.
  Income Tax Benefit (Expenses).
  Equity in Earning of Affiliated Companies. jjwxc.net
  Net Loss.
  Net Loss Attributable to Non-Controlling
    Interests.
  Net Loss Attributable to Cloudary
    Corporation. qidian.com
  Year
    Ended December 31, 2010 Compared to Year Ended
    December 31, 2009
  Net Revenues.
  
    Online Business.  Net revenues generated from
    our online business increased 110.4% to RMB207.5 million
    (US$31.7 million) in 2010 from RMB98.6 million in
    2009, primarily due to the growth of revenues from wireless
    service and online paid users service. 91




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Net revenues from wireless service significantly increased to
    RMB60.4 million (US$9.2 million) in 2010 from
    RMB5.8 million in 2009 as a result of the rapid growth of
    total fees paid by mobile users to access our literary content
    through China Mobiles wireless network as China Mobile
    commercially launched its wireless central reading station in
    January 2010.Net revenues from online paid users increased significantly to
    RMB103.6 million (US$15.8 million) in 2010 from
    RMB54.2 million in 2009, primarily due to growth of our
    active paying users which was achieved primarily through organic
    growth of our existing online business as we continued to offer
    more paid content that appeal to readers and, to a lesser
    extent, by acquiring certain new websites in 2010. Our active
    paying users grew 126.0% to 950,625 active paying users in the
    fourth quarter of 2010 from 420,645 active paying users in the
    fourth quarter of 2009. 
  Net revenues from our websites grew by 54.4% from 2009 to 2010,
    contributing to 59.5% of the growth of our net online revenues.
    The acquisition of the new websites in 2010 contributed to the
    remaining growth. 
 
  
    Offline Business.  Net revenues generated from
    our offline business increased significantly to
    RMB185.5 million (US$28.3 million) in 2010 from
    RMB35.9 million in 2009, primarily due to our acquisition
    in March 2010 of Zhongzhi, which operates a book publishing and
    distribution business. In addition, this growth reflected the
    2010 full-year operations of Jushi, which was established in
    June 2009 and Huawen, which we acquired in June 2009. The
    organic growth of our existing offline business also contributed
    to such significant increase because we successfully marketed
    more popular titles in 2010. 
  Cost of Revenues.
  
    Online Business.  Cost of revenues relating to
    our online business increased 100.7% to RMB171.6 million
    (US$26.2 million) in 2010 from RMB85.5 million in
    2009, primarily due to the significant increase in copyright
    licensing costs. Copyright licensing costs increased to
    RMB122.8 million (US$18.8 million) in 2010 from
    RMB59.2 million in 2009 as a result of the overall increase
    in payments to authors under the revenue-sharing agreements. In
    addition, we paid more premium in copyright acquisition or
    licensing costs in 2010 to retain additional prominent authors.    
    Offline Business.  Cost of revenues relating to
    our offline business increased significantly to
    RMB156.5 million (US$23.9 million) in 2010 from
    RMB22.5 million in 2009, primarily due to increases in book
    production cost and inventory write-downs.      Gross Profit and Gross Margin.
  
    Online Business.  Gross profit for our online
    business increased 172.8% to RMB35.9 million
    (US$5.5 million) in 2010 from RMB13.2 million in 2009.
    Gross margin for our online business increased to 17.3% from 92




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##### Table of Contents



13.4% during the same period primarily due to the scale effect
    with respect to salaries and benefits paid to our online
    professional editors.  
    Offline Business.  Gross profit for our offline
    business increased 116.2% to RMB28.9 million
    (US$4.4 million) in 2010 from RMB13.4 million in 2009.
    Gross margin for our offline business decreased to 15.6% from
    37.3% during the same period primarily due to the significant
    increase in inventory write-downs and book production cost as
    percentages of our total offline revenues.  Operating Expenses.
  
    Sales and Marketing.  Sales and marketing
    expenses decreased 3.2% to RMB69.8 million
    (US$10.7 million) in 2010 from RMB72.1 million in
    2009, primarily due to a RMB28.2 million
    (US$4.3 million) decrease in advertising and marketing
    costs, which was partially offset by increases in salaries,
    employee benefits and other expenses in the amount of
    RMB8.9 million (US$1.4 million) arising from increased
    headcount of our sales and marketing team. We incurred
    significant advertising and marketing costs to promote our brand
    awareness in 2009 and reduced such activities in 2010 as we
    decided to rely more on the effect of
    word-of-mouth
    and other community-based activities for our marketing and
    promotion. As a percentage of our net revenues, sales and
    marketing expenses decreased to 17.8% in 2010 from 53.6% in 2009.
    General and Administrative.  General and
    administrative expenses increased 116.8% to RMB62.2 million
    (US$9.5 million) in 2010 from RMB28.7 million in 2009,
    reflecting a RMB18.0 million (US$2.7 million) increase
    in salaries and employee benefits and increases in travel,
    share-based compensation and other expenses arising from
    increased headcount of our administrative staff team and rental
    and office expenses as a result of our office space expansion.
    This increase also reflected an expense of RMB6.3 million
    (US$1.0 million) incurred in 2010 because we recognized a
    portion of the acquisition consideration for certain of our
    acquired entities as compensation to the selling shareholders
    for their continued employment with us after the acquisition. As
    a percentage of our net revenues, general and administrative
    expenses decreased to 15.8% in 2010 from 21.3% in 2009.
    Product Development.  Product development
    expenses increased 132.7% to RMB6.0 million
    (US$0.9 million) in 2010 from RMB2.6 million in 2009,
    primarily due to increases in salaries, employee benefits and
    other headcount-related expenses and office expenses as we hired
    additional product development staff and devoted more resources
    to the development of our websites and services, including our
    platform.  Gain on Bargain Purchase.
  Interest Income.
 
  Interest Expenses.
 
  Other Income (Expenses), Net.
  Income Tax Benefit (Expenses).
 93




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Equity in Earning of Affiliated Companies. jjwxc.net,
  Net Loss.
  Net Loss Attributable to Non-Controlling
    Interests.
  Net Loss Attributable to Cloudary
    Corporation.
  Year
    Ended December 31, 2009 Compared to Year Ended
    December 31, 2008
  Net Revenues.
  
    Online Business.  Net revenues generated from
    our online business increased 86.2% to RMB98.6 million in
    2009 from RMB53.0 million in 2008, reflecting the overall
    growth of our online business. Net revenues from online
    advertising services grew to RMB19.7 million in 2009 from
    RMB3.0 million in 2008 as our websites attracted more
    advertisers. The number of advertisers increased significantly
    to 122 as of December 31, 2009 from 59 as of
    December 31, 2008, representing growth of 107%.  qidian.com hongxiu.com
  qidian.com
  
    Offline Business.  We commenced our offline
    business through the establishment of Jushi in June 2009 and the
    acquisition of Huawen in June 2009. Net revenues generated from
    our offline business amounted to RMB35.9 million in 2009.  Cost of Revenues.
  
    Online Business.  Cost of revenues relating to
    our online business increased 82.7% to RMB85.5 million in
    2009 from RMB46.8 million in 2008, primarily due to
    increases in copyright licensing costs and salaries, employee
    benefits and other expenses. Copyright licensing costs relating
    to our online business increased to RMB59.2 million in 2009
    from RMB35.5 million in 2008 as we acquired or licensed
    more literary content for our operations. We incurred additional
    costs of RMB8.8 million in connection with salaries and
    benefits for our online professional editors, as our editorial
    team expanded to 119 in 2009 from 42 in 2008.
    Offline Business.  Cost of revenues relating to
    our offline business amounted to RMB22.5 million in 2009,
    which primarily consisted of RMB17.9 million book
    production cost, RMB2.6 million headcount-based salaries
    and benefits for our offline professional editors, and
    RMB1.3 million office, travel and communication expenses
    attributable to our offline professional editors.  Gross Profit and Gross Margin.
 94




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##### Table of Contents




    Online Business.  Gross profit for our online
    business increased 113.8% to RMB13.2 million in 2009 from
    RMB6.2 million in 2008, in line with the significant growth
    of revenues in all of our four online business sectors as
    described above. Gross margin for our online business increased
    to 13.4% from 11.6% during the same period primarily due to the
    decrease in copyright licensing cost as a percentage of our
    total online revenues.
    Offline Business.  Gross profit for our offline
    business amounted to RMB13.4 million and gross margin was
    37.3% in 2009.  Operating Expenses.
  
    Sales and Marketing.  Sales and marketing
    expenses increased 259.6% to RMB72.1 million in 2009 from
    RMB20.0 million in 2008, primarily due to a
    RMB35.8 million increase in advertising and marketing
    expenses to promote our brand in 2009. Such increase also
    reflected a RMB6.6 million increase in headcount-related
    salaries and other expenses due to the expansion of our sales
    and marketing team. As a percentage of our net revenues, sales
    and marketing expenses increased to 53.6% in 2009 from 37.8% in
    2008.
    General and Administrative.  General and
    administrative expenses increased 170.3% to RMB28.7 million
    in 2009 from RMB10.6 million in 2008, primarily due to a
    RMB15.4 million increase in headcount-related salaries and
    other expense as we hired additional general and administration
    staff to build up our headquarters in Shanghai in 2009. As a
    percentage of our net revenues, general and administrative
    expenses increased to 21.3% in 2009 from 20.0% in 2008.
    Product Development.  Product development
    expenses significantly increased to RMB2.6 million in 2009
    from RMB0.5 million in 2008, primarily due to increases in
    headcount-related salaries and other expenses as we hired
    additional staff to develop new products and security and
    anti-piracy software.  Interest Income.
  Other Income (Expenses), Net.
  Income Tax Benefit (Expenses).
  Equity in Earning (Loss) of Affiliated
    Companies. jjwxc.net jjwxc.net
  Net Loss.
  Net Loss Attributable to Non-Controlling
    Interests.
  Net Loss Attributable to Cloudary
    Corporation.
  Selected
    Quarterly Results of Operations
   95




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##### Table of Contents



Quarter-to-quarter
  Three Months EndedMarch 31,

June 30,

September 30,

December 31,

March 31,2010

2010

2010

2010

2011(RMB in thousands)(Unaudited)Net revenues:Online business


29,918



50,505



63,387



63,733



83,101Offline business


18,270



48,702



54,833



63,665



55,648Total net revenues


48,188



99,207



118,220



127,399



138,749Cost of revenues:Online business


(25,132
)


(43,418
)


(52,984
)


(50,082
)


(54,183
)Offline business


(15,213
)


(37,586
)


(45,346
)


(58,378
)


(44,110
)Total cost of revenues


(40,345
)


(81,004
)


(98,330
)


(108,460
)


(98,293
)Gross profit:Online business


4,786



7,087



10,403



13,651



28,918Offline business


3,057



11,116



9,487



5,288



11,538Total gross profit


7,843



18,203



19,890



18,939



40,456Operating expenses:Sales and marketing


(13,153
)


(16,340
)


(18,682
)


(21,590
)


(20,786
)General and administrative


(11,298
)


(15,002
)


(16,225
)


(19,644
)


(21,794
)Product development


(575
)


(1,297
)


(1,712
)


(2,440
)


(2,109
)Total operating expenses


(25,026
)


(32,639
)


(36,619
)


(43,674
)


(44,689
)Gain on bargain purchase






6,501







897



Loss from operations


(17,183
)


(7,935
)


(16,729
)


(23,838
)


(4,233
)Interest income


233



301



435



836



1,066Interest expenses






(865
)


(1,211
)


(1,079
)


(1,130
)Other income (expenses)


(123
)


722



79



1,545



15Loss before income tax expenses and equity in earning of
    affiliated company


(17,073
)


(7,777
)


(17,426
)


(22,536
)


(4,282
)Income tax benefit (expenses)


1,206



244



1,481



2,554



(521
)Equity in earning of affiliated company


574



658



974



643



1,113Net loss


(15,293
)


(6,875
)


(14,971
)


(19,339
)


(3,690
)      96




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##### Table of Contents



Liquidity
    and Capital Resources
        For the Year Ended December 31,

For the Three Months Ended March 31,2008

2009

2010

2010

2011RMB

RMB

RMB

US$

RMB

RMB

US$(in thousands)Net cash used in operating activities


(5,220
)


(75,500
)


(99,795
)


(15,240
)


(50,259
)


(47,001
)


(7,178
)Net cash used in investing activities


(28,303
)


(118,494
)


(45,449
)


(6,941
)


(76,675
)


(11,514
)


(1,758
)Net cash provided by financing activities






300,000



305,641



46,675



100,000







Effect of exchange rate changes on cash


6



(6
)


(2,149
)


(328
)


(312
)


(141
)


(21
)Net increase/(decrease) in cash and cash equivalents


(33,517
)


106,000



158,248



24,166



(27,246
)


(58,656
)


(8,957
)Cash and cash equivalents at the beginning of year


68,875



35,358



141,358



21,587



141,358



299,606



45,753Cash and cash equivalents at the end of year


35,358



141,358



299,606



45,753



114,112



240,950



36,796   Operating
    Activities
     97




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Investing
    Activities
         98




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##### Table of Contents



Financing
    Activities
          Capital
    Expenditures
    Contractual
    Obligations, Commitments and Contingencies
    Payment Due by PeriodLess than

1-3

3-5

More thanTotal

1 Year

Years

Years

5 Years(RMB in thousands)Operating lease
    obligations(1)


15,780



9,343



6,437







Long-term
    debt(2)


436,569







436,569







Total


452,349



9,343



443,006    (1)
    
    Rental expenses for all leases were
    approximately RMB1.6 million, RMB5.7 million,
    RMB13.1 million (US$2.0 million) and
    RMB4.5 million (US$0.7 million) in 2008, 2009, 2010
    and March 31, 2011, respectively.(2)
    
    As of March 31, 2011,
    obligations under our long-term loans related to our repayment
    obligations under the loan agreements with Shanda Interactive
    and Shanda Networking. We had the following borrowings from
    Shanda Interactive outstanding as of March 31, 2011:
    (i) a US$4.8 million (equivalent to
    RMB31.8 million) interest-free loan, repayable in May 2013;
    and (ii) a US$721,813 (equivalent to 1.0 million
    Singapore dollars) loan with an interest rate of 2.09% per
    annum, repayable in July 2013.As of March 31, 2011, we had
    the following borrowings from Shanda Networking outstanding:
    (i) a RMB300.0 million interest-free loan, repayable
    in June 2012; (ii) a RMB10.3 million interest-free
    loan, repayable in March 2013; and (iii) a
    RMB89.7 million loan with an interest rate of 5.04% per
    annum, repayable in December 2013.   zubunet.com
   99




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Off-Balance
    Sheet Arrangements
    Holding
    Company Structure
           100




---



##### Table of Contents



Quantitative
    and Qualitative Disclosure about Market Risk
    Foreign
    Exchange Risk
       101




---



##### Table of Contents



Interest
    Rate Risk
    Inflation
  year-over-year
  Recent
    Accounting Pronouncements
      over-the-counter
   102




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##### Table of Contents



2011-04,
 103




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##### Table of Contents



OUR
    INDUSTRY  Overview
  e-commerce
   
  
    Creation  Online literature platforms
    enable a large number of individuals to more easily create and
    publish content for a broad audience. We believe online
    literature platforms provide a more efficient and transparent
    forum for readers and online literature websites to discover and
    identify talented authors. Successful online authors earn
    significant income and gain recognition from the online
    community for their literary works. 
  
    Distribution  Online literature was
    initially distributed through web pages of different online
    communities to be read on desktop computers. However, the
    proliferation of mobile connected devices, including
    smartphones, mobile tablets,
    e-readers
    and other mobile devices, makes it possible for online literary
    content to be distributed and accessed virtually anywhere.
    Consumption  The interactive characteristics
    and community functions of online literature platforms make
    reading and writing a more engaging experience, where an
    increasing number of users search, read, comment on and share
    literary works and offer encouragement and support to their
    favorite authors.
    Monetization  After more than a decade of
    development, the online literature industry has developed a
    monetization model that covers online paid reading, wireless
    subscription, targeted advertising and copyright licensing to
    various entertainment industries. 
   
  Internet
    Market in China
    Mobile
    Phone Market in China
  Largest Number of Mobile Phone Users in the
    World.
 104




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##### Table of Contents



Rapid Growth of Mobile Internet
    Usage.
  Online
    Literature Market in China
  Size and Growth of Chinas Original Online Literature
    Industry.
  China
    Original Online Literature Market Breakdown
  CAGRMarket size:

2008

2009

2010

2011F

2012F

2013F

2008-2010

2010-2013F(RMB in millions, except percentages)Online paid users


85



102



174



270



441



768



43.1
%


64.0
%Wireless service


0



24



72



159



314



672



NA



110.5
%Online advertising


10



15



33



64



137



288



81.7
%


105.9
%Copyright licensing


5



9



21



37



88



192



104.9
%


109.1
%Total online literature market


100



150



300



530



980



1,920



73.2
%


85.7
%Revenue
    breakdown:Online paid users


85
%


68
%


58
%


51
%


45
%


40
%Wireless service


0
%


16
%


24
%


30
%


32
%


35
%Online advertising


10
%


10
%


11
%


12
%


14
%


15
%Copyright licensing


5
%


6
%


7
%


7
%


9
%


10
%Total


100
%


100
%


100
%


100
%


100
%


100
%     Source: iResearch report
 
  User Growth, Penetration and
    Demographics. on-the-go
 
 105




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##### Table of Contents



qidian.com hongxiu.com
 
  Market Concentration. zongheng.com 17k.com
  Monetization.
  Online Paid Users. qidian.com
  Wireless Service.
 
  Online Advertising.
 
  Copyright Licensing.
 106




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Piracy.
  Mobile
    Literature Market in China
    e-readers, e-readers e-readers
  Offline
    Publication Market in China
   107




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##### Table of Contents



Retail value

2008

2009

2010

CAGR(RMB in millions, except percentages)Cloudary(1)


282



294



577



43.0
%Market share


0.8
%


0.8
%


1.6
%Motie


220



385



444



42.2
%Market share


0.6
%


1.1
%


1.2
%Dolphin Media


255



291



329



13.7
%Market share


0.7
%


0.8
%


0.9
%Booky


146



233



315



46.5
%Market share


0.4
%


0.6
%


0.9
%Xin Jing Dian


171



280



311



34.9
%Market share


0.5
%


0.8
%


0.8
%Aggregated retail value of the top five private offline
    publishers


1,074



1,482



1,976



35.6
%Total offline publishing market


34,867



36,335



37,000



3.0
%Market share


3.1
%


4.1
%


5.3
%     Source: Openbook
  (1)
    
    Based on the aggregate book retail
    value of Tianjin Jushi Wenhua Book Distribution Co., Ltd.,
    Tianjin Huawen Tianxia Book Co., Ltd. and Tianjin Zhongzhi Bowen
    Book Co., Ltd., which are subsidiaries of Shanghai Hongwen
    Network Technology Co., Ltd., our affiliated PRC entity.   108




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##### Table of Contents



BUSINESS  Our
    Mission
    Overview
    qidian
  work-in-progress,
  Dou Po Cang Qiong baidu.com The Desolation of the Ancient Path
    at Yangguan
   109




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Our
    Strengths
    Largest
    online Chinese literature community
   
  works-in-progress, qidian.com
 
    Largest
    and popular original online literary content
    library
   110




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##### Table of Contents



Dou Po Cang Qiong baidu.com
  Multiple
    channels and methods to monetize content
    
    Online Paid Users.  Our qidian.compioneered the online paid reading model in China, which has
    become a standard practice in Chinas online literature
    industry. Under this model, we charge users for viewing premium
    content on our websites. Further, qidian.comis among the
    first to offer paid community tools that enable users to provide
    encouragement and support to their favorite authors or to
    enhance their community experience. In addition, we have entered
    into arrangements to promote and distribute our content through
    several third-party websites.
    Wireless Service.  We have entered into content
    distribution arrangements with all three wireless carriers in
    China. We were the largest paid content provider for China
    Mobiles central reading station in 2010 accounting for
    nearly 50% of its revenues from such central reading station
    according to the iResearch report. We provided approximately 60%
    of bestselling novels in 2010 on China Mobiles central
    reading station according to the iResearch report. We also
    entered into revenue-sharing arrangements with WAP operators,
    including qq.com.
    Online Advertising.  We offer attractive
    advertising services because of the significant amount of user
    time spent on our websites, the page views generated by our
    content, and our capability to offer more targeted advertising
    as a result of the distinctive reader demographics of particular
    literature genres.
    Copyright Licensing.  As we own the copyright
    to a significant portion of the premium content in our original
    online literature library, we license the copyright of a
    selection of our titles to companies in other entertainment
    industries. We have licensed the adaptation rights to certain
    novels in our content library, including Ghost Blows Out the
    Light, Legend of Immortalsand My Boss is a Beautiful
    Girl, to gaming companies and film and television producers.
    Our copyright licensing capability is further enhanced by the
    establishment in March 2011 of Beijing Shanda New Classics
    Film & TV Culture Co., Ltd., or Shanda New Classics,
    an entity established by us and New Classics Entertainment
    Group, a leading television and film producer in China. Shanda
    New Classics focuses on the development of literary works
    generated by our online community into movie and television
    scripts.
    Offline Publications.  We distribute our books
    throughout China through more than 70 state-owned
    bookstores, over 440 private wholesalers, and online
    booksellers, including dangdang.com, amazon.cn and
    360buy.com. In 2010, we ranked first among all the
    private publishing companies in China in terms of retail value,
    according to Openbook.  e-readers,
  Strong
    brand recognition
  qidian.com
 111




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##### Table of Contents



Qidian.com Rongshuxia.com
  Experienced
    management team with complementary skills in literature and
    online media
  rongshuxia.com readnovel.com sina.com sina.com sina.com qidian.com
  Our
    Strategies
    Continue
    to attract, develop and retain promising and established authors
    and increase the breadth and depth of our content
    library
    Further
    expand our user base and improve their experience
    Continue
    to expand and diversify our revenue sources
   112




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e-readers
  Expand
    internationally
    Our
    Business Operations
  e-book e-readers,
  Our
    Online Literature Community
   113




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##### Table of Contents



Our
    Websites
    Market RankingMonthly UniqueName

Visitors(1)

User Time
    Spent(2)

HighlightsQidian.com


No. 1



No. 1


   Launched in 2002 and primarily attracts
    male readers between the ages of 19 and 35   Pioneered the paid reading model, which
    has become a standard practice in Chinas online literature
    industry   As of March 31, 2011, top 10 titles
    attracted in the aggregate approximately 622.0 million page
    views and 8.0 million comments since they were first posted   Well-known for fantasy novels. Also
    offers wuxia, sci-fi, history and military fictionReadnovel.com


No. 4



No. 4


   Launched in 2004 and primarily attracts
    readers below the age of 25   Well-known for literary works on
    subjects concerning campus lifeHongxiu.com


No. 6



No. 9


   Launched in 1999 and primarily attracts
    white-collar female readers   One of its literary works, The
    Desolation of the Ancient Path at Yangguan, was selected as
    reading test material for Chinas college entrance exam in
    2008 and excerpted in Chinese textbooks for middle school
    students in Hong Kong published by Oxford University Press   Well-known for romance, prose, poetry
    and short storiesXs8.cn


No. 8



No. 3


   Launched in 2005   Well-known for romance novels, and also
    offers horror and mystery fictionXxsy.net


No. 10



No. 7


   Launched in 2001 and primarily attracts
    female readers, especially housewives   Well-known for literary works on
    subjects concerning contemporary life and fantasyRongshuxia.com


No. 13



No. 14


   Launched in 1997 and is the literature
    website with the longest operating history in mainland China,
    according to the iResearch report   Leading culture-driven online literature
    platform   Well-known for book reviews written by
    professional reviewers and famous authors     (1)
    
    Based on the average number of
    monthly unique visitors in 2010, according to the iResearch
    report. A unique visitor refers to the visitor from
    the same IP address. Monthly unique visitors refers
    to the number of unique visitors to a specific website within a
    given month. Once an individual has visited a site in a given
    month, all subsequent visits from the same IP address during
    such month do not count towards the monthly unique visitor
    number. The aggregate number of monthly unique visitors to our
    six literature websites is the sum of monthly unique visitors to
    each website. As an individual with a unique IP address may
    access more than one of our websites, we may count such visitor
    more than once in such calculation and, as more than one
    individual may use a computer terminal with a unique IP address,
    more than one individual may be counted as a single unique
    visitor. The average number of monthly unique visitors in 2010
    is the average of the monthly unique visitors in each of the
    12 months of 2010.(2)
    
    Based on user time spent in 2010,
    according to the iResearch report. User time spent
    refers to the time an user spent on a webpage after he has
    opened the webpage for more than three seconds but excludes any
    time period during which there is no activity on the same
    webpage for more than 30 minutes without any action until
    further action by the user occurs. User time spent on a website
    in a given period is calculated by aggregating the user time
    spent by each user on the website in such given period. 114




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##### Table of Contents



qidian.com qdmm.com Qdmm.com qidian.com sdl.sg
  yzsc.com.cn yzsc.com.cn
  tingbook.com zubunet.com,
  
    Tingbook.com.  Established in 2004, we believe
    tingbook.comis the largest audio book website in China
    that allows its users to listen online or download audio books
    to various devices, including mobile phones, mobile tablets,
    e-readers,
    and MP3 players.
    Zubunet.com.  Established in 2005,
    zubunet.comprovides an open platform for users to
    download electronic copies of the bestselling magazines in
    China, including China Newsweek, Caijing Magazine and Southern
    People Weekly. Users can access the magazines on
    zubunet.com through personal computers, iPad or other
    mobile tablets.  Our
    Authors
  work-in-progress
    Qidian.com
  Our
    Readers
  works-in-progress
 115




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##### Table of Contents



Our
    Professional Editors
    work-in-progress
  Our
    Community Tools
    
    Personal Space.  A registered user can create a
    personal homepage that is accessible and searchable by other
    members. Registered users can post their blogs, photo album and
    certain personal information on their homepages and establish
    their own circles of friends who are also registered users. A
    registered user can also create a personal bookshelf to save,
    manage and share with other members his favorite works. See
     Our Readers.
    Virtual Gifting.  A registered user can support
    his favorite author by sending free or paid virtual gifts. A
    registered user can also motivate an author to update a work in
    progress more frequently by providing paid virtual gifts to the
    author on the condition that the author meets the users
    request, such as that a certain number of characters must be
    updated by the author before a certain deadline. The author can
    convert a paid virtual gift into cash from us at a certain
    percentage of its price. In addition, users can accumulate
    monthly tickets based on their consumption and
    points earned on our websites, and dispense such monthly tickets
    to the authors of their favorite works. Each month, the works on
    our websites are ranked according to the number of monthly
    tickets earned and the authors of the top ten to twenty works
    receive cash awards from us. Furthermore, through our paid
    answers service, a user can be rewarded by providing a
    satisfactory answer to a question posed by another user.
    Book Review Bar.  We create a space for each of
    the more popular literary works, whether it is a
    work-in-progress or finished, where fans can post their reviews,
    comments, feedback or questions to be discussed with others,
    including the author.
    Forum.  The forum is organized into different
    channels based on interest areas, where users, including
    readers, authors and our editors, can initiate topics, and
    exchange views and share comments on a given topic.  Our
    Offline Publishing Operations
   116




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##### Table of Contents



Publications
    and Target Market
    
    Huawen.  Founded in 2001, Huawen is primarily
    engaged in the publishing, licensing and distribution of
    literature and social science books. Huawens books also
    cover the subject areas of lifestyle, business and others. As of
    March 31, 2011, Huawen had published more than 2,540
    titles, including the bestselling literature book of 2010 in
    China, according to Openbook. Huawen has also introduced
    numerous overseas titles to mainland China.
    Zhongzhi.  Established in 2003, most of
    Zhongzhis publications are based on content in the public
    domain, including a selection of classics, or solicited by our
    editorial staff based on market demand. Its publications cover
    the subject areas of history, culture, encyclopedia, business,
    health and literature. As of March 31, 2011, Zhongzhi had
    published more than 1,880 titles. According to Openbook, in
    2010, Zhongzhi had more top 1,000 bestselling general interest
    titles than any other private publishing company in China.
    Jushi.  Established in 2009, Jushi is primarily
    engaged in publishing, licensing and distribution of literary
    works of contemporary authors. As of March 31, 2011, Jushi
    had published more than 310 titles, including the No. 3
    bestselling literature book of 2010 in China, according to
    Openbook.  Content
    Sourcing
    Review,
    Printing and Delivery
    Marketing
    and Promotion
   117




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##### Table of Contents



agreed-upon
  Distribution
  dangdang.com,
    amazon.cn 360buy.com
  Our
    Content
  revenue-sharing
  
    Ghost Blows Out the Light, also referred to as Candle
    in the Tomb, is a fantasy novel about two grave robbers
    seeking hidden treasure. First published on qidian.comin
    March 2006, it quickly became one of the bestselling online
    novels in China. It was published in print form in December
    2006. In July 2007, we licensed the movie adaptation right of
    the novel to a third-party movie studio. In March 2007, an
    affiliate entity of Shanda Games Limited licensed from us the
    right to develop an online game based on the novel.
    My Boss is a Beautiful Girlis a romantic comedy novel
    that follows the sparks, conflicts, and romance between a
    software programmer and his pretty boss. The novel was first
    published on hongxiu.comin 2006 and then published
    offline in the same year. In 2010, the novel was adapted to a
    movie bearing the same name.    Our
    Revenue Models
   118




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##### Table of Contents



Online
    Paid User Service
        Wireless
    Service
 
  revenue-sharing
 
  Online
    Advertising
  e-commerce,
      Copyright
    Licensing
  revenue-sharing
 119




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##### Table of Contents



Offline
    Publishing
    Marketing
  word-of-mouth
  
    Advertising on third-party Internet portals, such as
    baidu.comand hao123.com;
    Sponsoring public relations events such as university sporting
    competitions and music concerts ranging from small to
    large-scale performances; and
    Hosting receptions, press conferences, writing contests and
    other events for authors and journalists to improve the
    publicity of our authors and websites.    Sales
        Technology,
    Infrastructure and Internal Operations
  Infrastructure
    
    Servers.  We have over 512 servers that are
    currently located primarily in
    third-party
    data centers in Nanjing and Shanghai.
    Bandwidth.  Our content delivery network, or
    CDN, contracts are primarily with various third-party or
    affiliated agencies who in turn engage Chinas major
    providers of Internet bandwidth. 120




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##### Table of Contents




    Security of User Data.  User data is stored on
    a number of servers maintained at the main offices of each
    website which have industry-standard authentication mechanisms
    which strictly monitor and control access to personal user
    information.        Advertisement
    Serving System
  pop-up
  Content
    Monitoring and Copyright Protection
    Literary
    Content
      Advertisement
    Offline
    Publications
   121




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##### Table of Contents



Intellectual
    Property
      
    We have entered into certain revenue-sharing arrangements or
    licensing agreements with authors and business partners in
    relation to the use of intellectual property rights. We
    typically acquire from the respective authors general copyrights
    in the more popular literary works, including subsidiary rights,
    and are able to
    sub-license
    such rights to our business partners, including game companies,
    television and movie studios and other content users. We license
    some specific copyrights from the respective authors in the less
    popular literary works, pursuant to which we have rights to
    publish or monetize such content in a designated way.
    We seek and maintain proper registration of our intellectual
    property rights. In China, as of March 31, 2011, we had 12
    registered copyrights, 214 registered trademarks and 417
    trademark applications, two patent applications and 378
    registered domain names, including our official website and the
    literature websites we operate.
    We require substantially all of our employees to sign an
    employment agreement which prohibits the unauthorized disclosure
    of our trade secrets, confidential information and proprietary
    technologies subject to the terms and conditions of the
    employment agreement, and we also require our employees to
    assign to us any invention related to our business that they
    develop during the course of employment.  Competition
  zongheng.com 17k.com zhulang.com sina.com sohu.com qq.com
   122




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##### Table of Contents



Employees
    Number of

Percentage ofEmployees

Total (%)Editor


215



25.9Sales, marketing and business development


216



26.1Management, finance and administration


203



24.5Research and development


145



17.5Technology support and customer service


50



6.0Total


829



100.0         Facilities
    Legal
    Proceedings
 
   
 123




---



##### Table of Contents



REGULATION    Regulation
    of Telecommunication and Internet Information Services
    PRC Telecommunications Regulations Notice on
    Adjusting the Catalog of Telecommunication Business
  Administrative Measures on Internet Information Services
  Administrative Measures on Telecommunications
    Business Operating License
    Regulation
    of Foreign Ownership Restriction in Value-Added
    Telecommunications Industry
  Guidance Catalogue of Industries for Foreign
    Investment
 124




---



##### Table of Contents



Regulations on Administration of Foreign-invested
    Telecommunication Enterprises
  Circular on
    Strengthening the Administration of Foreign Investment in
    Value-added Telecommunication Services
    Regulation
    of Offline Publishing Channels and Distribution
  Regulations on the Administration of
    Publication Administration Provisions on Book Publishing
  Administrative Measures for the Publications
    Market
  Regulation
    of Internet Publication
  Interim Administration Measures on Internet
    Publication
 125




---



##### Table of Contents



qidian.com. qidian.com
    Regulation
    of Online Transmission of Audiovisual Programs
  Rules for the
    Administration of Transmission of Audiovisual Programs Through
    Internet and Other Information Networks
  Rules for the Administration of Audiovisual Program
    Services tingbook.com tingbook.com
  Regulation
    of Online Cultural Activities
  Provisional Measures for the Administration
    of Online Culture
 126




---



##### Table of Contents



Regulation
    of Content, Information Security and Censorship
    PRC Law on
    Preservation of State Secrets and/or
    Regulation
    of Intellectual Property Rights
  Agreement on Trade Related Aspects of Intellectual Property
    Rights
  Copyright. PRC Copyright
    Law, Trial Measures
    of Voluntary Registration of Works
 127




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##### Table of Contents



Trademark. PRC
    Trademark Law
  first-to-file
    Patent. PRC Patent
    Law
  first-to-file
  Software Copyright. Regulations on Computer Software
    Protection, Measures
    on the Registration of Computer Software Copyright
 128




---



##### Table of Contents



Administrative
    Measures on Software Products
    Regulation
    of Advertising
  PRC Advertisement Law Administrative
    Regulations on Advertising Implementing Rules on
    the Administrative Regulations for Advertisement Administrative Measures on Advertising Operating License
       129




---



##### Table of Contents



Regulation
    of Foreign Currency Exchange and Dividend
    Distributions
  Foreign Currency Administration
    Regulations
    Notice on Relevant Issues
    Concerning Strengthening the Administration of Foreign Exchange
    Businesses
    PRC Company Law Wholly Foreign-owned Enterprise Law Wholly Foreign-owned
    Enterprise Law Implementing Rules
 130




---



##### Table of Contents



Regulation
    of Loans Between a Foreign Company and Its PRC
    Subsidiaries
  Foreign Exchange Administration Regulation Interim Measures on Foreign Debts
    Administration Statistical Monitoring of Foreign Debts Tentative Provisions Administration Provisions on the Settlement, Sale and
    Payment of Foreign Exchange Notice of
    SAFE on Issues Related to Perfection of Foreign Debts
    Administration
      Regulation
    of Investment in Offshore Special Purpose Vehicles
  Notice Concerning Foreign Exchange Controls on Domestic
    Residents Financing and Roundtrip Investment Through
    Offshore Special Purpose Vehicles
     131




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##### Table of Contents



Regulation
    of Employee Stock Options Plan
  Measures for the Administration of Individual
    Foreign Exchange Implementation Rules of the Administration Measure for
    Individual Foreign Exchange Processing Guidance
    on Foreign Exchange Administration of Domestic Individuals
    Participating in the Employee Stock Ownership Plans or Stock
    Option Plans of Overseas-Listed Companies
        Regulation Relating
    to M&A Rules and Overseas Listing
   132




---



##### Table of Contents



Regulations
    Relating to the PRC Anti-Monopoly Law
  PRC Anti-Monopoly Law
     133




---



##### Table of Contents



Regulation
    of Labor Contracts and Social Insurance
  Labor Contract Law of the PRC, Labor Contract Regulations
    PRC Social
    Insurance Law Regulation of Insurance for Labor
    Injury Regulations of Insurance for
    Unemployment Provisional Insurance Measures for
    Maternal Employees Interim Provisions on
    Registration of Social Insurance
 134




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##### Table of Contents



Regulation
    of Taxation
  Enterprise Income Tax Law
  de facto
 
   
    Provisional Regulations on Value-Added Tax of
    the PRC Rules for
    Implementation of Provisional Regulations on Value-Added Tax of
    the PRC
 135




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##### Table of Contents



MANAGEMENT  Directors
    and Executive Officers
    Directors and Executive Officers

Age

Position/TitleTianqiao Chen


38


Chairman of the Board of DirectorsQianqian Luo


35


DirectorXiaoqiang Hou


36


Director, Chief Executive OfficerJin Koh Teoh


46


Independent Director Appointee*Wenhui Wu


33


PresidentXiaodong Liang


34


Chief Financial Officer, Vice PresidentHua Lin


41


Vice PresidentBingsha Liu


33


Vice PresidentQiang Liu


33


Vice President     *
    
    Mr. Teoh has accepted
    appointment to serve as our independent director, effective upon
    the completion of this offering. 
  Tianqiao Chen
 
  Qianqian Luo
  Xiaoqiang Hou sina.com sina.com
  Jin Koh Teoh
  Wenhui Wu qidian.com
 136




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##### Table of Contents



Xiaodong Liang
 
  Hua Lin
 
  Bingsha Liu
 
  Qiang Liu
 
  Duties of
    Directors
      
    convening shareholders meetings and reporting its work to
    shareholders at such meetings;
    implementing shareholders resolutions;
    determining our business plans and investment proposals;
    formulating our profit distribution plans and loss recovery
    plans;
    determining our debt and finance policies and proposals for the
    increase or decrease in our registered capital and the issuance
    of debentures;
    formulating our major acquisition and disposition plans, and
    plans for merger, division or dissolution;
    proposing amendments to our memorandum and articles of
    association; and
    exercising any other powers conferred by the shareholders
    meetings or under our memorandum and articles of association.  Terms of
    Directors and Executive Officers
   137




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Qualification
    Board
    Practices
    Board
    Committees
  Audit Committee.
    
    selecting independent auditors and pre-approving all auditing
    and non-auditing services permitted to be performed by the
    independent auditors;
    setting clear hiring policies for employees or former employees
    of the independent auditors;
    reviewing with the independent auditors any audit problems or
    difficulties and managements response;
    reviewing and approving all proposed related-party transactions;
    discussing the annual audited financial statements with
    management and the independent auditors;
    discussing with management and the independent auditors major
    issues regarding accounting principles and financial statement
    presentations;
    reviewing reports prepared by management or the independent
    auditors relating to significant financial reporting issues and
    judgments;
    reviewing with management and the independent auditors
    related-party transactions and off-balance sheet transactions
    and structures;
    reviewing with management and the independent auditors the
    effect of regulatory and accounting initiatives and actions;
    reviewing policies with respect to risk assessment and risk
    management;
    reviewing our disclosure controls and procedures and internal
    control over financial reporting;
    timely reviewing reports from the independent auditors regarding
    all critical accounting policies and practices to be used by our
    company, all alternative treatments of financial information
    within GAAP that have been discussed with management and all
    other material written communications between the independent
    auditors and management;
    establishing procedures for the receipt, retention and treatment
    of complaints received from our employees regarding accounting,
    internal accounting controls or auditing matters and the
    confidential, anonymous submission by our employees of concerns
    regarding questionable accounting or auditing matters;
    annually reviewing and reassessing the adequacy of our audit
    committee charter; 138




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##### Table of Contents




    such other matters that are specifically delegated to our audit
    committee by our board of directors from time to time; and
    meeting separately, periodically, with management, the internal
    auditors and the independent auditors.  Compensation and Leadership Development
    Committee.
    
    reviewing and approving our compensation provided to our
    directors and officers;
    reviewing and evaluating our executive compensation and benefits
    policies generally;
    reviewing and recommending stock-based compensation for our
    directors, officers and employees;
    determining and reviewing stock-based compensation for our
    directors, officers, employees and consultants;
    reviewing and approving the process of recruitment, appointment
    and evaluation and development plan of our executive officers;
    evaluating its own performance and reporting to our board of
    directors on such evaluation;
    periodically reviewing and assessing the adequacy of the
    compensation committee charter and recommending any proposed
    changes to our board of directors; and
    such other matters that are specifically delegated to the
    compensation committee by our board of directors from time to
    time.  Corporate
    Governance
      
    a majority of our board of directors must be independent
    directors;
    the compensation of our chief executive officer must be
    determined or recommended by a majority of the independent
    directors or a compensation committee comprised solely of
    independent directors;
    the director nominees must be selected or recommended by a
    majority of the independent directors or a nomination committee
    comprised solely of independent directors; and
    the compensation committee must be composed of independent
    directors.  Compensation
    of Directors and Executive Officers
   139




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##### Table of Contents



Equity
    Compensation Plan
  2010
    Equity Compensation Plan
    Plan Administration.
  Eligibility.
  Transfer Restrictions.
  Types of Awards.
  
    Options.  Options provide for the right to
    purchase our Class B ordinary shares at a specified
    exercise price subject to vesting. All our options will be
    exercisable only if the option holder continues employment or a
    non-employee consultant provides service through each vesting
    date. Those option awards expire in six years. One-fourth of the
    options will vest each year over a four year period starting
    from the date of the grant.
    Share Appreciation Rights.  A share
    appreciation right is a right to receive a payment, in cash or
    ordinary shares, equal to the excess of the fair market value of
    a specified number of our Class B ordinary shares on the
    date the share appreciation right is exercised over the base
    price as set forth in the award document. The maximum term of a
    share appreciation right is six years.
    Restricted Shares.  A restricted share award is
    the sale of Class B ordinary shares at a price determined
    by our board or the committee administering our 2010 Equity
    Compensation Plan or a grant of our Class B ordinary
    shares, in each case subject to restrictions on transfer and
    vesting terms.
    Restricted Share Units.  Restricted share units
    represent the right to receive our Class B ordinary shares,
    subject to vesting. Restricted share units will be settled upon
    vesting, subject to the terms of the award agreement, either by
    our delivery to the holder of the number of Class B
    ordinary shares that equals the number of the vested restricted
    share units or by a cash payment to the holder that equals the
    then fair market value of the number of underlying Class B
    ordinary shares.  Award Document.
  Termination of the 2010 Equity Compensation
    Plan.
 140




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##### Table of Contents



Number of Class BOrdinary Shares to

Exercise Price perBe Issued upon

Class B OrdinaryExercise of Options

Share

Date of Grant

Date of Expiration(in US$)Tianqiao Chen














Qianqian Luo














Xiaoqiang Hou


*



1.8



December 1, 2010



November 30, 2016Wenhui Wu


3,125,000



1.8



December 1, 2010



November 30, 2016Xiaodong Liang


*



1.8



December 1, 2010



November 30, 2016Hua Lin


*



1.8



December 1, 2010



November 30, 2016Bingsha Liu


*



1.8



December 1, 2010



November 30, 2016Qiang Liu


*



1.8



December 1, 2010



November 30, 2016     *
    
    Upon exercise of all options
    granted, would beneficially own less than 1% of our outstanding
    share capital.    Equity
    Compensation Plans of Shanda Interactive and Shanda Games
    Limited
    Employment
    Agreements
  30-day
 141




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PRINCIPAL
    AND SELLING SHAREHOLDERS    
    each of our directors and executive officers who beneficially
    own our ordinary shares; and
    each person known to us to own beneficially more than 5% of our
    ordinary shares and each person who owns our Series A
    preference shares; and
    the selling shareholder.    Series A-1 Series A-2 Series A-1 Series A-2
    Shares BeneficiallyShares

Owned after this Offering

Percentage of VotesShares Beneficially

to Be Sold by Selling

(Assuming No Exercise of

Held after thisOwned Prior to this Offering

Shareholder in this Offering

Overallotment Option)

OfferingNumber

Percent

Number

Percent

Number

Percent

PercentDirectors and Executive
    Officers:(1)Tianqiao Chen


























Qianqian Luo


























Xiaoqiang Hou


























Wenhui Wu


























Xiaodong Liang


























Hua Lin


























Bingsha Liu


























Qiang Liu


























All Directors and Executive Officers as a Group


























Principal and Selling Shareholders:Shanda Investment Holdings
    Limited(2)


261,313,150(3
)


100.0
%  142




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##### Table of Contents



(1)
    
    The address of our directors and
    executive officers is 35 Boxia Road, Pudong New Area, Shanghai
    201203, Peoples Republic of China.(2)
    
    Shanda Investment Holdings Limited,
    or Shanda Investment, is a Cayman Islands corporation and a
    direct wholly owned subsidiary of Shanda Interactive
    Entertainment Limited, or Shanda Interactive. Shanda Interactive
    is a publicly listed company whose ADSs trade on the Nasdaq
    Global Market under the symbol SNDA. As of
    March 31, 2011, Mr. Tianqiao Chen beneficially held
    approximately 55.3% of the outstanding shares of Shanda
    Interactive. The address of the selling shareholder is
    No. 208 Juli Road, Pudong New Area, Shanghai 201203,
    Peoples Republic of China.(3)
    
    Consists of (i) 250,000,000 Class A
    ordinary shares held by Shanda Investment and (ii) 11,313,150
    Class A ordinary shares that are issuable upon conversion of
    3,196,393 Series A-1 preference shares and 7,396,757 Series A-2
    preference shares held by Shanda Investment. Immediately
    following the completion of this offering, Shanda Investment
    intends to convert all of the
    Series A-1
    and
    Series A-2
    preference shares it currently holds into our Class A
    ordinary shares on a
    one-for-one
    basis. Following its conversion of the
    Series A-1
    and
    Series A-2
    preference shares, Shanda Investment will hold 261,313,150
    Class A ordinary shares in aggregate,
    representing          %
    and          %
    of the equity interest and voting power in our share capital,
    respectively.       143




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RELATED
    PARTY TRANSACTIONS  Reorganization
        Private
    Placement
    Loans
    from Shanda Interactive and Its Affiliates
  Loans
    Provided by Shanda Interactive
  Series A-1
    Series A-2
   144




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##### Table of Contents



Borrowings
    with Shanda Networking
        Other
    Transactions with Affiliates of Shanda Interactive
      Integrated
    Platform Services
    hongxiu.com xs8.cn
  readnovel.com xxsy.net tingbook.com zubunet.com
 145




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##### Table of Contents



Online
    Payment Services
     
   
  Sales
    and Promotion of Pre-Paid Cards
        Exclusive
    Advertising Agency Services
  qidian.com
  Online
    Games
  qidian.com qidian.com
 146




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Copyright
    Licensing
 
   
  Other
    Agreements
    Employment
    Agreements
    Equity
    Compensation Plan
   147




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##### Table of Contents



DESCRIPTION
    OF SHARE CAPITAL  Series A-1 Series A-2 Series A-1 Series A-2
    
    is a company that conducts its business outside the Cayman
    Islands;
    is exempted from certain requirements of the Companies Law,
    including the filing of an annual return of its shareholders
    with the Registrar of Companies;
    does not have to make its register of shareholders open to
    inspection; and
    may obtain an undertaking against the imposition of any future
    taxation.      Meetings
       148




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##### Table of Contents



Voting
    Rights Attaching to the Shares
  Series A-1 Series A-2 Series A-2 Series A-2 Series A-1 Series A-2
        Conversion
    Rights Attaching to the Shares
   149




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Series A-1 Series A-2
  Difference
    Between Class A and Class B Ordinary Shares
    Series A-1 Series A-2
  Protection
    of Minority Shareholders
    winding-up
    ultra vires
  Pre-Emption
    Rights
    Liquidation
    Rights
  pari passu paid-up
   150




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##### Table of Contents



Modification
    of Rights
 
   
      Alteration
    of Capital
    
    increase our capital by such sum, to be divided into shares of
    such amounts, as the resolution shall prescribe;
    consolidate and divide all or any of our share capital into
    shares of larger amount than our existing shares;
    cancel any shares which at the date of the passing of the
    resolution have not been taken or agreed to be taken by any
    person, and diminish the amount of its share capital by the
    amount of the shares so cancelled subject to the provisions of
    the Companies Law;
    sub-divide
    our shares or any of them into shares of smaller amount than is
    fixed by our amended and restated memorandum of association,
    subject nevertheless to the Companies Law, and so that the
    resolution whereby any share is
    sub-divided
    may determine that, as between the holders of the shares
    resulting from such subdivision, one or more of the shares may
    have any such preferred or other special rights, over, or may
    have such deferred rights or be subject to any such restrictions
    as compared with the others as we have power to attach to
    unissued or new shares; and
    divide shares into several classes and without prejudice to any
    special rights previously conferred on the holders of existing
    shares, attach to the shares respectively any preferential,
    deferred, qualified or special rights, privileges, conditions or
    such restrictions that in the absence of any such determination
    in general meeting may be determined by our directors.    Transfer
    of Shares
   151




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##### Table of Contents




    the instrument of transfer is lodged with us accompanied by the
    certificate for the shares to which it relates and such other
    evidence as our directors may reasonably require to show the
    right of the transferor to make the transfer;
    the instrument of transfer is in respect of only one class of
    share;
    the instrument of transfer is properly stamped (in circumstances
    where stamping is required);
    in the case of a transfer to joint holders, the number of joint
    holders to whom the share is to be transferred does not exceed
    four; and
    a fee of such maximum sum as the NYSE may determine to be
    payable or such lesser sum as our directors may from time to
    time require is paid to us in respect thereof.      Share
    Repurchase
    Dividends
             152




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##### Table of Contents



Untraceable
    Shareholders
    
    all checks or warrants in respect of dividends of such shares,
    not being less than three in number, for any sums payable in
    cash to the holder of such shares have remained un-cashed for a
    period of 12 years prior to the publication of the
    advertisement and during the three months referred to in third
    bullet point below;
    we have not during that time received any indication of the
    whereabouts or existence of the shareholder or person entitled
    to such shares by death, bankruptcy or operation of law; and
    we have caused an advertisement to be published in newspapers in
    the manner stipulated by our amended and restated articles of
    association, giving notice of our intention to sell these
    shares, and a period of three months has elapsed since such
    advertisement and the NYSE has been notified of such intention.    Board of
    Directors
 
   
 153




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Committees
    of the Board of Directors
    Issuance
    of Additional Ordinary Shares or Preference Shares
      
    the designation of the series;
    the number of shares of the series;
    the dividend rights, dividend rates, conversion rights, voting
    rights; and
    the rights and terms of redemption and liquidation preferences.      Inspection
    of Books and Records
    Differences
    in Corporate Law
   154




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##### Table of Contents



Mergers
    and Similar Arrangements
            
    the statutory provisions as to the required majority vote have
    been met;
    the shareholders have been fairly represented at the meeting in
    question and the statutory majority are acting bona fide without
    coercion of the minority to promote interests adverse to those
    of the class;
    the arrangement is such that may be reasonably approved by an
    intelligent and honest man of that class acting in respect of
    his interest; and
    the arrangement is not one that would more properly be
    sanctioned under some other provision of the Companies Law.     155




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##### Table of Contents



Shareholders
    Suits
    
    a company acts or proposes to act illegally or ultra
    vires;
    the act complained of, although not ultra vires, could
    only be effected duly if authorized by more than a simple
    majority vote that has not been obtained; and
    those who control the company are perpetrating a fraud on
    the minority.  Indemnification
    of Directors and Executive Officers and Limitation of
    Liability
      Directors
    Fiduciary Duties
     156




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##### Table of Contents



Shareholder
    Proposals
      Cumulative
    Voting
    Removal
    of Directors
    Transactions
    with Interested Shareholders
      Dissolution;
    Winding Up
   157




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Variation
    of Rights of Shares
    Amendment
    of Governing Documents
    History
    of Securities Issuances and Transfers
  Ordinary
    Shares
      Series A
    Preference Shares
  Series A-1 Series A-2
  Issuance
  Series A-1 Series A-2
 158




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##### Table of Contents



Conversion
    Redemption
  365-day
  Cash
    Dividends
  Series A-1 Series A-2
  Liquidation
    Preference
    Voting
    Rights
   159




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##### Table of Contents



DESCRIPTION
    OF AMERICAN DEPOSITARY SHARES  American
    Depositary Receipts
          1-800-732-0330. http://www.sec.gov.
  Share
    Dividends and Other Distributions
  How
    will I receive dividends and other distributions on the shares
    underlying my ADSs?
      
    Cash.  The depositary will distribute any
    U.S. dollars available to it resulting from a cash dividend
    or other cash distribution or the net proceeds of sales of any
    other distribution or portion thereof (to the extent
    applicable), on an averaged or other practicable basis, subject
    to (i) appropriate adjustments for taxes 160




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##### Table of Contents



withheld, (ii) such distribution being impermissible or
    impracticable with respect to certain registered ADR holders,
    and (iii) deduction of the depositarys expenses in
    (1) converting any foreign currency to U.S. dollars to
    the extent that it determines that such conversion may be made
    on a reasonable basis, (2) transferring foreign currency or
    U.S. dollars to the United States by such means as the
    depositary may determine to the extent that it determines that
    such transfer may be made on a reasonable basis,
    (3) obtaining any approval or license of any governmental
    authority required for such conversion or transfer, which is
    obtainable at a reasonable cost and within a reasonable time and
    (4) making any sale by public or private means in any
    commercially reasonable manner. If exchange rates fluctuate
    during a time when the depositary cannot convert a foreign
    currency, you may lose some or all of the value of the
    distribution.  
    Shares.  In the case of a distribution in
    shares, the depositary will issue additional ADRs to evidence
    the number of ADSs representing such shares. Only whole ADSs
    will be issued. Any shares which would result in fractional ADSs
    will be sold and the net proceeds will be distributed in the
    same manner as cash to the ADR holders entitled thereto.
    Rights to receive additional shares.  In the
    case of a distribution of rights to subscribe for additional
    shares or other rights, if we provide evidence satisfactory to
    the depositary that it may lawfully distribute such rights, the
    depositary will distribute warrants or other instruments in the
    discretion of the depositary representing such rights. However,
    if we do not furnish such evidence, the depositary may:  
    sell such rights if practicable and distribute the net proceeds
    in the same manner as cash to the ADR holders entitled
    thereto; or
    if it is not practicable to sell such rights, do nothing and
    allow such rights to lapse, in which case ADR holders will
    receive nothing.    
    Other Distributions.  In the case of a
    distribution of securities or property other than those
    described above, the depositary may either (i) distribute
    such securities or property in any manner it deems equitable and
    practicable or (ii) to the extent the depositary deems
    distribution of such securities or property not to be equitable
    and practicable, sell such securities or property and distribute
    any net proceeds in the same way it distributes cash.      The depositary is not responsible if it decides that it is
    unlawful or impractical to make a distribution available to any
    ADR holders.
  There can be no assurance that the depositary will be able to
    convert any currency at a specified exchange rate or sell any
    property, rights, shares or other securities at a specified
    price, nor that any of such transactions can be completed within
    a specified time period.
  Deposit,
    Withdrawal and Cancellation
  How
    does the depositary issue ADSs?
   161




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##### Table of Contents



How do
    ADR holders cancel an ADS and obtain deposited
    securities?
      
    temporary delays caused by closing our transfer books or those
    of the depositary or the deposit of shares in connection with
    voting at a shareholders meeting, or the payment of
    dividends;
    the payment of fees, taxes and similar charges; or
    compliance with any U.S. or foreign laws or governmental
    regulations relating to the ADRs or to the withdrawal of
    deposited securities.    Record
    Dates
    
    to receive any distribution on or in respect of shares;
    to give instructions for the exercise of voting rights at a
    meeting of holders of shares;
    to pay the fee assessed by the depositary for administration of
    the ADR program and for any expenses as provided for in the
    ADR; or
    to receive any notice or to act in respect of other matters;   162




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##### Table of Contents



Voting
    Rights
  How do
    I vote?
  i.e.
    Reports
    and Other Communications
  Will
    ADR holders be able to view our reports?
      Fees and
    Expenses
  What
    fees and expenses will I be responsible for
    paying?
   163




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##### Table of Contents



and/or
    
    a fee of U.S.$1.50 per ADR or ADRs for transfers of certificated
    or direct registration ADRs;
    a fee of up to U.S.$0.05 per ADS for any cash distribution made
    pursuant to the deposit agreement;
    a fee of up to U.S.$0.05 per ADS per calendar year (or portion
    thereof) for services performed by the depositary in
    administering the ADRs (which fee may be charged on a periodic
    basis during each calendar year and shall be assessed against
    holders of ADRs as of the record date or record dates set by the
    depositary during each calendar year and shall be payable in the
    manner described in the next succeeding provision);
    reimbursement of such fees, charges and expenses as are incurred
    by the depositary
    and/or any
    of the depositarys agents (including, without limitation,
    the custodian and expenses incurred on behalf of holders in
    connection with compliance with foreign exchange control
    regulations or any law or regulation relating to foreign
    investment) in connection with the servicing of the shares or
    other deposited securities, the delivery of deposited securities
    or otherwise in connection with the depositarys or its
    custodians compliance with applicable law, rule or
    regulation (which charge shall be assessed on a proportionate
    basis against holders as of the record date or dates set by the
    depositary and shall be payable at the sole discretion of the
    depositary by billing such holders or by deducting such charge
    from one or more cash dividends or other cash distributions);
    a fee for the distribution of securities (or the sale of
    securities in connection with a distribution), such fee being in
    an amount equal to the fee for the execution and delivery of
    ADSs which would have been charged as a result of the deposit of
    such securities (treating all such securities as if they were
    shares) but which securities or the net cash proceeds from the
    sale thereof are instead distributed by the depositary to those
    holders entitled thereto;
    stock transfer or other taxes and other governmental charges;
    cable, telex and facsimile transmission and delivery charges
    incurred at your request in connection with the deposit or
    delivery of shares;
    transfer or registration fees for the registration of transfer
    of deposited securities on any applicable register in connection
    with the deposit or withdrawal of deposited securities; and
    expenses of the depositary in connection with the conversion of
    foreign currency into U.S. dollars.     164




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##### Table of Contents



and/or
  Payment
    of Taxes
  and/or split-up
    Reclassifications,
    Recapitalizations and Mergers
  split-up,
              Amendment
    and Termination
  How
    may the deposit agreement be amended?
   165




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##### Table of Contents



How
    may the deposit agreement be terminated?
  th
  Limitations
    on Obligations and Liability to ADR holders
  Limits
    on our obligations and the obligations of the depositary; limits
    on liability to ADR holders and holders of ADSs
  split-up,
  
    payment with respect thereto of (i) any stock transfer or
    other tax or other governmental charge, (ii) any stock
    transfer or registration fees in effect for the registration of
    transfers of shares or other deposited securities upon any
    applicable register and (iii) any applicable fees and
    expenses described in the deposit agreement;
    the production of proof satisfactory to it of (i) the
    identity of any signatory and genuineness of any signature and
    (ii) such other information, including without limitation,
    information as to citizenship, residence, exchange control
    approval, beneficial ownership of any securities, compliance
    with applicable law, regulations, provisions of or governing
    deposited securities and terms of the deposit agreement and the
    ADRs, as it may deem necessary or proper; and
    compliance with such regulations as the depositary may establish
    consistent with the deposit agreement.  split-up
 166




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##### Table of Contents




    any present or future law, rule, regulation, fiat, order or
    decree of the United States, the Cayman Islands, the
    Peoples Republic of China or any other country, or of any
    governmental or regulatory authority or securities exchange or
    market or automated quotation system, the provisions of or
    governing any deposited securities, any present or future
    provision of our charter, any act of God, war, terrorism or
    other circumstance beyond our, the depositarys or our
    respective agents control shall prevent or delay, or shall
    cause any of them to be subject to any civil or criminal penalty
    in connection with, any act which the deposit agreement or the
    ADRs provide shall be done or performed by us, the depositary or
    our respective agents (including, without limitation, voting);
    it exercises or fails to exercise discretion under the deposit
    agreement or the ADR;
    it performs its obligations under the deposit agreement and ADRs
    without gross negligence or bad faith;
    it takes any action or refrains from taking any action in
    reliance upon the advice of or information from legal counsel,
    accountants, any person presenting shares for deposit, any
    registered holder of ADRs, or any other person believed by it to
    be competent to give such advice or information; or
    it relies upon any written notice, request, direction or other
    document believed by it to be genuine and to have been signed or
    presented by the proper party or parties.    non-U.S. tax
   167




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##### Table of Contents



and/or and/or
    Disclosure
    of Interest in ADSs
    Books of
    Depositary
  split-up
    Pre-Release
    of ADSs
  case-by-case
 168




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##### Table of Contents



Appointment
    
    be a party to and bound by the terms of the deposit agreement
    and the applicable ADR or ADRs, and
    appoint the depositary its attorney-in-fact, with full power to
    delegate, to act on its behalf and to take any and all actions
    contemplated in the deposit agreement and the applicable ADR or
    ADRs, to adopt any and all procedures necessary to comply with
    applicable laws and to take such action as the depositary in its
    sole discretion may deem necessary or appropriate to carry out
    the purposes of the deposit agreement and the applicable ADR and
    ADRs, the taking of such actions to be the conclusive
    determinant of the necessity and appropriateness thereof.  Governing
    Law
  and/or
 169




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##### Table of Contents



SHARES ELIGIBLE
    FOR FUTURE SALE    Rule 144
          Rule 701
  lock-up lock-up
  Stock
    Options
  Form S-8
  Lock-Up
    Agreements
   170




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lock-up
  lock-up
     171




---



##### Table of Contents



TAXATION  The following sets forth material Cayman Islands, PRC and
    U.S. federal income tax consequences of an investment in
    our Class B ordinary shares or ADSs. It is based upon laws
    and relevant interpretations thereof as of the date of this
    prospectus, all of which are subject to change. This discussion
    does not deal with all possible tax consequences relating to an
    investment in our Class B ordinary shares or ADSs, such as
    the tax consequences under state, local and other tax laws. To
    the extent that this discussion relates to matters of Cayman
    Islands tax law, it is the opinion of Conyers Dill &
    Pearman, our special Cayman Islands counsel. To the extent that
    the discussion relates to matters of PRC tax law, it is the
    opinion of Jade & Fountain, our special PRC counsel.
    To the extent that the discussion relates to matters of
    U.S. federal income tax law, it is the opinion of Davis
    Polk & Wardwell LLP, our U.S. counsel.
 
  Cayman
    Islands Taxation
    PRC
    Taxation
    de facto de facto de facto de facto
     172




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##### Table of Contents



Notice on
    Issues Concerning Process of Enterprise Income Tax in Enterprise
    Restructuring Business Notice Concerning the Strengthening
    of Enterprise Income Tax Administration with Respect to Equity
    Transfers by Non-resident Enterprises
    United
    States Federal Income Tax Considerations
    
    certain financial institutions;
    dealers or traders in securities who use a
    mark-to-market
    method of tax accounting;
    persons holding Class B ordinary shares or ADSs as part of
    a hedging transaction, straddle, wash sale, conversion
    transaction or integrated transaction or persons entering into a
    constructive sale with respect to the Class B ordinary
    shares or ADSs;
    persons whose functional currency for U.S. federal income
    tax purposes is not the U.S. dollar; 173




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##### Table of Contents




    entities classified as partnerships for U.S. federal income
    tax purposes;
    tax-exempt entities, including individual retirement
    accounts or Roth IRAs; 
  
    persons that own or are deemed to own shares or ADSs
    representing 10% or more of our voting stock; or 
  
    persons holding Class B ordinary shares or ADSs in
    connection with a trade or business conducted outside of the
    United States.   
   
    
    an individual citizen or resident of the United States;
    a corporation, or other entity taxable as a corporation, created
    or organized in or under the laws of the United States, any
    state therein or the District of Columbia; or
    an estate or trust the income of which is subject to
    U.S. federal income taxation regardless of its source.        Taxation of Distributions. pro rata
   174




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Sale or Other Disposition of Class B Ordinary Shares or
    ADSs. U.S.-source
 
   
  Passive Foreign Investment Company Rules.
   175




---



##### Table of Contents



mark-to-market de minimis mark-to-market mark-to-market
 
  mark-to-market mark-to-market mark-to-market
     176




---



##### Table of Contents



Information Reporting and Backup
    Withholding. U.S.-related
 
 
   
 177




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##### Table of Contents



UNDERWRITING    Underwriters

Number of ADSsGoldman Sachs (Asia) L.L.C.Merrill Lynch, Pierce, Fenner & Smith
                         IncorporatedTotal         Paid by Us

No Exercise

Full ExercisePer ADS


US
$



US
$Total


US
$



US
$   Paid by the Selling Shareholder

No Exercise

Full ExercisePer ADS


US
$



US
$Total


US
$



US
$       lock-up 180-day lock-up
 178




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##### Table of Contents



lock-up
  180-day lock-up 180-day 180-day lock-up 16-day 180-day 18-day
          over-the-counter
   179




---



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and/or
  and/or
 180




---



##### Table of Contents



and/or
         181




---



##### Table of Contents



182




---



##### Table of Contents



EXPENSES
    RELATING TO THIS OFFERING    SEC registration fee

US$NYSE listing feeFINRA filing feePrinting expensesLegal fees and expensesAccounting fees and expensesMiscellaneousTotal

US$  183




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##### Table of Contents



LEGAL
    MATTERS   EXPERTS   184




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##### Table of Contents



WHERE YOU
    CAN FIND ADDITIONAL INFORMATION  Form F-1, Form F-1
  Form 20-F, 1-800-SEC-0330 www.sec.gov
   185




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##### Table of Contents



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS  PageAnnual Consolidated Financial StatementsReport of Independent Registered Public
    Accounting Firm


F-2Consolidated Statements of Operations and
    Comprehensive Loss for the years ended December 31, 2008,
    2009 and 2010


F-3Consolidated Balance Sheets as of
    December 31, 2009 and 2010


F-4Consolidated Statements of Changes in
    Shareholders Deficits 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 the Consolidated Financial Statements
    for the years ended December 31, 2008, 2009 and 2010


F-7Unaudited Interim Condensed Consolidated Financial
    StatementsUnaudited Condensed Consolidated Statements of
    Operations and Comprehensive Loss for the three months ended
    March 31, 2010 and 2011


F-66Unaudited Condensed Consolidated Balance Sheets
    as of December 31, 2010 and March 31, 2011


F-67Unaudited Condensed Consolidated Statements of
    Changes in Shareholders Deficits for the three months
    ended March 31, 2010 and 2011


F-68Unaudited Condensed Consolidated Statements of
    Cash Flows for the three months ended March 31, 2010 and
    2011


F-69Notes to Unaudited Condensed Consolidated
    Financial Statements for the three months ended March 31,
    2010 and 2011


F-70  F-1




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the
    Board of Directors and Shareholder of Cloudary
    Corporation:
       F-2




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##### Table of Contents



CLOUDARY
    CORPORATION
  CONSOLIDATED
    STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
  For the Years Ended December 31Notes

2008

2009

2010

2010RMB

RMB

RMB

US$ (Note 2(6))Net revenues:

2(18),5Online business




52,975,784



98,628,592



207,543,496



31,445,984Third parties




47,447,241



81,712,111



187,941,965



28,476,055Related parties

22


5,528,543



16,916,481



19,601,531



2,969,929Offline business








35,922,316



185,470,570



28,101,602Total net revenues




52,975,784



134,550,908



393,014,066



59,547,586Cost of revenues:Online business




(46,816,263
)


(85,459,029
)


(171,616,484
)


(26,002,498
)Third parties




(44,309,371
)


(81,620,913
)


(165,903,434
)


(25,136,884
)Related parties

22


(2,506,892
)


(3,838,116
)


(5,713,050
)


(865,614
)Offline business








(22,533,196
)


(156,522,433
)


(23,715,520
)Total cost of revenues




(46,816,263
)


(107,992,225
)


(328,138,917
)


(49,718,018
)Gross profit




6,159,521



26,558,683



64,875,149



9,829,568Operating expenses:Product development

2(20)


(467,210
)


(2,588,348
)


(6,023,460
)


(912,645
)Sales and marketing

2(21)


(20,044,765
)


(72,083,242
)


(69,765,193
)


(10,570,484
)Third parties




(17,017,761
)


(64,019,370
)


(62,619,801
)


(9,487,849
)Related parties

22


(3,027,004
)


(8,063,872
)


(7,145,392
)


(1,082,635
)General and administrative




(10,611,819
)


(28,678,598
)


(62,169,139
)


(9,419,567
)Total operating expenses




(31,123,794
)


(103,350,188
)


(137,957,792
)


(20,902,696
)Gain on bargain purchase

4










7,397,545



1,120,840Loss from operations




(24,964,273
)


(76,791,505
)


(65,685,098
)


(9,952,288
)Interest income




2,171,820



870,335



1,805,446



273,552Interest expenses to related parties

22










(3,155,278
)


(478,072
)Other income (expenses), net

2(24)


636,353



(323,731
)


2,222,867



336,798Loss before income tax benefit and equity in earning (loss) of
    affiliated company




(22,156,100
)


(76,244,901
)


(64,812,063
)


(9,820,010
)Income tax benefit (expenses)

6


(253,383
)


1,156,688



5,485,320



831,109Equity in earning (loss) of affiliated company

11


(94,618
)


585,130



2,848,667



431,616Net loss




(22,504,101
)


(74,503,083
)


(56,478,076
)


(8,557,285
)Net loss attributable to non-controlling interests




398,460



1,078,402



11,683,968



1,770,298Net income attributable to redeemable non-controlling interests












(76,584
)


(11,603
)Net loss attributable to Cloudary Corporation




(22,105,641
)


(73,424,681
)


(44,870,692
)


(6,798,590
)Series A Preferred Shares redemption value accretion

17










(510,175
)


(77,299
)Net loss attributable to Cloudary Corporations ordinary
    shareholder




(22,105,641
)


(73,424,681
)


(45,380,867
)


(6,875,889
)Net loss




(22,504,101
)


(74,503,083
)


(56,478,076
)


(8,557,285
)Other comprehensive income:Unrealized gain of investment in securities

2(11)










500,000



75,758Currency translation adjustments








5,111



1,249,949



189,385Comprehensive loss




(22,504,101
)


(74,497,972
)


(54,728,127
)


(8,292,142
)Comprehensive loss attributable to non-controlling interests:




398,460



1,078,402



11,683,968



1,770,298Comprehensive income attributable to redeemable non-controlling
    interests












(76,584
)


(11,603
)Comprehensive loss attributable to Cloudary Corporation




(22,105,641
)


(73,419,570
)


(43,120,743
)


(6,533,447
)Net loss per share attributable to Cloudary Corporations
    ordinary shareholderBasic and diluted

7


(0.09
)


(0.29
)


(0.18
)


(0.03
)Weighted average ordinary shares used in per share calculationBasic and diluted

7


250,000,000



250,000,000



250,000,000



250,000,000    F-3




---



##### Table of Contents



CLOUDARY
    CORPORATION
  CONSOLIDATED
    BALANCE SHEETS
  December 31,

December 31,

December 31,Notes

2009

2010

2010RMB

RMB

US$ (Note 2(6))ASSETSCurrent assets:Cash and cash equivalents

8


141,357,496



299,605,808



45,394,819Accounts receivable, net of allowance for doubtful accounts

9


17,750,984



42,578,763



6,451,328Accounts receivable due from related parties

22


12,138,972



11,580,474



1,754,617Inventories

10


23,530,230



109,248,948



16,552,871Prepayments and other current assets




11,627,271



13,127,642



1,989,037Other receivables due from related parties

22


19,000,000







Current deferred tax assets




3,519,374



16,940,918



2,566,806Total current assets




228,924,327



493,082,553



74,709,478Investment in securities

2(11)


7,000,000



7,500,000



1,136,363Investment in affiliated company

11


9,990,512



12,839,179



1,945,330Property and equipment

12


12,955,498



19,853,535



3,008,111Intangible assets

13


33,201,379



154,488,511



23,407,350Goodwill

14


15,854,638



47,540,748



7,203,144Royalty advances

2(14)


11,923,630



32,622,652



4,942,826Advance payment for acquisition

4


6,900,000







Other long-term assets

4


4,066,615



45,608,334



6,910,354Non-current deferred tax assets

6


515,866



400,937



60,748Total assets




331,332,465



813,936,449



123,323,704LIABILITIESCurrent liabilities:Accounts payable




29,442,613



119,470,468



18,101,586Accounts payable due to related parties

22


536,523



1,069,693



162,075Taxes payable




733,952



2,577,364



390,510Deferred revenue

2(19)


5,538,957



13,161,864



1,994,221Other payables and accruals

15


30,668,339



49,163,592



7,449,029Other payables due to related parties

22


16,013,367



16,422,586



2,488,272Total current liabilities




82,933,751



201,865,567



30,585,693Non-current deferred tax liabilities

6


6,492,620



27,219,275



4,124,133Long-term borrowings from related parties

16, 22


300,000,000



436,569,312



66,146,865Total liabilities




389,426,371



665,654,154



100,856,691Commitments and contingencies

24Series A-1
    Redeemable Convertible Preferred Shares (US$0.01 par value;
    3,916,393 shares authorized; 3,916,393 issued and
    outstanding as of December 31, 2010) (redemption value of
    US$8,264,972 as of December 31, 2010)

17






51,809,560



7,849,933Series A-2
    Redeemable Convertible Preferred Shares (US$0.01 par value;
    7,396,757 shares authorized; 7,396,757 issued and
    outstanding as of December 31, 2010) (redemption value of
    US$15,752,783 as of December 31, 2010)

17






97,764,231



14,812,762Redeemable non-controlling interests

4, 19






25,296,245



3,832,765Shareholders deficitsClass A ordinary shares (US$0.01 par value,
    488,686,850 shares authorized, 250,000,000 issued and
    outstanding as of December 31, 2009 and 2010)

18


16,651,250



16,651,250



2,522,917Class B ordinary shares (US$0.01 par value,
    500,000,000 shares authorized, nil issued and outstanding
    as of December 31, 2009 and 2010)

18Additional paid-in capital




7,502,208



24,243,328



3,673,232Accumulated other comprehensive income




5,111



1,755,060



265,918Accumulated deficits




(114,187,574
)


(159,058,266
)


(24,099,739
)Total Cloudary Corporation shareholders deficits




(90,029,005
)


(116,408,628
)


(17,637,672
)Non-controlling interests

19


31,935,099



89,820,887



13,609,225Total shareholders deficits




(58,093,906
)


(26,587,741
)


(4,028,447
)Total liabilities and shareholders deficits




331,332,465



813,936,449



123,323,704    F-4




---



##### Table of Contents



CLOUDARY
    CORPORATION
  CONSOLIDATED
    STATEMENTS OF CHANGES IN SHAREHOLDERS
    DEFICITS
  TotalClass A Ordinary Share





Accumulated



Cloudary(US$0.01 Par Value)

Additional



Other



Corporation

Non-

TotalNumber



Paid-in

Statutory

Comprehensive

Accumulated

Shareholders

controlling

Shareholdersof Shares

Par Value

Capital

Reserves

Income

Deficits

Deficits

Interests

DeficitsRMB

RMB

RMB

RMB

RMB

RMB

RMB

RMBBalance as of January 1, 2008


250,000,000



16,651,250



(16,651,250
)










(18,657,252
)


(18,657,252
)






(18,657,252
)Non-controlling interest arising from business combination
    (Note 4)






























2,215,728



2,215,728Corporate expense allocation (Note 2(1))










3,301,171















3,301,171







3,301,171Share-based compensation










71,149















71,149







71,149Net loss






















(22,105,641
)


(22,105,641
)


(398,460
)


(22,504,101
)Balance as of December 31, 2008


250,000,000



16,651,250



(13,278,930
)










(40,762,893
)


(37,390,573
)


1,817,268



(35,573,305
)Non-controlling interest arising from business combination
    (Note 4)






























27,450,980



27,450,980Corporate expense allocation (Note 1)










997,081















997,081







997,081Share-based compensation










443,000















443,000







443,000Capital contribution to a subsidiary attributable to
    non-controlling interest (Note 4(c))










(3,745,253
)














(3,745,253
)


3,745,253



Contribution from Shanda (Note 1)










23,086,310















23,086,310







23,086,310Currency translation adjustments


















5,111







5,111







5,111Net loss






















(73,424,681
)


(73,424,681
)


(1,078,402
)


(74,503,083
)Balance as of December 31, 2009


250,000,000



16,651,250



7,502,208







5,111



(114,187,574
)


(90,029,005
)


31,935,099



(58,093,906
)Non-controlling interest arising from business combination
    (Note 4)






























68,965,076



68,965,076Capital contribution to a subsidiary by non-controlling interest










708,595















708,595



531,405



1,240,000Transactions with non-controlling shareholder










(73,275
)














(73,275
)


73,275



Share-based compensation










904,556















904,556







904,556Class A ordinary share subscription fee paid by Shanda
    (Note 18)










16,651,250















16,651,250







16,651,250Series A Preferred Shares redemption value accretion










(510,175
)














(510,175
)






(510,175
)Unrealized appreciation of investment in securities


















500,000







500,000







500,000Distribution to Shanda (Note 22)










(939,831
)














(939,831
)






(939,831
)Currency translation adjustments


















1,249,949







1,249,949







1,249,949Net loss






















(44,870,692
)


(44,870,692
)


(11,683,968
)


(56,554,660
)Balance as of December 31, 2010


250,000,000



16,651,250



24,243,328







1,755,060



(159,058,266
)


(116,408,628
)


89,820,887



(26,587,741
)    F-5




---



##### Table of Contents



CLOUDARY
    CORPORATION
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  For the Years Ended December 312008

2009

2010

2010RMB

RMB

RMB

USDCash flows from operating activities:Net loss


(22,504,101
)


(74,503,083
)


(56,478,076
)


(8,557,285
)Adjustments for:Corporate expenses allocated from Shanda


3,301,171



997,081







Share-based compensation


71,149



443,000



1,311,230



198,671Compensation charge for postcombination services










6,318,889



957,407Depreciation of property and equipment


1,249,653



2,511,362



4,645,008



703,789Amortization of intangible assets


4,584,738



3,581,755



12,250,275



1,856,102Provision/(reversal) for doubtful receivables






568,277



(47,660
)


(7,221
)Write-down of inventory






323,621



25,548,182



3,870,937Loss / (gain) from disposal of fixed assets


(1,416
)


7,160



566,437



85,824Gain on bargain purchase










(7,397,545
)


(1,120,840
)Equity in (earnings) loss of affiliated company


94,618



(585,130
)


(2,848,667
)


(431,616
)Foreign exchange (gain) loss


(6,090
)


5,577



451,128



68,353Distribution to Shanda










(939,831
)


(142,399
)Deferred taxes


253,383



(2,131,258
)


(11,738,760
)


(1,778,600
)Changes in assets and liabilities, net of acquisitions:Accounts receivable


(2,717,612
)


(12,388,030
)


(21,133,913
)


(3,202,109
)Accounts receivable due from related parties


(382,772
)


(9,243,681
)


558,498



84,621Inventory


(38,596
)


(13,828,054
)


(94,374,324
)


(14,299,140
)Royalty advances






(11,923,630
)


(14,920,450
)


(2,260,674
)Prepayments and other current assets


(4,652,204
)


(2,415,676
)


10,735,516



1,626,593Other long-term assets






(4,066,615
)


(8,120,608
)


(1,230,395
)Compensation paid for postcombination services










(39,740,000
)


(6,021,212
)Accounts payable


33,447



17,616,316



79,129,357



11,989,298Accounts payable due to related parties


(324,518
)


278,000



533,170



80,783Taxes payable


827,812



3,643,010



4,271,471



647,193Deferred revenue


775,019



1,154,694



7,622,907



1,154,986Other payables and accruals


5,021,432



17,636,487



4,002,690



606,468Other payables due to related parties


9,195,160



6,818,208



Net cash used in operating activities


(5,219,727
)


(75,500,609
)


(99,795,076
)


(15,120,466
)Cash flows from investing activities:Distribution to Shanda for subsidiaries and affiliated company
    contributed by Shanda






(121,913,690
)






Amount received from/(paid to) Shanda


(9,000,000
)


(10,000,000
)


19,000,000



2,878,788Sale of short-term investments






53,500,000







Purchase of short-term investments


(23,500,000
)










Purchase of property and equipment


(1,456,736
)


(8,681,892
)


(9,549,136
)


(1,446,839
)Proceeds from disposal of fixed assets


78,840



14,371



21,073



3,193Purchase of intangible assets






(660,000
)


(7,606,170
)


(1,152,450
)Cash paid for the investment in securities






(7,000,000
)






Cash received upon consolidation of a subsidiary contributed by
    Shanda


5,574,581











Advance payment for investments






(6,900,000
)






Capital contribution to a subsidiary by non-controlling
    shareholder










1,240,000



187,879Acquisition of subsidiaries, net of cash acquired






(16,852,874
)


(48,554,598
)


(7,356,757
)Net cash used by investing activities


(28,303,315
)


(118,494,085
)


(45,448,831
)


(6,886,186
)Cash flows from financing activities:Proceeds from loans borrowed from related parties






300,000,000



465,356,382



70,508,543Repayment of loans borrowed from related parties










(159,714,800
)


(24,199,212
)Net cash provided by financing activities






300,000,000



305,641,582



46,309,331Effect of exchange rate changes on cash and cash equivalents


6,090



(5,577
)


(2,149,363
)


(325,661
)Net increase/(decrease) in cash and cash equivalents


(33,516,952
)


105,999,729



158,248,312



23,977,018Cash, beginning of year


68,874,719



35,357,767



141,357,496



21,417,801Cash, end of year


35,357,767



141,357,496



299,605,808



45,394,819Supplemental disclosure of cash flow information:Cash paid during the year for income taxes


58,799



269,704



4,411,288



668,377Cash paid during the year for interest of loan










2,082,282



315,497Supplemental disclosure of non-cash investing activities:Accrual related to purchase of property and equipment and
    intangible assets


363,027



1,781,787



3,815,900



578,167Acquisition-related obligation at year end






646,626



3,500,000



530,303Supplemental disclosure of non-cash financing activities:Conversion from loans to the Class A ordinary shares by
    Shanda










16,651,250



2,522,917Conversion from loans to Series A Preferred Shares by Shanda










149,063,616



22,585,396    F-6




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
 (AMOUNTS EXPRESSED IN RENMINBI (RMB) UNLESS OTHERWISE
    STATED)
  1.
    ORGANIZATION
    AND NATURE OF OPERATIONS  Nature
    of operations
    The
    Reorganization
         F-7




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        2.
    PRINCIPAL
    ACCOUNTING POLICIES  (1)
    Basis
    of preparation            (2)
    Use of
    estimates   F-8




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (3)
    Consolidation      810-10 Amendments to FASB Interpretation No, 46(R)
      
    Loan Agreements.  Shengting entered into a loan
    agreement with each of the shareholders of Shanghai Hongwen,
    namely Ms. Dongxu Wang and Mr. Mingfeng Chen, in
    August 2008, which was amended and restated in February 2011.
    Under these loan agreements, Shengting has granted an
    interest-free loan of RMB5 million to each of
    Ms. DongxuWang and Mr.Mingfeng Chen who are the employees
    of Shanda, solely for their capital contributions to Shanghai
    Hongwen. The loans shall become payable when Shengting requests
    repayment. Shengting may request early repayment of the loans
    with 30 days advance notice and may decide the loans
    to be repaid in cash or in other forms, but the shareholders of
    Shanghai Hongwen may not repay all or any part of the loans
    without Shengtings prior written consent.
    Business Operation Agreement.  Shengting
    entered into a business operation agreement with Shanghai
    Hongwen and its shareholders in October 2010, as amended and
    restated in March 2011. Under this agreement, Shanghai Hongwen
    must designate the candidates nominated by Shengting to be the
    directors on its board of directors, and must appoint the
    persons recommended by Shengting to be its general manager,
    financial controller and other senior management. Moreover,
    Shanghai Hongwen agrees that it will not engage in any
    transactions that could materially affect its assets,
    liabilities, rights or operations without the prior consent of
    Shengting. Such transactions include incurrence or assumption of
    any indebtedness that are not in the ordinary course of
    business; sale or purchase of any assets or rights with values
    of more than RMB0.1 million; encumbrance on any of their
    assets or intellectual property rights in favor of a third
    party; or transfer of any rights or obligations under this
    agreement to a third party. The agreement is for an initial term
    of 20 years and renewable upon Shengtings request.
    Shengting may terminate the agreement at any time by providing
    30 days advance written notice to Shanghai Hongwen
    and to each of its shareholders. Neither Shanghai Hongwen nor
    any of its shareholders may terminate this agreement prior to
    its expiration date. F-9




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    Exclusive Call Option Agreement.  Shanghai
    Hongwen and its shareholders entered into an exclusive call
    option agreement with Shengting in 2008. Pursuant to this
    agreement, Shengting and any third party designated by Shengting
    have the exclusive right to purchase from the shareholders of
    Shanghai Hongwen all or any part of their equity interests in
    Shanghai Hongwen at a purchase price equal to the lowest price
    permissible by the then-applicable PRC laws and regulations.
    Shengting may exercise such option at any time during the term
    of the agreement until it has acquired all equity interests of
    Shanghai Hongwen, subject to applicable PRC laws. Moreover,
    under the 2008 exclusive call option agreement, neither Shanghai
    Hongwen nor its shareholders may take actions that could
    materially affect Shanghai Hongwens assets, liabilities,
    operation, equity and other legal rights without the prior
    written approval of Shengting, including, without limitation,
    declaration and distribution of any dividends and profits; sale,
    assignment, mortgage or disposition of, or creation of any other
    encumbrances on, Shanghai Hongwens equity; merger or
    consolidation; acquisition of and investment in any third-party
    entities; creation, assumption, guarantee or incurrence of any
    indebtedness; entering into other material contracts. The
    agreement is for an initial term of 20 years and renewable
    upon Shengtings request. The agreement was amended and
    restated in March 2011. 
  
    Exclusive Technology Consulting and Service Framework
    Agreement. Shengting and Shanghai Hongwen entered into an
    exclusive technology consulting and service framework agreement
    in March 2011. Under this agreement, Shanghai Hongwen and its
    affiliated companies agree to engage Shengting as its exclusive
    provider of technology consulting and services. Shanghai Hongwen
    shall pay to Shengting service and consulting fees determined
    based on the nature and time of the services and the revenues of
    Shanghai Hongwen or its affiliated companies may earn
    thereunder. Shengting shall exclusively own any intellectual
    property arising from the performance of this agreement. The
    agreement is for an initial term of 20 years and renewable
    upon Shengtings request. Shengting may terminate the
    agreement at any time by providing 30 days advance
    written notice to Shanghai Hongwen. Shanghai Hongwen may not
    terminate this agreement prior to its expiration date. As
    Shengting has effective control over Shanghai Hongwen through
    the contractual arrangements among the parties, the Company
    believes that Shengting is able to cause Shanghai Hongwen to
    agree to pay any fees or percentage of revenues that Shengting
    sees fit. 
  
    Share Pledge Agreement.  The shareholders of
    Shanghai Hongwen entered into a share pledge agreement with
    Shengting in August 2008, which was amended and restated in
    March 2011. Under the share pledge agreement, the shareholders
    of Shanghai Hongwen pledged all of their equity interests in
    Shanghai Hongwen to Shengting as collateral for all of their
    payments due to Shengting and to secure performance of all
    obligations of Shanghai Hongwen and its shareholders under the
    above loan agreements, exclusive call option agreement,
    exclusive technology consulting and service agreement and the
    business operation agreement. Shanghai Hongwen is prohibited
    from declaring any dividend or making any profit distribution
    during the term of the pledge. Without Shengtings prior
    written consent, neither shareholder of Shanghai Hongwen may
    transfer any equity interests in Shanghai Hongwen. If any event
    of default as provided for therein occurs, Shengting, as the
    pledgee, will be entitled to dispose of the pledged equity
    interests through transfer or assignment and use the proceeds to
    repay the loans or make other payments due under the above
    agreements.
    Power of Attorney.  Each shareholder of
    Shanghai Hongwen executed an irrevocable power of attorney in
    March 2011 to appoint Shengting as the attorney-in-fact to act
    on his or her behalf on all matters pertaining to Shanghai
    Hongwen and to exercise all of his or her rights as a
    shareholder of Shanghai Hongwen, including the right to attend
    shareholders meeting, to exercise voting rights, to appoint
    directors, general manager, financial controller and other
    senior management of Shanghai Hongwen. The power of attorney is
    irrevocable and continually valid as long as the principal is
    the shareholder of Shanghai Hongwen. These powers of attorney
    superseded the share entrustment agreement the parties executed
    in 2008, under which Ms. DongxuWang and Mr.Mingfeng Chen
    acknowledged that they are nominee shareholders of Shanghai
    Hongwen on behalf of Shengting. F-10




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
             (4)
    Fair
    value measurements   F-11




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (5)
    Foreign
    currency translation        (6)
    Convenience
    translation    (7)
    Cash
    and cash equivalents    (8)
    Short-term
    investments   F-12




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (9)
    Allowances
    for doubtful accounts    (10)
    Inventories    (11)
    Investment
    in securities  held-to-maturity available-for-sale held-to-maturity held-to-maturity available-for-sale
  available-for-sale
  available-for-sale available-for-sale other-than-temporary other-than-temporary
   F-13




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (12)
    Investment
    in affiliated companies      (13)
    Property
    and equipment    Computer equipment

5 yearsLeasehold improvements

Lesser of the term of the lease or the estimated useful lives of
    the assetsFurniture and fixtures

5 yearsMotor vehicles

5 years     (14)
    Royalty
    advances    (15)
    Intangible
    assets  Websites
    and internally used software development costs
  No. 98-1, Accounting for the Costs of Computer Software Developed
    or Obtained for Internal Use)
 F-14




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Copyrights
    Software
    Websites
    Intangible
    assets acquired through business combinations
  Business Combinations
  Brand names

19 to 20 yearsCopyrights

5 to 10 yearsWriter contracts

5 to 6 yearsTelecom relationships

9 to 11 yearsUser lists

5 yearsBookstore relationships

6 to 10 years   (16)
    Goodwill    Goodwill and other intangible
    assets
 F-15




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (17)
    Impairment
    of long-lived assets and intangible assets    (18)
    Revenue
    recognition  Online
    Business
  Online
    paid users
          605-45
 F-16




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Wireless
    services
            
    where the Company has timely access to usage information (i.e.
    under the per usage basis), in accordance with ASC 605, the
    revenues are recognized in the period in which the service is
    performed provided that no significant obligation remains,
    collection of the receivable is reasonably assured and the
    amounts can be reliably estimated. The estimate of revenue is
    based on Companys analysis of usage information for the
    month provided by the mobile operator, the contractual rates
    with the mobile operator and any historical adjustments for
    discrepancies between internally estimated revenues and actual
    revenues subsequently confirmed by the mobile operator. There
    were no significant true up adjustments between the
    Companys analysis of usage information and the statements
    received during 2010.
    where the Company does not have timely access to usage
    information (i.e. under the monthly subscription basis), until
    billing statements are received, the Company cannot reliably
    determine the revenue earned for that period as it has limited
    relationship history with the mobile operator which began in
    2010 and lacks the information necessary to make a reliable
    estimate. Accordingly, the Company recognized revenue in the
    period in which the service is performed only if the billing
    statements for the related period have been received prior to
    the issuance of its financial statements. The Company has
    applied such policy on a consistent basis. 
   
 F-17




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 
   
    Revenue
    sharing arrangements with authors
  ASC 605-45
  Copyright
    licensing
  sub-licensing sub-licensing sub-licensing sub-licensing
  Online
    advertising
    Customer
    loyalty program
   F-18




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Offline
    Business
      first-in-first-out
     F-19




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      ASC 605-50
  Business
    tax and value added tax
    (19)
    Deferred
    revenue    (20)
    Product
    development    (21)
    Sales
    and marketing    (22)
    Share-based
    compensation   F-20




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (23)
    Leases    (24)
    Government
    subsidies        (25)
    Taxation    Income Taxes
  ASC 740-10-25 Accounting for Uncertainty in Income Taxes  An
    interpretation of FASB Statement No. 109
 F-21




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (26)
    Loss
    per share  260-10 Earnings per Share).
    (27)
    Comprehensive
    income or loss    (28)
    Segment
    reporting  Disclosures about Segments of an Enterprise and Related
    Information
  Online Business
  Offline Business
     F-22




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31, 2010Online

Offline

Elimination

TotalNet revenues


215,694,500



185,470,570



(8,151,004
)


393,014,066Costs of revenues


(170,377,384
)


(165,896,995
)


8,135,462



(328,138,917
)Gross profit


45,317,116



19,573,575



(15,542
)


64,875,149   Year Ended December 31, 2009Online

Offline

Elimination

TotalNet revenues


100,050,709



35,922,316



(1,422,117
)


134,550,908Costs of revenues


(85,459,029
)


(23,873,953
)


1,340,757



(107,992,225
)Gross profit


14,591,680



12,048,363



(81,360
)


26,558,683   Year Ended December 31, 2008Online

Offline

Elimination

TotalNet revenues


52,975,784











52,975,784Costs of revenues


(46,816,263
)










(46,816,263
)Gross profit


6,159,521











6,159,521   (29)
    Statutory
    reserves    ~
       F-23




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (30)
    Dividends    (31)
    Business
    combinations and non-controlling interests    Business combinations
      Non-controlling Interests in Consolidated Financial
    Statements-an amendment of ARB No. 51. Classification and Measurement of Redeemable
    Securities
  3.
    RECENT
    ACCOUNTING PRONOUNCEMENTS  No. 2009-17, Consolidations (Topic 810): Improvements to Financial
    Reporting by Enterprises Involved with Variable Interest
    Entities
 F-24




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Amendments to
    FASB Interpretation No. 46 (R) ASC 810-10-50-2A Consolidation  Overall 
    Disclosure  Variable Interest Entities No. 2009-17
  2010-06, ASC 820-10, 2010-06
  2010-09, over-the-counter 2010-09
  2010-13, 2010-13
  2010-17, 2010-17
  2010-20,
 F-25




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2010-20
  No. 2010-28, 2010-28
  No. 2010-29, 2010-29
  4.
    BUSINESS
    COMBINATIONS   F-26




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (a)
    2010
    acquisition  Acquisition
    of Tianjin Rongshuxia Information Co., Ltd. or
    Rongshuxia
        AmortizationPeriodCash and cash equivalents


7,403,858Acquired identifiable intangible assets:Brand name


2,500,000



20 yearsUser list


700,000



5 yearsGoodwill allocated to online segment


3,631,435Current liabilities


(2,400,000
)Non-current deferred tax liabilities


(200,000
)Non-controlling interests at fair value


(4,735,294
)Consideration transferred to Rongshuxia


6,900,000          F-27




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Acquisition
    of Tianjin Zhongzhi Bowen Book Co., Ltd. or Zhongzhi
    Bowen
          AmortizationPeriodCash and cash equivalents


70,074,167Accounts receivable


1,459,055Inventories


18,221,795Other current assets


5,610,605Acquired intangible assets:Bookstore relationship


47,800,000



9.8 yearsCopyright


16,200,000



9.8 yearsGain on bargain purchase


(6,500,443
)Property and equipment, net


76,464Deferred tax assets


2,120,700Current liabilities


(45,000,000
)Non-current deferred tax liabilities


(11,854,500
)Non-controlling interests at fair value


(48,107,843
)Consideration transferred to Zhongzhi Bowen


50,100,000    F-28




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Acquisition
    of Tianjin Shengda Tianfang Tingshu Information Technology Co.,
    Ltd. or Tianfang Tingshu
         F-29




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Total consideration transferred to Tianfang Tingshu and selling
    shareholdersConsideration transferred to Tiangfang Tinshu and selling
    shareholders


7,500,000Fair value of the put option


(100,000
)7,400,000   
 AmortizationPeriodCash and cash equivalents


4,200,000Other current assets


1,700,000Acquired intangible assets:Brand name


4,800,000



19.58 yearsUser list


1,000,000



5 yearsGoodwill allocated to online segment


1,446,429Deferred tax assets


2,075,000Other current liabilities


(2,700,000
)Non-current deferred tax liabilities


(1,450,000
)Fair value of redeemable non-controlling interests


(3,671,429
)Total consideration transferred to Tianfang Tingshu and selling
    shareholders


7,400,000  
          Acquisition
    of Xiaoxiang Shuyuan (Tianjin) Culture Development Co., Ltd. or
    Xiaoxiang Shuyuan
   F-30




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        AmortizationPeriodCash and cash equivalents


7,068,639Other current assets


947,621Acquired intangible assets:Brand name


6,700,000



19.6 yearsWriter contracts


5,200,000



5.6 yearsTelecom relationship


100,000



9.6 yearsUser list


900,000



5.0 yearsGoodwill allocated to online segment


1,036,515Property and equipment, net


47,735Non-current deferred tax liabilities


(3,225,000
)Non-controlling interests at fair value


(8,150,510
)Total consideration transferred to Xiaoxiang Shuyuan and selling
    shareholders


10,625,000          F-31




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Acquisition
    of Tianjin Yueduwang Technology Co., Ltd. or Cuilong
         F-32




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Total consideration transferred to Cuilong and selling
    shareholdersConsideration transferred to Cuilong and selling shareholders


9,100,000Contingent consideration receivable


(5,678,571
)3,421,429   AmortizationPeriodCash and cash equivalents


4,040,131Accounts receivable


143,911Other current assets


5,450,111Acquired intangible assets:Brand name


3,700,000



19.2 yearsUser list


400,000



5 yearsGain on bargain purchase


(897,102
)Property and equipment, net


208,806Current liabilities


(627,999
)Non-current deferred tax liabilities


(1,025,000
)Non-controlling interests at fair value


(7,971,429
)Total consideration transferred to Cuilong and selling
    shareholders


3,421,429           Acquisition
    of Beijing Wangwen Xinyue Technology Co., Ltd. or Wangwen
    Xinyue
     F-33




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Total consideration transferred to Wangwen Xinyue and selling
    shareholdersConsideration transferred to Wangwen Xinyue and selling
    shareholders


27,500,000Contingent consideration


27,500,000   F-34




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  AmortizationPeriodAggregate purchase price allocation  Wangwen XinyueCash and cash equivalents


6,390,234Accounts receivable


2,043,235Other current assets


238,039Acquired intangible assets:Brand name


10,100,000



19.7 yearsWriter contracts


10,000,000



5.7 yearsCopyright


500,000



5.7 yearsTelecom relationship


2,200,000



9.7 yearsUser list


400,000



5 yearsGoodwill allocated to online segment


25,571,731Property and equipment, net


214,300Current liabilities


(3,415,981
)Non-current deferred tax liabilities


(5,600,000
)Fair value of redeemable non-controlling interests


(21,141,558
)Total consideration transferred to Wangwen Xinyue and selling
    shareholders


27,500,000          F-35




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Unaudited
    Pro forma information on 2010 acquisitions
    December 31, 2010RMBNet revenues:Rongshuxia


49,194Zhongzhi Bowen


69,409,974Tianfang Tingshu


1,375,958Xiaoxing Shuyuan


11,324,350Cuilong


300,788Wangwen Xinyue


13,224,486Total


95,684,750Net income (loss):Rongshuxia


(6,686,856
)Zhongzhi Bowen


1,264,728Tianfang Tingshu


(1,568,560
)Xiaoxing Shuyuan


1,547,417Cuilong


(1,271,554
)Wangwen Xinyue


2,734,658Total


(3,980,167
)     December 31, 2009

December 31, 2010RMB

RMBNet revenues:


194,266,979



404,241,244Net loss attributable to Cloudary Corporation ordinary
    shareholders


80,126,335



46,600,134Net loss per share attributable to Cloudary Corporation-basic
    and diluted


0.32



0.19    F-36




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (b)
    2009
    acquisition  Acquisition
    of Tianjing Huawen Tianxia Book Co., Ltd. or Huawen
    Tianxia
        AmortizationPeriodAggregate purchase price allocation  Huawen Tianxia:Cash and cash equivalents


45,000,500Inventory


9,918,895Other assets


4,368,858Acquired intangible assets:Bookstore relationship


13,300,000



6.5 yearsCopyright


9,400,000



9.5 yearsGoodwill allocated to offline segment


11,363,231Property and equipment, net


295,245Deferred tax assets


1,979,251Current liabilities


(22,500,000
)Non-current deferred tax liabilities


(5,675,000
)Non-controlling interests at fair value


(27,450,980
)Total consideration transferred to Huawen Tianxia


40,000,000        F-37




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (c)
    2008
    acquisition  Acquisition
    of Hong Xiu Tian Xiang Science and Technology Development
    (Beijing) Co., Ltd. or Hong Xiu
          AmortizationPeriodAggregate purchase price allocation  Hong Xiu:Cash and cash equivalents


74,749Other current assets


448,872Acquired intangible assets:Brand name


3,540,000



19.5 yearsWriter contracts


1,320,000



5.5 yearsTelecom relationship


360,000



10.5 yearsUser list


360,000



5.0 yearsGoodwill allocated to online segment


4,491,407Property and equipment, net


168,990Current liabilities


(639,018
)Non-current deferred tax liabilities


(1,395,000
)Total purchase price


8,730,000   Business
    Combinations
   F-38




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Non
    controlling interests in Consolidated financial
    statements
  5.
    NET
    REVENUES  For the Years Ended December 31,2008

2009

2010RMB

RMB

RMBOnline business:Online paid users


37,359,610



54,156,842



103,610,759Wireless service


1,392,351



5,762,876



60,415,342Online advertising


2,952,427



19,748,615



21,098,065Copyright licensing


6,342,119



12,423,553



17,619,767Others


4,929,277



6,536,706



4,799,56352,975,784



98,628,592



207,543,496Offline business






35,922,316



185,470,570Total net revenues


52,975,784



134,550,908



393,014,066   6.
    TAXATION  Cayman
    Islands
    Hong
    Kong
    China
     F-39




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5-year
      For the Years Ended December 31,2008

2009

2010RMB

RMB

RMBCurrent income tax expenses






974,570



6,253,440Deferred income tax expense (benefits)


253,383



(2,131,258
)


(11,738,760
)Income tax expense (benefits)


253,383



(1,156,688
)


(5,485,320
)   Reconciliation
    of the differences between statutory tax rate and the effective
    tax rate
    For the Years Ended December 31,2008

2009

2010PRC statutory CIT rate


25
%


25
%


25
%Tax differential from statutory rate applicable to subsidiaries
    in the PRC


(5
)%


(2
)%


1
%Enacted tax rate change






1
%


2
%Non-deductible expenses incurred outside PRC


(4
)%


(1
)%


(1
)%Non-deductible expenses


(1
)%


(4
)%


(1
)%Change in valuation allowances


(16
)%


(17
)%


(17
)%Effective CIT rate


(1
)%


2
%


9
%  F-40




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Significant
    components of deferred tax assets and deferred tax liabilities
    are as follows:
  December 31,

December 31,2009

2010RMB

RMBDeferred tax assetsAccrued expense


9,003,869



2,173,246Inventory write-down






7,282,790Deferred profit


1,164,849



2,978,784Other temporary differences


1,979,251



6,174,951Less : valuation allowances


(8,628,595
)


(1,668,853
)Current deferred tax assets


3,519,374



16,940,918Tax loss carry forward


7,686,855



24,043,503Other temporary differences


668,397



1,371,346Less : valuation allowances


(7,839,386
)


(25,013,912
)Non-current deferred tax assets


515,866



400,937Deferred tax liabilitiesIntangible assets arisen from business combination


6,492,620



27,219,275Non-current deferred tax liabilities


6,492,620



27,219,275   Movement
    of valuation allowances
  For the Years Ended December 31,2008

2009

2010RMB

RMB

RMBBalance at beginning of year






(3,649,807
)


(16,467,981
)Current year additions


(3,649,807
)


(12,818,174
)


(12,597,440
)Current year reversals










2,382,656Balance at end of year


(3,649,807
)


(16,467,981
)


(26,682,765
)      F-41




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  7.
    BASIC AND
    DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO CLOUDARY
    CORPORATIONS ORDINARY SHAREHOLDER    For the Year Ended December 31,2008

2009

2010RMB

RMB

RMBNumerator:Net loss attributable to Cloudary Corporations ordinary
    shareholders


(22,105,641
)


(73,424,681
)


(45,380,867
)Denominator:Denominator for weighted-average ordinary shares outstanding for
    basic and diluted loss per share calculation


250,000,000



250,000,000



250,000,000Basic and diluted loss per share attributable to Cloudary
    Corporations ordinary shareholders


(0.09
)


(0.29
)


(0.18
)     8.
    CASH AND
    CASH EQUIVALENTS      9.
    ACCOUNTS
    RECEIVABLE  December 31,

December 31,2009

2010RMB

RMBAccounts receivable


18,319,211



43,099,380Less: Allowance for doubtful accounts


(568,227
)


(520,617
)17,750,984



42,578,763  F-42




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    For the Years Ended December 31,2008

2009

2010RMB

RMB

RMBBalance at beginning of year










568,227Current year additions






568,227



Less: Current year reversal










(47,610
)Balance at end of year






568,227



520,617   10.
    INVENTORIES    As of December 31,2009

2010Raw materials


2,817,253



19,700,353Work in progress


3,389,683



15,948,032Finished goods


5,750,876



27,168,782Inventory held with distributors on consignment


11,572,418



46,431,781Inventories


23,530,230



109,248,948     11.
    INVESTMENT
    IN AFFILIATED COMPANY    December 31,

December 31,2009

2010RMB

RMB

PercentageOwnership%Beijing Jinjiang Networking Technology Co., Ltd.
    (Jinjiang)


9,990,512



12,839,179



50.00  F-43




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    For the Years Ended December 31,2008

2009

2010RMB

RMB

RMBBalance at beginning of year






9,405,382



9,990,512Investments


9,500,000







Share of profit/(loss) of affiliated company


(22,038
)


672,226



2,935,763Amortization of identifiable intangible assets, net of tax


(72,580
)


(87,096
)


(87,096
)Balance at end of year


9,405,382



9,990,512



12,839,179   12.
    PROPERTY
    AND EQUIPMENT    December 31,

December 31,2009

2010RMB

RMBComputer equipment


14,901,369



23,692,524Leasehold improvements


935,331



2,916,258Furniture and fixtures


1,270,537



1,892,849Motor vehicles


221,285



399,085Less: Accumulated depreciation


(4,373,024
)


(9,047,181
)Net book value


12,955,498



19,853,535     13.
    INTANGIBLE
    ASSETS    December 31,

December 31,2009

2010RMB

RMBGross carrying amount:Copyrights


37,592,774



74,863,819Websites


1,868,160



2,978,371Software and others






1,598,791Intangible assets arising from business combinations Brand names


13,183,142



40,983,142 Writers contracts


1,320,000



16,520,000 Copyrights


9,400,000



26,100,000 Telecom relationships


360,000



2,660,000 User list


360,000



3,760,000 Bookstore relationships


13,300,000



61,100,00077,384,076



230,564,123 F-44




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  December 31,

December 31,2009

2010RMB

RMBLess: accumulated amortizationCopyrights


(32,023,243
)


(52,033,381
)Websites


(206,768
)


(383,768
)Software and others






(49,495
)Intangible assets arising from business combinations Brand names


(9,915,452
)


(10,918,672
) Writers contracts


(360,000
)


(2,319,753
) Copyrights


(494,736
)


(2,789,191
) Telecom relationships


(51,420
)


(243,513
) User list


(108,000
)


(591,684
) Bookstore relationships


(1,023,078
)


(6,746,155
)(44,182,697
)


(76,075,612
)Net book value


33,201,379



154,488,511       AmortizationRMB2011


25,211,9312012


22,162,2762013


19,076,6202014


15,234,5322015


14,857,851Total


96,543,210   14.
    GOODWILL    January 1,



December 31,



December 31,



December 31,2008

Addition

2008

Addition

2009

Addition

2010Hong Xiu






4,491,407



4,491,407







4,491,407







4,491,407Huawen














11,363,231



11,363,231







11,363,231Rongshuxia






















3,631,435



3,631,435Wangwen Xueyue






















25,571,731



25,571,731Xiaoxiang Shuyuan






















1,036,515



1,036,515Tianfang Tingshu






















1,446,429



1,446,429Total






4,491,407



4,491,407



11,363,231



15,854,638



31,686,110



47,540,748  F-45




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    OTHER
    PAYABLES AND ACCRUALS  December 31,

December 31,2009

2010RMB

RMBSalary, bonus and welfare payable


3,674,219



9,578,201Advances from customers


258,793



19,818,126Unpaid advertisement and promotion fee


14,412,970



1,354,655Acquisition related obligation (Note 4)






3,500,000Other tax payables


3,852,367



5,710,230Other payables


8,469,990



9,202,380Total


30,668,339



49,163,592   16.
    LONG-TERM
    BORROWINGS FROM RELATED PARTIES  December 31,2009

2010Borrowing from Shanda






36,569,312Borrowing from a company under common control of Shanda


300,000,000



400,000,000Total long-term borrowings


300,000,000



436,569,312                F-46




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Movement
    of borrowings from related parties
  For the Years Ended December 31,2009

2010RMB

RMBBalance at beginning of year






300,000,000Current year additions


300,000,000



465,356,382Current year repayment






(159,714,800
)Conversion to Series A preferred shares






(149,063,616
)Conversion to Class A ordinary shares






(16,651,250
)Foreign currency translation






(3,357,404
)Balance at end of year


300,000,000



436,569,312     17.
    SERIES A-1
    AND A-2
    REDEEMABLE CONVERTIBLE PREFERRED SHARES  Series A-1 (Series A-1 Series A-2 (Series A-2
      Conversion
      Voting
    Rights
    Dividends
  Series A-1 Series A-2
 F-47




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Redemption
    Rights
    Series A-1 Series A-2
  Liquidation
    Preference
    Accretion
  Series A-1 Series A-2 Series A-1 Series A-2
  18.
    SHAREHOLDERS
    EQUITY       F-48




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        19.
    NON-CONTROLLING
    INTERESTS    December 31,

December 31,2009

2010RMB

RMBNon-controlling interests in consolidated subsidiaries or VIE
    subsidiariesHong Xiu


3,619,826



3,849,279Huawen Tianxia


28,315,273



23,875,566Rongshuxia






1,451,794Zhongzhi Bowen






45,809,445Cuilong






7,489,263Xiaoxiang Shuyuan






7,345,54031,935,099



89,820,887   2009

2010RMB

RMBBalance at beginning of year


1,817,268



31,935,099Add: Additions during the year-Non-controlling interest arising from business combination


27,450,980



68,965,076Capital contribution to a subsidiary attributable to
    non-controlling interest


3,745,253



Capital contribution to a subsidiary by non-controlling interest






531,405Capital contribution to non-controlling interest






73,275Less: decrease during the yearLoss attributable to non-controlling interests


(1,078,402
)


(11,683,968
)Balance at the end of year


31,935,099



89,820,887  F-49




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,

December 31,2009

2010RMB

RMBTianfang Tingshu






3,134,086Wangwen Xinyue






22,162,159



25,296,245   Balances at

Arising from





Balances atJanuary 1,

Business

Share of

Share-Based

December 31,2010

Combination

Profit/(Loss)

Compensation

2010RMB

RMB

RMB

RMB

RMBTianfang Tingshu






3,671,429



(537,343
)






3,134,086Wangwen Xinyue






21,141,558



613,927



406,674



22,162,159Total






24,812,987



76,584



406,674



25,296,245   ASC 810-10-55-4.
  2008

2009

2010RMB

RMB

RMBNet loss attributable to Cloudary Corporation


22,105,641



73,424,681



44,870,692Decrease in additional paid-in capital for purchase of
    additional equity of a subsidiary






3,745,253



Capital contribution to a subsidiary by non-controlling interest










(708,595
)Capital contribution to non-controlling shareholder










73,275Change from net loss attributable to Cloudary Corporation and
    transfers to non-controlling interests


22,105,641



77,169,934



44,235,372   20.
    SHARE
    OPTION PLAN  Share-based
    compensation of Shanda
   F-50




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    WeightedAverageWeighted

Remaining

AggregateOptions

Average

Contractual

IntrinsicOutstanding

Exercise Price

Life

ValueUS$



US$Outstanding at December 31, 2007


500



5.50



6.25



5,418Granted






Transferred from Shanda


17,000



7.87Exercised


(500
)


5.50Forfeited






Expired






Outstanding at December 31, 2008


17,000



7.87



7.33



141,210Vested and expected to vest at December 31, 2008


17,000



7.87



7.33



141,210Vested and exercisable at December 31, 2008


1,500



15.55



6.08



945Granted






Exercised


(9,500
)


8.68Forfeited






Expired






Outstanding at December 31, 2009


7,500



6.85



6.5



145,913Vested and expected to vest at December 31, 2009


7,500



6.85



6.5



145,913Vested and exercisable at December 31, 2009














Granted






Transferred from Shanda


33,250



4.90Exercised


(3,750
)


6.85Forfeited






Expired






Outstanding at December 31, 2010


37,000



8.05



4.49



471,165Vested and expected to vest at December 31, 2010


37,000



8.05



4.49



471,165Vested and exercisable at December 31, 2010


34,500



7.79



5.34



414,915        F-51




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Share-based
    compensation of Shanda Games
  2008
    Equity Compensation Plan
  and/or and/or
    Weighted Average Grant-Unvested Restricted Shares

Number of Shares

Date Fair Value US$Granted


52,000



6.25Transferred from Shanda


21,000



6.25Vested






Forfeited






Unvested at December 31, 2009


73,000



6.25Expected to vest at December 31, 2009


73,000



6.25Transferred from Shanda


70,000



5.94Vested


(27,083
)


5.75Forfeited






Unvested at December 31, 2010


115,917



6.11Expected to vest at December 31, 2010


115,917



6.11        F-52




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Share-based
    compensation of the Company
  2010
    Equity Compensation Plan
      1 4 3 4 provided provided further
         F-53




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    WeightedAverageWeighted

Remaining

AggregateOptions

Average

Contractual

IntrinsicOutstanding

Exercise Price

Life

ValueUS$



US$Granted


11,000,750



1.8Exercised






Forfeited






Expired






Outstanding at December 31, 2010


11,000,750



1.8



5.92



Vested and expected to vest at December 31, 2010


11,000,750



1.8



5.92



Vested and exercisable at December 31, 2010














         For the Year EndedDecember 31, 2010Risk-free interest
    rate(1)

1.9%-2.3%Expected life (in
    years)(2)

4.5-5Expected dividend
    yield(3)

Expected
    volatility(4)

50%-55%Fair value per option at grant date

US$0.76-US$0.85     (1)
    
    The risk-free interest rate for
    periods within the contractual life of the share option is based
    on the rate of US$ China government bond yield in effect at the
    time of grant for a term consistent with the expected term of
    the awards.(2)
    
    The expected term of share options
    granted under the 2010 Equity and Performance Incentive Plan is
    developed giving consideration to vesting period, contractual
    term, share price, employees level within the organization
    and the expected volatility of the underlying shares.(3)
    
    The company has no expectation of
    paying dividends on its common shares in future.(4)
    
    Expected volatility is estimated
    based on the historical data volatilities of the comparable
    companies in similar industry as at the valuation dates.  21.
    EMPLOYEE
    BENEFITS   F-54




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  22.
    RELATED
    PARTY TRANSACTIONS    For the Years Ended December 31,2008

2009

2010RMB

RMB

RMBPlatform service fees and sales agent fees paid to companies
    under common control by
    Shanda(1)


(4,657,012
)


(11,201,817
)


(12,245,756
)Rental fee paid to companies under common control by Shanda


(994,806
)


(808,221
)


Other management fees paid to companies under common control by
    Shanda










(834,857
)Interest expense paid to companies under common control by Shanda










(3,155,278
)Corporate general administrative expenses allocated from Shanda


(3,301,171
)


(997,081
)


Technology transfer fees received from companies under common
    control by Shanda






4,317,866



Advertising revenue received from companies under common control
    by Shanda


274,065



7,255,798



14,499,540Copyright licensing fees received from a company under common
    control by Shanda


284,250



3,174,125



143,508Platform game revenue received from companies under common
    control by Shanda


4,970,228



2,168,692



4,067,993Wireless revenue from companies under common control by
    Shanda(2)










890,490     (1)
    
    Prior to the Reorganization, these
    services were provided by Shandas various subsidiaries and
    VIEs, and the service fees were incurred based on the
    contractual arrangement entered prior to the reorganization. For
    the five-year period beginning after the Reorganization, the
    Group has agreed to continue to use services provided by the
    fellow companies of the Group based on the new services
    agreements.(2)
    
    The amount of receivables relating
    to wireless revenue earned by the Company from companies under
    common control of Shanda was waived off and was recorded as a
    distribution by the Company to Shanda.  December 31,

December 31,2009

2010RMB

RMBAccounts receivables due from companies under common control by
    Shanda


12,138,972



11,580,474Other receivables due from companies under common control by
    Shanda


19,000,000



     December 31,

December 31,2009

2010RMB

RMBAccounts payable due to companies under common control by Shanda


536,523



1,069,693Other payables due to companies under common control by Shanda


16,013,367



16,422,586Long-term borrowings from related parties (Note 16)


300,000,000



436,569,312    F-55




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Integrated
    Platform Services
      Online
    Payment Services
      Sales
    and Promotion of Pre-Paid Cards
      Exclusive
    Advertising Agency Services
  qidian.com
 F-56




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Online
    Games
  qidian.com qidian.com
  Copyright
    Licensing
    Other
    Agreements
    23.
    CERTAIN
    RISKS AND CONCENTRATIONS         F-57




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  24.
    COMMITMENTS
    AND CONTINGENCIES  Operating
    lease agreements
    ComputerOffice Premise

Equipment

TotalRMB

RMB

RMB2011


8,037,801



190,511



8,228,3122012


2,658,643



127,007



2,785,6502013


800,435







800,43511,496,879



317,518



11,814,397     Contingent
    considerations for business acquisitions
      Contingencies
  ASC 450-10
     F-58




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          25.
    FAIR
    VALUE MEASUREMENTS         F-59




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair Value Measurements at Reporting Date UsingQuoted Prices in

Significant

SignificantActive Markets for

Other Observable

UnobservableYear Ended

Identical Assets

Inputs

InputsDescription

December 31, 2009

(Level 1)

(Level 2)

(Level 3)Investment in securities


7,000,000











7,000,000   Fair Value Measurements at Reporting Date UsingQuoted Prices in

Significant

SignificantActive Markets for

Other Observable

UnobservableYear Ended

Identical Assets

Inputs

InputsDescription

December 31, 2010

(Level 1)

(Level 2)

(Level 3)Investment in securities


7,500,000











7,500,000Contingent consideration receivable


5,678,571











5,678,571     At January 1, 2009


Current year purchase


7,000,000December 31, 2009


7,000,000Unrealized gain in value


500,000December 31, 2010


7,500,000     At January 1, 2010


Current year addition upon acquisition of Cuilong


5,678,571December 31, 2010


5,678,571   26.
    SUBSEQUENT
    EVENTS       F-60




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  27.
    UNAUDITED
    PRO FORMA LOSS PER SHARE FOR CONVERSION OF SERIES A
    PREFERRED SHARES      For The Year EndedDecember 31, 2010(Unaudited)Numerator:Net loss attributable to Cloudary Corporations ordinary
    shareholders


(45,380,867
)Pro-forma effect of the Series A Preferred Shares


510,175Pro-forma net loss attributable to Cloudary Corporations
    ordinary shareholders  Basic and diluted


(44,870,692
)Denominator:Denominator for weighted-average ordinary shares outstanding for
    basic and diluted loss per share calculation


250,000,000Pro-forma effect of Series A Preferred Shares


11,313,150Denominator for pro-forma basic and diluted calculation


261,313,150Pro-forma basic and diluted loss per share attributable to
    Cloudary Corporations ordinary shareholders


(0.17
)   28.
    RESTRICTED
    NET ASSETS   F-61




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  29.
    ADDITIONAL
    INFORMATION  CONDENSED FINANCIAL STATEMENTS  Regulation S-X Rule 5-04 Rule 12-04.
       F-62




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Financial
    information of Cloudary Corporation
  Condensed
    Statements of Operations
  For the Years Ended December 312008

2009

2010

2010RMB

RMB

RMB

US$ (Note 2(6))(Unaudited)Net revenues










Cost of revenues










Gross profit










Operating expenses:Product development










Sales and marketing










General and administrative


(71,149
)


(443,000
)


(956,062
)


(144,858
)Total operating expenses


(71,149
)


(443,000
)


(956,062
)


(144,858
)Loss from operations


(71,149
)


(443,000
)


(956,062
)


(144,858
)Interest income










19,904



3,016Interest expense










(947,616
)


(143,578
)Other income, net










250,788



37,998Income tax benefit














Equity in loss of subsidiaries and VIE subsidiaries


(22,034,492
)


(72,981,681
)


(43,237,706
)


(6,551,168
)Net loss


(22,105,641
)


(73,424,681
)


(44,870,692
)


(6,798,590
)  F-63




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Financial
    information of Cloudary Corporation
  Condensed
    Balance Sheets
  December 31,2009

2010

2010RMB

RMB

US$ (Note 2(6))(Unaudited)ASSETSCurrent assets:Cash and cash equivalents






1,555,920



235,745Other receivables due from subsidiaries






77,068,392



11,677,030Total assets






78,624,312



11,912,775LIABILITIESCurrent liabilities:Other payables due to subsidiaries


81,833,845







Other payables due to related parties


8,195,160



8,889,837



1,346,945Current liabilities


90,029,005



8,889,837



1,346,945Long-term borrowings from related parties






36,569,312



5,540,805Total liabilities


90,029,005



45,459,149



6,887,750Series A-1
    Redeemable Convertible Preferred Shares (US$0.01 par value;
    3,916,393 shares authorized; 3,916,393 issued and
    outstanding as of December 31, 2010) (redemption value of
    US$8,264,972 as of December 31, 2010)






51,809,560



7,849,933Series A-2
    Redeemable Convertible Preferred Shares (US$0.01 par value;
    7,396,757 shares authorized; 7,396,757 issued and
    outstanding as of December 31, 2010) (redemption value of
    US$15,752,783 as of December 31, 2010)






97,764,231



14,812,762Shareholders deficitClass A ordinary shares (US$0.01 par value,
    488,686,850 shares authorized, 250,000,000 issued and
    outstanding as of December 31, 2009 and 2010)


16,651,250



16,651,250



2,522,917Class B ordinary shares (US$0.01 par value,
    500,000,000 shares authorized, nil issued and outstanding
    as of December 31, 2009 and 2010)










Additional paid-in capital


7,502,208



24,243,328



3,673,232Accumulated other comprehensive income


5,111



1,755,060



265,918Accumulated deficit


(114,187,574
)


(159,058,266
)


(24,099,737
)Total Cloudary Corporation shareholders deficit


(90,029,005
)


(116,408,628
)


(17,637,670
)Total liabilities and shareholders deficit






78,624,312



11,912,775  F-64




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Financial
    information of Cloudary Corporation
  Condensed
    statements of Cash Flows
  For the Years Ended December 31,2008

2009

2010

2010RMB

RMB

RMB

US$(Note 2(6))(Unaudited)Net cash provided by operating activities














Net cash used by investing activities










(203,707,780
)


(30,864,815
)Net cash provided by financing activities










205,641,582



31,157,815Effect of foreign exchange rate changes on cash










(377,882
)


(57,255
)Net increase in cash










1,555,920



235,745Cash, beginning of year










Cash, end of year










1,555,920



235,745  F-65




---



##### Table of Contents



CLOUDARY
    CORPORATION
  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
    OPERATIONS
 AND COMPREHENSIVE LOSS
  For the Three Months Ended March 31,Notes


2010


2011


2011RMB


RMB


US$ (Note 2(2))Net revenues:


3Online business






29,917,633



83,101,059



12,690,478Third parties






25,324,698



81,067,082



12,379,867Related parties


16



4,592,935



2,033,977



310,611Offline business






18,270,138



55,647,733



8,498,043Total net revenues






48,187,771



138,748,792



21,188,521Cost of revenues:Online business






(25,132,168
)


(54,183,494
)


(8,274,437
)Third parties






(24,429,131
)


(52,663,439
)


(8,042,307
)Related parties


16



(703,037
)


(1,520,055
)


(232,130
)Offline business






(15,213,047
)


(44,109,494
)


(6,736,022
)Total cost of revenues






(40,345,215
)


(98,292,988
)


(15,010,459
)Gross profit






7,842,556



40,455,804



(6,178,062
)Operating expenses:Product development






(574,233
)


(2,109,026
)


(322,072
)Sales and marketing






(13,153,334
)


(20,785,936
)


(3,174,249
)Third parties






(11,440,362
)


(19,246,459
)


(2,939,154
)Related parties


16



(1,712,972
)


(1,539,477
)


(235,095
)General and administrative






(11,298,111
)


(21,793,867
)


(3,328,172
)Total operating expenses






(25,025,678
)


(44,688,829
)


(6,824,493
)Loss from operations






(17,183,122
)


(4,233,025
)


(646,431
)Interest income






232,854



1,065,882



162,772Interest expense to related parties


16







(1,130,406
)


(172,626
)Other income (expenses), net






(122,824
)


15,446



2,359Loss before income tax benefit (expenses) and equity in earning
    of affiliated company






(17,073,092
)


(4,282,103
)


(653,926
)Income tax benefit (expenses)






1,205,752



(521,195
)


(79,592
)Equity in earning of affiliated company






574,153



1,113,009



169,969Net loss






(15,293,187
)


(3,690,289
)


(563,549
)Net loss attributable to non-controlling interests






2,046,357



3,217,131



491,293Net income attributable to redeemable non-controlling interests










(523,199
)


(79,899
)Net loss attributable to Cloudary Corporation






(13,246,830
)


(996,357
)


(152,155
)Series A Preferred Shares redemption value accretion










(1,668,894
)


(254,859
)Net loss attributable to Cloudary Corporations ordinary
    shareholder






(13,246,830
)


(2,665,251
)


(407,014
)Net loss






(15,293,187
)


(3,690,289
)


(563,549
)Other comprehensive income:Currency translation adjustments






1,757



2,571,304



392,667Comprehensive loss






(15,291,430
)


(1,118,985
)


(170,882
)Comprehensive loss attributable to non-controlling interests:






2,046,357



3,217,131



491,293Comprehensive income attributable to redeemable non-controlling
    interests










(523,199
)


(79,899
)Comprehensive (loss)/ income attributable to Cloudary Corporation






(13,245,073
)


1,574,947



240,512Net loss per share attributable to Cloudary Corporations
    ordinary shareholderBasic and diluted


5



(0.05
)


(0.01
)


Weighted average ordinary shares used in per share calculationBasic and diluted


5



250,000,000



250,000,000



250,000,000    F-66




---



##### Table of Contents



CLOUDARY
    CORPORATION
  UNAUDITED CONDENSED CONSOLIDATED BALANCE
    SHEETS
  December 31,

March 31,

March 31,

March 31,

March 31,Notes

2010

2011

2011

2011

2011RMB

RMB

US$ (Note 2(2))

RMB

US$Pro forma

Pro forma(Note 21)

(Note 2(2))(Note 21)ASSETSCurrent assets:Cash and cash equivalents






299,605,808



240,950,091



36,795,823



240,950,091



36,795,823Short-term investments










4,000,000



610,846



4,000,000



610,846Accounts receivable, net of allowance for doubtful accounts


6



42,578,763



81,423,959



12,434,366



81,423,959



12,434,366Accounts receivable due from related parties


16



11,580,474



15,010,639



2,292,296



15,010,639



2,292,296Inventories


7



109,248,948



123,811,728



18,907,461



123,811,728



18,907,461Prepayments and other current assets






13,127,642



11,772,707



1,797,827



11,772,707



1,797,827Current deferred tax assets






16,940,918



17,174,151



2,622,688



17,174,151



2,622,688Total current assets






493,082,553



494,143,275



75,461,307



494,143,275



75,461,307Investment in securities






7,500,000



7,500,000



1,145,335



7,500,000



1,145,335Investment in affiliated company






12,839,179



13,952,188



2,130,658



13,952,188



2,130,658Property and equipment


8



19,853,535



19,419,416



2,956,566



19,419,416



2,965,566Intangible assets


9



154,488,511



154,433,019



23,583,681



154,433,019



23,583,681Goodwill


10



47,540,748



47,540,748



7,260,014



47,540,748



7,260,014Royalty advances






32,622,652



33,659,068



5,140,123



33,659,068



5,140,123Other long-term assets


11



45,608,334



42,270,199



6,455,141



42,270,199



6,455,141Non-current deferred tax assets






400,937



1,486,548



227,013



1,486,548



227,013Total assets






813,936,449



814,404,461



124,368,838



814,404,461



124,368,838LIABILITIESCurrent liabilities:Accounts payable






119,470,468



130,709,218



1,996,0786



130,709,218



19,960,786Accounts payable due to related parties


16



1,069,693



2,003,365



305,937



2,003,365



305,937Taxes payable






2,577,364



2,211,277



337,687



2,211,277



337,687Deferred revenue






13,161,864



15,868,067



2,423,235



15,868,067



2,423,235Other payables and accruals


12



49,163,592



38,519,927



5,882,430



38,519,927



5,882,430Other payables due to related parties


16



16,422,586



16,191,291



2,472,596



16,191,291



2,472,596Total current liabilities






201,865,567



205,503,145



31,382,671



205,503,145



31,382,671Non-current deferred tax liabilities






27,219,275



26,414,696



4,033,825



26,414,696



4,033,825Long-term borrowings from related parties


13,16



436,569,312



436,193,779



66,611,759



436,193,779



66,611,759Total liabilities






665,654,154



668,111,620



102,028,255



668,111,620



102,028,255Commitments and contingenciesSeries A-1
    Redeemable Convertible Preferred Shares (US$0.01 par value;
    3,916,393 shares authorized; 3,916,393 issued and
    outstanding as of December 31, 2010 and March 31,
    2011) (redemption value of US$8,264,972 as of March 31,
    2011)






51,809,560



51,528,984



7,869,063







Series A-2
    Redeemable Convertible Preferred Shares (US$0.01 par value;
    7,396,757 shares authorized; 7,396,757 issued and
    outstanding as of December 31, 2010 and March 31,
    2011) (redemption value of US$15,752,783 as of March 31,
    2011)






97,764,231



97,513,667



14,891,448







Redeemable non-controlling interests






25,296,245



25,955,002



3,963,624



25,955,002



3,963,624Shareholders deficitsClass A ordinary shares (US$0.01 par value,
    488,686,850 shares authorized, 250,000,000 issued and
    outstanding as of December 31, 2010 and March 31, 2011)






16,651,250



16,651,250



2,542,836



17,392,985



2,655,968Class B ordinary shares (US$0.01 par value,
    500,000,000 shares authorized, nil issued and outstanding
    as of December 31, 2010 and March 31, 2011)Additional paid-in capital






24,243,328



22,788,441



3,480,055



171,089,357



26,127,434Accumulated other comprehensive income






1,755,060



4,326,364



660,684



4,326,364



660,684Accumulated deficits






(159,058,266
)


(160,054,623
)


(24,442,164
)


(160,054,623
)


(24,442,164
)Total Cloudary Corporation shareholders deficits






(116,408,628
)


(116,288,568
)


(17,758,589
)


32,754,083



5,001,922Non-controlling interests


14



89,820,887



87,583,756



13,375,037



87,583,756



13,375,037Total shareholders deficits






(26,587,741
)


(28,704,812
)


(4,383,552
)


120,337,839



18,376,959Total liabilities and shareholders deficits






813,936,449



814,404,461



124,368,838



814,404,461



124,368,838    F-67




---



##### Table of Contents



CLOUDARY
    CORPORATION
  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
    CHANGES IN SHAREHOLDERS DEFICITS
  TotalClass A Ordinary Share





Accumulated





Cloudary(US$0.01 Par Value)


Additional


Other





Corporation


Non-


TotalNumber





Paid-in


Comprehensive


Accumulated


Shareholders


controlling


Shareholdersof Shares


Par Value


Capital


Income


Deficits


Deficits


Interests


DeficitsRMB


RMB


RMB


RMB


RMB


RMB


RMBBalance as of January 1, 2010


250,000,000



16,651,250



7,502,208



5,111



(114,187,574
)


(90,029,005
)


31,935,099



(58,093,906
)Non-controlling interest arising from business combination


























4,735,294



4,735,294Share-based compensation










216,452











216,452







216,452Distribution to Shanda










(252,085
)










(252,085
)






(252,085
)Currency translation adjustments














1,757







1,757







1,757Net loss


















(13,246,830
)


(13,246,830
)


(2,046,357
)


(15,293,187
)Balance as of March 31, 2010


250,000,000



16,651,250



7,466,575



6,868



(127,434,404
)


(103,309,711
)


34,624,036



(68,685,675
)Balance as of January 1, 2011


250,000,000



16,651,250



24,243,328



1,755,060



(159,058,266
)


(116,408,628
)


89,820,887



(26,587,741
)Capital contribution to a subsidiary by non-controlling interest


























980,000



980,000Share-based compensation










214,007











214,007







214,007Series A Preferred Shares redemption value accretion










(1,668,894
)










(1,668,894
)






(1,668,894
)Currency translation adjustments














2,571,304







2,571,304







2,571,304Net loss


















(996,357
)


(996,357
)


(3,217,131
)


(4,213,488
)Balance as of March 31, 2011


250,000,000



16,651,250



22,788,441



4,326,364



(160,054,623
)


(116,288,568
)


87,583,756



(28,704,812
)    F-68




---



##### Table of Contents



CLOUDARY
    CORPORATION
  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
    CASH FLOWS
  For the Three Months Ended March 312010


2011


2011RMB


RMB


US$ (Note 2(2))Cash flows from operating activities:Net loss


(15,293,187
)


(3,690,289
)


(563,549
)Adjustments for:Share-based compensation


216,452



349,565



53,383Compensation charge for postcombination services






2,644,998



403,921Depreciation of property and equipment


902,831



1,497,340



228,661Amortization of intangible assets


1,003,818



4,183,337



638,843Write-down of inventory


2,511,246



5,608,528



856,486Loss from disposal of fixed assets


7,315



17,166



2,621Equity in earning of affiliated company


(574,153
)


(1,113,009
)


(169,969
)Foreign exchange (gain) loss


11,882



(16,127
)


(2,463
)Distribution to Shanda


(252,085
)






Deferred taxes


(1,643,743
)


(2,123,423
)


(324,271
)Changes in assets and liabilities, net of acquisitions:Accounts receivable


(2,183,872
)


(38,845,196
)


(5,932,104
)Accounts receivable due from related parties


(4,807,356
)


(3,430,165
)


(523,825
)Inventory


(16,182,645
)


(20,171,308
)


(3,080,388
)Royalty advances


(7,965,084
)


(1,036,416
)


(158,273
)Prepayments and other current assets


(7,239,963
)


1,354,935



206,914Other long-term assets


(2,693,052
)


693,137



105,850Accounts payable


13,224,617



11,024,624



1,683,586Accounts payable due to related parties


899,622



933,672



142,582Taxes payable


3,701,275



(366,087
)


(55,906
)Deferred revenue


(939,942
)


2,706,202



413,268Other payables and accruals


(12,963,229
)


(7,143,665
)


(1,090,919
)Other payables due to related parties






(78,735
)


(12,023
)Net cash used in operating activities


(50,259,253
)


(47,000,916
)


(7,177,575
)Cash flows from investing activities:Purchase of short-term investments






(4,000,000
)


(610,846
)Amount received from Shanda


2,300,000







Purchase of property and equipment


(763,963
)


(4,249,406
)


(648,933
)Proceeds from disposal of fixed assets


39,564



3,492



534Purchase of intangible assets


(5,007,500
)


(748,191
)


(114,257
)Advance payment for investments


(77,600,000
)






Capital contribution to a subsidiary by non-controlling
    shareholder






980,000



149,657Acquisition of subsidiaries, net of cash acquired


4,357,232



(3,500,000
)


(534,490
)Net cash used by investing activities


(76,674,667
)


(11,514,105
)


(1,758,335
)Cash flows from financing activities:Proceeds from loans borrowed from related parties


100,000,000







Net cash provided by financing activities


100,000,000







Effect of exchange rate changes on cash and cash equivalents


(312,217
)


(140,696
)


(21,487
)Net decrease in cash and cash equivalents


(27,246,137
)


(58,655,717
)


(8,957,397
)Cash, beginning of period


141,357,496



299,605,808



45,753,220Cash, end of period


114,111,359



240,950,091



36,795,823Supplemental disclosure of cash flow information:Cash paid during the period for income taxes


672,679



2,926,847



446,963Cash paid during the period for interest of loan






1,130,406



172,626Supplemental disclosure of non-cash investing activities:Accrual related to purchase of property and equipment and
    intangible assets


1,354,999



242,224



36,990    F-69




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO THE UNAUDITED CONDENSED
    CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2011
 (AMOUNTS EXPRESSED IN RENMINBI (RMB) UNLESS OTHERWISE
    STATED)
  1.
    ORGANIZATION
    AND NATURE OF OPERATIONS  Nature
    of operations
    2.
    PRINCIPAL
    ACCOUNTING POLICIES  (1)
    Basis
    of presentation and use of estimates        (2)
    Convenience
    translation    (3)
    Recent
    accounting pronouncements  2011-04, Amendments to Achieve Common Fair Value Measurement and
    Disclosure Requirements in U.S. GAAP and IFRSs
 F-70




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
  3.
    NET
    REVENUES  For the Three MonthsEnded March 31,2010

2011RMB

RMBOnline businessOnline paid users


16,435,984



34,635,490Wireless service


4,980,566



32,867,131Online advertising


4,168,189



7,650,231Copyright licensing


3,436,624



5,423,118Others


896,270



2,525,08929,917,633



83,101,059Offline business


18,270,138



55,647,733Total net revenues


48,187,771



138,748,792   4.
    TAXATION       F-71




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
  5.
    BASIC AND
    DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO CLOUDARY
    CORPORATIONS ORDINARY SHAREHOLDER    For the Three MonthsEnded March 31,2010

2011RMB

RMBNumerator:Net loss attributable to Cloudary Corporations ordinary
    shareholders


(13,246,830
)


(2,665,251
)Denominator:Denominator for weighted-average ordinary shares outstanding for
    basic and diluted loss per share calculation


250,000,000



250,000,000Basic and diluted loss per share attributable to Cloudary
    Corporations ordinary shareholders


(0.05
)


(0.01
)     6.
    ACCOUNTS
    RECEIVABLE  December 31,

March 31,2010

2011RMB

RMBAccounts receivable


43,099,380



81,944,692Less: Allowance for doubtful accounts


(520,617
)


(520,733
)42,578,763



81,423,959   7.
    INVENTORIES    December 31,

March 31,2010

2011Raw materials


19,700,353



21,701,607Work in progress


15,948,032



17,287,015Finished goods


27,168,782



29,596,240Inventory held with distributors on consignment


46,431,781



55,226,866Inventories


109,248,948



123,811,728    F-72




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
  8.
    PROPERTY
    AND EQUIPMENT    December 31,

March 31,2010

2011RMB

RMBComputer equipment


23,692,524



24,135,295Leasehold improvements


2,916,258



3,317,948Furniture and fixtures


1,892,849



1,893,119Motor vehicles


399,085



399,085Less: Accumulated depreciation


(9,047,181
)


(10,326,031
)Net book value


19,853,535



19,419,416     9.
    INTANGIBLE
    ASSETS    December 31,

March 31,2010

2011RMB

RMBGross carrying amount:Copyrights


74,863,819



82,240,710Websites


2,978,371



2,978,371Software and others


1,598,791



2,346,982Intangible assets arising from business combinations Brand names


40,983,142



40,983,142 Writers contracts


16,520,000



16,520,000 Copyrights


26,100,000



26,100,000 Telecom relationships


2,660,000



2,660,000 User lists


3,760,000



3,760,000 Bookstore relationships


61,100,000



61,100,000230,564,123



238,689,205Less: accumulated amortizationCopyrights


(52,033,381
)


(56,153,117
)Websites


(383,768
)


(541,025
)Software and others


(49,495
)


(140,892
) F-73




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##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
  December 31,

March 31,2010

2011RMB

RMBIntangible assets arising from business combinations Brand names


(10,918,672
)


(11,318,769
) Writers contracts


(2,319,753
)


(3,053,765
) Copyrights


(2,789,191
)


(3,474,004
) Telecom relationships


(243,513
)


(311,589
) User lists


(591,684
)


(779,689
) Bookstore relationships


(6,746,155
)


(8,483,336
)(76,075,612
)


(84,256,186
)Net book value


154,488,511



154,433,019     10.
    GOODWILL    December 31,

March 31,2010

2011Hong Xiu


4,491,407



4,491,407Huawen


11,363,231



11,363,231Rongshuxia


3,631,435



3,631,435Wangwen Xueyue


25,571,731



25,571,731Xiaoxiang Shuyuan


1,036,515



1,036,515Tianfang Tingshu


1,446,429



1,446,429Total


47,540,748



47,540,748   11.
    OTHER
    LONG-TERM ASSETS   F-74




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##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
  12.
    OTHER
    PAYABLES AND ACCRUALS  December 31,

March 31,2010

2011RMB

RMBAdvances from customers


19,818,126



14,769,041Salary, bonus and welfare payable


9,578,201



4,414,239Unpaid advertisement and promotion fee


1,354,655



524,136Other tax payables


5,710,230



4,096,036Acquisition related obligation


3,500,000



Unsettled sales rebates


743,636



3,064,527Unpaid shipping and handling costs


551,053



3,253,009Unpaid professional service fee


80,000



2,885,491Other payables


7,827,691



5,513,448Total


49,163,592



38,519,927   13.
    LONG-TERM
    BORROWINGS FROM RELATED PARTIES  December 31,

March 31,2010

2011RMB

RMBBorrowing from Shanda


36,569,312



36,193,779Borrowing from a company under common control of Shanda


400,000,000



400,000,000Total long-term borrowings


436,569,312



436,193,779            F-75




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##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
  14.
    NON-CONTROLLING
    INTERESTS    December 31,

March 31,2010

2011RMB

RMBNon-controlling interests in consolidated subsidiaries or VIE
    subsidiaries Hong Xiu


3,849,279



4,203,902Huawen Tianxia


23,875,566



22,223,174Rongshuxia


1,451,794



724,567Zhongzhi Bowen


45,809,445



45,768,538Cuilong


7,489,263



6,455,278Xiaoxiang Shuyuan


7,345,540



7,228,297Xinjingdian






980,00089,820,887



87,583,756     December 31,

March 31,2010

2011RMB

RMBTianfang Tingshu


3,134,086



2,989,245Wangwen Xinyue


22,162,159



22,965,75725,296,245



25,955,002   15.
    SHARE
    OPTION PLAN  Share-based
    compensation of Shanda
   F-76




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##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
    WeightedAverageWeighted

Remaining

AggregateOptions

Average

Contractual

IntrinsicOutstanding

Exercise Price

Life

ValueUS$



US$Outstanding at December 31, 2010


37,000



8.05



4.49



471,165Granted






Transferred from Shanda






Exercised






Forfeited






Expired






Outstanding at March 31, 2011


37,000



8.05



4.23



517,578Vested and expected to vest at March 31, 2011


37,000



8.05



4.23



517,578Vested and exercisable at March 31, 2011


34,500



7.79



4.39



455,453       Share-based
    compensation of Shanda Games
  2008
    Equity Compensation Plan
  and/or and/or
 F-77




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##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
    Weighted Average Grant-Unvested Restricted Shares

Number of Shares

Date Fair ValueUS$Unvested at December 31, 2010


115,917



6.11Transferred to Shanda


(750
)


6.11Vested






Forfeited






Unvested at March 31, 2011


115,167



6.11Expected to vest at March 31, 2011


115,167



6.11         Share-based
    compensation of the Company
  2010
    Equity Compensation Plan
          1 4 3 4
 F-78




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
  provided provided further
             F-79




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
    WeightedAverageWeighted

Remaining

AggregateOptions

Average

Contractual

IntrinsicOutstanding

Exercise Price

Life

ValueUS$



US$Outstanding at December 31, 2010


11,000,750



1.8



5.9



Granted


9,328,600



1.8Exercised






Forfeited






Expired






Outstanding at March 31, 2011


20,329,350



1.8



5.7



Vested and expected to vest at March 31, 2011


17,614,607



1.8



5.7



Vested and exercisable at March 31, 2011














         For The Period EndedMarch 31, 2011Risk-free interest
    rate(1)


1.80%-2.39%Expected life (in
    years)(2)


3.5-5.1Expected dividend
    yield(3)


Expected
    volatility(4)


55%-60%Fair value per option at grant date

US$
0.79-US$0.89     (1)
    
    The risk-free interest rate for
    periods within the contractual life of the share option is based
    on the rate of US$ China government bond yield in effect at the
    time of grant for a term consistent with the expected term of
    the awards.(2)
    
    The expected term of share options
    granted under the 2010 Equity and Performance Incentive Plan is
    developed giving consideration to vesting period, contractual
    term, share price, employees level within the organization
    and the expected volatility of the underlying share.(3)
    
    The company has no expectation of
    paying dividends on its common shares in future.(4)
    
    Expected volatility is estimated
    based on the historical data volatilities of the comparable
    companies in similar industry as at the valuation dates. F-80




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##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
  16.
    RELATED
    PARTY TRANSACTIONS    For the Three MonthsEnded March 31,2010

2011RMB

RMBPlatform service fees and sales agent fees paid to companies
    under common control by Shanda


(2,416,009
)


(2,434,047
)Other management fees paid to companies under common control by
    Shanda






(704,349
)Interest expense paid to companies under common control by Shanda






(1,130,406
)Advertising revenue received from companies under common control
    by Shanda


3,501,379



193,325Platform game revenue received from companies under common
    control by Shanda


852,705



1,840,652Wireless revenue from companies under common control by Shanda(1)


238,851



     (1)
    
    The amount of receivables relating
    to wireless revenue earned by the Company from companies under
    common control of Shanda was waived off and was recorded as a
    distribution by the Company to Shanda.  December 31,

March 31,2010

2011RMB

RMBAccounts receivables due from companies under common control by
    Shanda


11,580,474



15,010,639     December 31,

March 31,2010

2011RMB

RMBAccounts payable due to companies under common control by Shanda


1,069,693



2,003,365Other payables due to companies under common control by Shanda


16,422,586



16,191,291Long-term borrowings from related parties


436,569,312



436,193,779     17.
    SEGMENT
    REPORTING   F-81




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
    For the Three Months Ended March 31, 2011Online

Offline

Elimination

TotalNet revenues


84,188,089



55,647,733



(1,087,030
)


138,748,792Cost of revenues


(54,372,993
)


(45,007,025
)


1,087,030



(98,292,988
)Gross profit


29,815,096



10,640,708







40,455,804   For the Three Months Ended March 31, 2010Online

Offline

Elimination

TotalNet revenues


30,344,751



18,270,138



(427,118
)


48,187,771Cost of revenues


(25,424,086
)


(15,348,247
)


427,118



(40,345,215
)Gross profit


4,920,665



2,921,891







7,842,556   18.
    COMMITMENTS
    AND CONTINGENCIES  Operating
    lease agreements
    ComputerOffice Premise

Equipment

TotalRMB

RMB

RMBNine months ended December 31, 2011


7,645,444



748,028



8,393,4722012


5,305,864



160,016



5,465,8802013


2,060,342







2,060,34215,011,650



908,044



15,919,694     19.
    FAIR
    VALUE MEASUREMENTS       F-82




---



##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
        Fair Value Measurements at Reporting Date UsingDecember 31,

Quoted Prices in

Significant

Significant2010

Active Markets for

Other Observable

Unobservableand March 31,

Identical Assets

Inputs

InputsDescription

2011

(Level 1)

(Level 2)

(Level 3)Investment in securities


7,500,000











7,500,000Contingent consideration receivable


5,678,571











5,678,571     At January 1, 2010


7,000,000At March 31, 2010


7,000,000At January 1, 2011


7,500,000At March 31, 2011


7,500,000     At January 1, 2011


5,678,571At March 31, 2011


5,678,571   20.
    SUBSEQUENT
    EVENTS    21.
    UNAUDITED
    PRO FORMA BALANCE SHEET AND LOSS PER SHARE FOR CONVERSION OF
    SERIES A PREFERRED SHARES    Series A-1 Series A-2
 F-83




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##### Table of Contents



CLOUDARY
    CORPORATION
  NOTES TO
    THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
 STATEMENTS  (Continued)
  Series A-1 Series A-2
    For the Three MonthsEnded March 31, 2011(Unaudited)Numerator:Net loss attributable to Cloudary Corporations ordinary
    shareholders


(2,665,251
)Pro-forma effect of the Series A Preferred Shares


1,668,894Pro-forma net loss attributable to Cloudary Corporations
    ordinary shareholders  Basic and diluted


(996,357
)Denominator:Denominator for weighted-average ordinary shares outstanding for
    basic and diluted loss per share calculation


250,000,000Pro-forma effect of Series A Preferred Shares


11,313,150Denominator for pro-forma basic and diluted calculation


261,313,150Pro-forma basic and diluted loss per share attributable to
    Cloudary Corporations ordinary shareholders


(0.00
)  F-84




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##### Table of Contents



Cloudary Corporation
  American Depositary Shares
  Representing          
    Class B Ordinary Shares
      
      (in alphabetical order)
  BofA
    Merrill Lynch
    Goldman Sachs (Asia) L.L.C.




---



##### Table of Contents



PART II
  INFORMATION
    NOT REQUIRED IN PROSPECTUS
  ITEM 6
    INDEMNIFICATION
    OF DIRECTORS AND OFFICERS          ITEM 7
    RECENT
    SALES OF UNREGISTERED SECURITIES  (ii) Series A-1 (iii) Series A-2
  Date of Sale or

Number of

Consideration in

Securities ActPurchaser

Issuance

Securities

U.S. dollars

ExemptionOrdinary SharesShanda Investment Holdings Limited*

September 2007


15,000,000


US$
15,000,000(1
)


Regulation SSeries A-1
    Preference SharesShanda Investment Holdings Limited

December 2010


3,916,393


US$
7,754,457



Regulation SSeries A-2
    Preference SharesShanda Investment Holdings Limited

December 2010


7,396,757


US$
14,645,577



Regulation SClass A Ordinary SharesShanda Interactive Entertainment Limited

November 2009


1


US$
0.01



Regulation SShanda Investment Holdings Limited

November 2010


249,999,999


US$
2,500,000



Regulation S     *
    
    Known as Shanda Online Holdings
    Limited prior to November 5, 2008.  (1)
    
    Ordinary shares of Cloudary
    Holdings Limited, which became our wholly owned subsidiary since
    2009.     II-1




---



##### Table of Contents



ITEM 8
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES  Exhibits
  page II-5
  Financial Statement Schedules
    ITEM 9
    UNDERTAKINGS           II-2




---



##### Table of Contents



SIGNATURES
 
  Form F-1
 
    By:
    /s/  Xiaoqiang
    Hou   Title:
    Chief Executive Officer 
   
  Signature

Title/s/  Xiaoqiang
    HouName:
    Xiaoqiang Hou

Director, Chief Executive Officer
    (principal executive officer)/s/  Xiaodong
    LiangName:
    Xiaodong Liang

Chief Financial Officer 
    (principal financial and accounting officer)*Name:
    Tianqiao Chen

Chairman of Board of Directors*Name:
    Qianqian Luo

Director*By:

/s/  Xiaoqiang
    HouName:
    Xiaoqiang Hou
    Attorney-in-fact  II-3




---



##### Table of Contents



SIGNATURE
    OF AUTHORIZED U.S. REPRESENTATIVE
 
   
    By:
    /s/  Donald
    J. Puglisi    II-4




---



##### Table of Contents



Cloudary
    Corporation
  EXHIBIT INDEX
  
 Exhibit Number

Description1
.1*

Form of Underwriting Agreement3
.1

The Second Amended and Restated Memorandum and Articles of
    Association of the Registrant, as currently in effect3
.2*

Form of the Third Amended and Restated Memorandum and Articles
    of Association of the Registrant, to become effective upon the
    completion of this offering4
.1*

Form of the Registrants American Depositary Receipt
    (included in Exhibit 4.3)4
.2*

Specimen Certificate for Class B Ordinary Shares4
.3*

Form of Deposit Agreement among the Registrant, the Depositary
    and all Holders and Beneficial Owners of the American Depositary
    Shares issued thereunder4
.4

Series A-1
    Preference Shares Subscription Agreement between Shanda
    Literature Corporation and Shanda Investment Holdings Limited
    dated December 6, 20104
.5

Supplemental Agreement to
    Series A-1
    Preference Shares Subscription Agreement between Shanda
    Literature Corporation and Shanda Investment Holdings Limited
    dated December 6, 20104
.6

Series A-2
    Preference Shares Subscription Agreement between Shanda
    Literature Corporation and Shanda Investment Holdings Limited
    dated December 6, 20104
.7

Supplemental Agreement to
    Series A-2
    Preference Shares Subscription Agreement between Shanda
    Literature Corporation and Shanda Investment Holdings Limited
    dated December 6, 20105
.1

Form of Opinion of Conyers Dill & Pearman regarding
    the validity of the Class B ordinary shares being registered8
.1

Form of Opinion of Conyers Dill & Pearman regarding
    certain Cayman Islands tax matters8
.2

Form of Opinion of Davis Polk & Wardwell LLP regarding
    certain U.S. tax matters8
.3

Form of Opinion of Jade & Fountain PRC Lawyers regarding
    certain PRC tax matters10
.1

2010 Equity Compensation Plan adopted as of November 15,
    201010
.2

Form of Indemnification Agreement with the Registrants
    Directors10
.3

Employment Agreement between the Registrant and Executive
    Officers of the Registrant**10
.4

Business Operation Agreement among Shengting Information
    Technology (Shanghai) Co., Ltd., Shanghai Hongwen Networking
    Technology Co., Ltd., Dongxu Wang and Mingfeng Chen dated
    March 18, 2011 (English translation)10
.5

Exclusive Technology Consulting and Service Framework Agreement
    between Shengting Information Technology (Shanghai) Co., Ltd.
    and Shanghai Hongwen Networking Technology Co., Ltd. dated
    March 18, 2011 (English translation)10
.6

Amended and Restated Exclusive Call Option Agreement among
    Shengting Information Technology (Shanghai), Shanghai Hongwen
    Networking Technology Co., Ltd., Dongxu Wang and Mingfeng Chen
    dated March 18, 2011 (English translation)10
.7

Amended and Restated Share Pledge Agreement among Shengting
    Information Technology (Shanghai) Co., Ltd., Dongxu Wang and
    Mingfeng Chen dated March 18, 2011 (English translation)10
.8

Amended and Restated Loan Agreement among Shengting Information
    Technology (Shanghai) Co., Ltd. and Dongxu Wang dated
    February 25, 2011 (English translation)10
.9

Amended and Restated Loan Agreement among Shengting Information
    Technology (Shanghai) Co., Ltd. and Mingfeng Chen dated
    February 25, 2011 (English translation)10
.10

Power of Attorney executed by Dongxu Wang in favor of Shenting
    Information Technology (Shanghai) Co., Ltd. dated March 18,
    2011 (English translation)10
.11

Power of Attorney executed by Mingfeng Chen in favor of Shenting
    Information Technology (Shanghai) Co., Ltd. dated March 18,
    2011 (English translation) 
 II-5




---



##### Table of Contents



Exhibit Number

Description10
.12

Loan Agreement between Shanda Interactive Entertainment Limited
    and Shanda Literature Corporation dated April 2, 2010
    (English translation)10
.13

Loan Agreement between Shanda Interactive Entertainment Limited
    and Shanda Literature Corporation dated April 26, 2010
    (English translation)10
.14

Loan Agreement between Shanda Interactive Entertainment Limited
    and Shanda Literature Corporation dated June 15, 2010
    (English translation)10
.15

Loan Agreement between Shanda Interactive Entertainment Limited
    and Shanda Literature Corporation dated June 30, 2010
    (English translation)10
.16

Strategic Cooperation Agreement on Mobile Reading Business
    between China Mobile Group Zhejiang Co., Ltd. and Shanghai
    Xuanting Entertainment Information Technology Co., Ltd. dated
    March 4, 2010 (English translation)**21
.1

Subsidiaries of the Registrant23
.1

Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited
    Company, an Independent Registered Public Accounting Firm23
.2

Consent of Conyers Dill & Pearman (included in
    Exhibits 5.1 and 8.1)23
.3

Consent of Davis Polk & Wardwell LLP (included in
    Exhibit 8.2)23
.4

Consent of Jade & Fountain PRC Lawyers (included in
    Exhibits 8.3 and 99.2)23
.5

Consent of Jin Koh Teoh, an independent director appointee24
.1

Powers of Attorney99
.1

Code of Business Conduct and Ethics of the Registrant99
.2

Form of Opinion of Jade & Fountain PRC Lawyers regarding
    certain PRC Law matters99
.3

Consent of iResearch99
.4

Consent of Openbook  
    
    
    Filed previously*
    
    To be filed by amendment.**
    
    Portions of this exhibit have been omitted pursuant to a request
    for confidential treatment, and the omitted information has been
    filed separately with the Securities and Exchange Commission. II-6