##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 20-F
 
 (Mark One)
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 or
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010.
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 or
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report: .
 Commission file number: 001-34238
 
 THE9 LIMITED
 (Exact name of Registrant as specified in its charter)
 
 N/A
(Translation of Registrants name into English)
 Cayman Islands
(Jurisdiction of incorporation or organization)
 Building No. 3, 690 Bibo Road
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
Shanghai 201203
Peoples Republic of China
(Address of principal executive offices)
 
 George Lai, Chief Financial Officer
Tel: +86-21-5172-9999
Facsimile number: +86-21-5172-9903
Building No. 3, 690 Bibo Road
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
Shanghai 201203
Peoples Republic of China
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
 Securities registered or to be registered pursuant to Section 12(b) of the Act.
 Name of each exchange and title of each class on which registered:
American Depositary Shares, each representing one ordinary share, par value
US$0.01 per share, Nasdaq Global Market
 Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of Class)
 
  o þ
 o þ
 þ o
 o o
  o Large accelerated filer
    

þ Accelerated filer
    

o Non-accelerated filer
  þ U.S. GAAP
    
    o International Financial Reporting Standards as issued
    
    o Otherby the International Accounting Standards Board
 o o
 o þ
  o o




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##### 



TABLE OF CONTENTS
 PageINTRODUCTION
    
    
    1PART I
    
    
    2ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    2ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    2ITEM 3. KEY INFORMATION
    
    
    2ITEM 4. INFORMATION ON THE COMPANY
    
    
    27ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    42ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    42ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    61ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    69ITEM 8. FINANCIAL INFORMATION
    
    
    71ITEM 9. THE OFFER AND LISTING
    
    
    72ITEM 10. ADDITIONAL INFORMATION
    
    
    73ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    85ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    86PART II
    
    
    87ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    87ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    87ITEM 15. CONTROLS AND PROCEDURES
    
    
    88ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    89ITEM 16B. CODE OF ETHICS
    
    
    89ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    90ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    90ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    90ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
    
    
    90ITEM 16G. CORPORATE GOVERNANCE
    
    
    90PART III
    
    
    91ITEM 17. FINANCIAL STATEMENTS
    
    
    91ITEM 18. FINANCIAL STATEMENTS
    
    
    91ITEM 19. EXHIBITS
    
    
    91EX-1.1EX-4.31EX-4.32EX-4.33EX-4.34EX-4.35EX-4.36EX-8.1EX-12.1EX-12.2EX-13.1EX-13.2EX-15.1EX-15.2EX-15.3EX-15.4




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INTRODUCTION
     1




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PART I
 
 ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3.
    
    KEY INFORMATION
 A.
    
    Selected Financial Data
  For the Year Ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    

US$ (1)(in thousands, except for per share and per ADS data)Consolidated Statement
of Operation Data:Revenues
    
    
    1,038,328
    
    
    
    1,350,129
    
    
    
    1,806,130
    
    
    
    802,629
    
    
    
    108,514
    
    
    
    16,441Sales taxes
    
    
    (52,502
    )
    
    
    (70,522
    )
    
    
    (94,639
    )
    
    
    (42,113
    )
    
    
    (5,676
    )
    
    
    (860
    )Net revenues
    
    
    985,826
    
    
    
    1,279,607
    
    
    
    1,711,491
    
    
    
    760,516
    
    
    
    102,838
    
    
    
    15,581Cost of services
    
    
    (524,032
    )
    
    
    (700,047
    )
    
    
    (997,949
    )
    
    
    (712,473
    )
    
    
    (103,257
    )
    
    
    (15,645
    )Gross profit (loss)
    
    
    461,794
    
    
    
    579,560
    
    
    
    713,542
    
    
    
    48,043
    
    
    
    (419
    )
    
    
    (64
    )Operating expenses
    
    
    (191,639
    )
    
    
    (343,695
    )
    
    
    (578,993
    )
    
    
    (530,884
    )
    
    
    (353,365
    )
    
    
    (53,540
    )Profit (loss) from operations
    
    
    270,155
    
    
    
    235,865
    
    
    
    134,549
    
    
    
    (482,841
    )
    
    
    (353,784
    )
    
    
    (53,604
    )Interest income
    
    
    9,136
    
    
    
    50,656
    
    
    
    56,691
    
    
    
    30,501
    
    
    
    23,183
    
    
    
    3,513Other income (expense), net
    
    
    28,417
    
    
    
    (30,054
    )
    
    
    (18,967
    )
    
    
    61,840
    
    
    
    19,259
    
    
    
    2,918Income (loss) before income
tax (expense) benefit, gain
on investment disposal,
impairment loss on
investments and share of loss
in equity investments
    
    
    307,708
    
    
    
    256,467
    
    
    
    172,273
    
    
    
    (390,500
    )
    
    
    (311,342
    )
    
    
    (47,173
    )Income tax (expense) benefit
    
    
    2,670
    
    
    
    (9,269
    )
    
    
    (47,929
    )
    
    
    5,536
    
    
    
    (7,368
    )
    
    
    (1,116
    )Income (loss) before gain on
investment disposal,
impairment loss on
investments and share of loss
in equity investments
    
    
    310,378
    
    
    
    247,198
    
    
    
    124,344
    
    
    
    (384,964
    )
    
    
    (318,710
    )
    
    
    (48,289
    )Gain on investment disposal
    
    
    23,409
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,828
    
    
    
    1,034Impairment loss on investments
    
    
    (20,402
    )
    
    
    (627
    )
    
    
    (25,922
    )
    
    
    (22,412
    )
    
    
    (196,116
    )
    
    
    (29,715
    )Share of loss in equity
investments, net of taxes
    
    
    (908
    )
    
    
    (5,679
    )
    
    
    (2,241
    )
    
    
    (2,556
    )
    
    
    (10,713
    )
    
    
    (1,623
    )Net income (loss)
    
    
    312,477
    
    
    
    240,892
    
    
    
    96,181
    
    
    
    (409,932
    )
    
    
    (518,711
    )
    
    
    (78,593
    )Less: Net income (loss)
attributable to
noncontrolling
interest(2)
    
    
    
    
    
    
    
    
    
    
    (655
    )
    
    
    (4,780
    )
    
    
    (19,099
    )
    
    
    (2,894
    )Net income (loss)
attributable to holders of
ordinary shares
    
    
    312,477
    
    
    
    240,892
    
    
    
    96,836
    
    
    
    (405,152
    )
    
    
    (499,612
    )
    
    
    (75,699
    )Net income (loss)
attributable to holders of
ordinary shares per share Basic
    
    
    12.78
    
    
    
    8.79
    
    
    
    3.50
    
    
    
    (15.94
    )
    
    
    (19.89
    )
    
    
    (3.01
    ) Diluted
    
    
    12.72
    
    
    
    8.72
    
    
    
    3.50
    
    
    
    (15.94
    )
    
    
    (19.89
    )
    
    
    (3.01
    )Net income (loss)
attributable to holders of
ordinary shares per
ADS(3) Basic
    
    
    12.78
    
    
    
    8.79
    
    
    
    3.50
    
    
    
    (15.94
    )
    
    
    (19.89
    )
    
    
    (3.01
    ) Diluted
    
    
    12.72
    
    
    
    8.72
    
    
    
    3.50
    
    
    
    (15.94
    )
    
    
    (19.89
    )
    
    
    (3.01
    )
  2




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As of December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    

US$ (1)(in thousands, except for per share and per ADS data)Consolidated Balance Sheet Data:Cash and cash equivalents
    
    
    937,846
    
    
    
    2,215,282
    
    
    
    2,152,586
    
    
    
    1,675,081
    
    
    
    1,416,189
    
    
    
    214,574Non-current assets
    
    
    537,492
    
    
    
    831,342
    
    
    
    769,023
    
    
    
    522,161
    
    
    
    295,886
    
    
    
    44,831Total assets
    
    
    1,624,585
    
    
    
    3,246,101
    
    
    
    3,263,009
    
    
    
    2,324,958
    
    
    
    1,857,339
    
    
    
    281,415Total current liabilities
    
    
    288,427
    
    
    
    440,011
    
    
    
    543,767
    
    
    
    311,508
    
    
    
    316,319
    
    
    
    47,927Total equity
    
    
    1,336,158
    
    
    
    2,806,090
    
    
    
    2,719,242
    
    
    
    2,013,450
    
    
    
    1,535,217
    
    
    
    232,609Total liabilities and equity
    
    
    1,624,585
    
    
    
    3,246,101
    
    
    
    3,263,009
    
    
    
    2,324,958
    
    
    
    1,857,339
    
    
    
    281,415
 
 (1)
    
    Translation from RMB amounts into U.S. dollars was made at a rate of RMB6.6000 to US$1.00.
See  Exchange Rate Information.(2)
    
    We adopted authoritative guidance regarding accounting for noncontrolling interests on
January 1, 2009, retrospectively.(3)
    
    Each ADS represents one ordinary share. Exchange Rate Information
   3




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Noon Buying RatePeriodPeriod
    
    End
    
    
    Average(1)
    
    
    Low
    
    
    High2006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.29462008
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    7.2946
    
    
    
    6.78002009
    
    
    6.8259
    
    
    
    6.8295
    
    
    
    6.8470
    
    
    
    6.81762010
    
    
    6.6000
    
    
    
    6.7603
    
    
    
    6.8330
    
    
    
    6.6000October
    
    
    6.6707
    
    
    
    6.6678
    
    
    
    6.6912
    
    
    
    6.6397November
    
    
    6.6670
    
    
    
    6.6538
    
    
    
    6.6892
    
    
    
    6.6330December
    
    
    6.6000
    
    
    
    6.6497
    
    
    
    6.6745
    
    
    
    6.60002011January
    
    
    6.6017
    
    
    
    6.5964
    
    
    
    6.6364
    
    
    
    6.5809February
    
    
    6.5713
    
    
    
    6.5761
    
    
    
    6.5965
    
    
    
    6.5520March
    
    
    6.5483
    
    
    
    6.5645
    
    
    
    6.5743
    
    
    
    6.5483April (through April 1)
    
    
    6.5477
    
    
    
    6.5477
    
    
    
    6.5477
    
    
    
    6.5477
 
 (1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. B.
    
    Capitalization and Indebtedness
  C.
    
    Reasons for the Offer and Use of Proceeds
  D.
    
    Risk Factors
 Risks Related to Our Company
 We have incurred losses starting from the expiration of the license of World of Warcraft, or WoW.
We may incur losses in the future and may not maintain profitability.
    4




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If we are unable to successfully establish new relationships with online game developers, and
maintain a satisfactory relationship with the online game developers that have licensed games to
us, our future results of operations and profitability will be materially impacted.
 ,
 Our business is intensely competitive and hit driven. If we do not deliver new hit products to
the market, or if consumers prefer our competitors products or services over those we provide, our
operating results will suffer.
    5




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We may not be able to recover our market share and profitability as we operate in a highly
competitive industry and compete against many companies.
  We are subject to securities class action lawsuits alleging that we and certain of our directors
and officers disseminated or approved materially false and misleading statements and failed to
disclose that we might not be able to renew the license of WoW. If the class action lawsuits are
successful, they may have an adverse effect on our financial condition and operating results.
 Glaser v. The9 Ltd. et
al. ODea v. The9 Ltd. et al.
 Illegal game servers, unauthorized character enhancements and other infringements of our
intellectual property rights, as well as theft of in-game goods, could harm our business and
reputation and materially and adversely affect our results of operation.
    6




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Our business, financial condition and results of operations may be adversely affected by the
downturn in the global or Chinese economy.
  We face the risks of changing consumer preferences and uncertainty about market acceptance of our
new products.
  
    
    the popularity of new online games that we operate;
 
    
    the introduction of new online games competing with or replacing our existing online
games;
 
    
    general economic conditions, particularly economic conditions adversely affecting
discretionary consumer spending;
 
    
    changes in customer tastes and preferences;
 
    
    the availability of other forms of entertainment;
 
    
    critical reviews and public tastes and preferences, all of which change rapidly and
cannot be predicted; and
 
    
    the acceptance by customers of the purchase of in-game items.
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Future acquisitions may have an adverse effect on our ability to manage our business and our
results of operations.
   Future equity investments may have an adverse effect on our ability to manage our business.
  Undetected programming errors or flaws in our games could harm our reputation or decrease market
acceptance of our games, which would materially and adversely affect our results of operations.
   8




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We may not be able to prevent others from infringing upon our intellectual property rights, which
may harm our business and expose us to litigation.
  We may need additional financing and we may not be able to obtain it on terms acceptable to us, or
at all.
  Our sale of a significant number of equity shares to third parties may have an adverse effect on
our ability to manage our business, and subsequent sales of large shareholdings by third parties
may impact our share price.
  Any failure to maintain a stable and efficient distribution network could materially and adversely
affect our business and results of operations. In particular, we rely on one national distributor
to sell our online game points, and any delay or failure by the national distributor to
successfully market our online game points could have a material adverse effect on our business.
   9




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We rely on services from third parties to carry out our businesses and to deliver our online game
points to end users, and if there is any interruption or deterioration in the quality of these
services, our end users may cease to use our products and services.
  Unexpected network interruptions caused by system failures or other internal or external factors
may lead to user attrition, revenue reductions and may harm our reputation.
   Our business may be harmed if our technology becomes obsolete or if our system infrastructure fails
to operate effectively.
   Our results of operations may be materially and adversely affected if our licensors cannot prevail
on future intellectual property rights claims brought against them by third parties.
   10




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We have been and may be subject to future intellectual property rights claims or other claims,
which could result in substantial costs and diversion of our financial and management resources
away from our business.
  We experience fluctuations in quarterly operating results.
   Our business depends substantially on the continuing efforts of our senior executives, and our
business may be severely disrupted if we lose their services.
   11




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If we are unable to attract, train and retain key individuals and highly skilled employees, our
business may be adversely affected.
  PRC laws and regulations restrict foreign ownership of Internet content provision, Internet culture
operation and Internet publishing licenses, and substantial uncertainties exist with respect to the
application and implementation of PRC laws and regulations.
     12




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We may not be able to get approval for renewing our current foreign games, or for licensing new
foreign games, if the PRC regulatory authorities promote a policy of domestic online or mobile game
development and tighten approval criteria for online or mobile game imports.
  Failure to obtain or renew approvals or filings for online games we operate may adversely affect
our operations or subject us to penalties.
   13




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We depend on Shanghai IT to hold certain operating licenses. If Shanghai IT or its shareholders
violate our contractual arrangements with it, our business could be disrupted and our reputation
may be harmed.
  The principal shareholders of Shanghai IT and Shanghai Huopu Cloud Computing Terminal Technology
Co., Ltd. have potential conflicts of interest with us, which may adversely affect our business.
  Our subsidiaries in China are subject to restrictions on paying dividends or making other payments.
   14




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We may not be able to successfully implement our growth strategies.
  We could be liable for breaches of security on our websites and fraudulent transactions by users of
our websites.
  Existing major shareholders have substantial control over us and could delay or prevent a change in
corporate control.
  New income tax laws may increase our tax burden or the tax burden on the holders of our shares or
ADSs, and tax benefits available to us may be reduced or repealed, causing the value of your
investment in us to suffer.
   15




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Strengthened scrutiny over acquisition transactions by the PRC tax authorities may have a negative
impact on our acquisition strategy.
  We have adopted a shareholders rights plan, which, together with the other anti-takeover provisions
of our articles of association, could discourage a third party from acquiring us, which could limit
our shareholders opportunity to sell their shares, including ordinary shares represented by our
ADSs, at a premium.
   17




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We have limited business insurance coverage in China.
  Some of our subsidiaries and an affiliated entity in China engaged in certain business activities
beyond the authorized scope of their respective licenses, and if they are subject to administrative
penalties or fines, our operating results may be adversely affected.
  Failure to achieve and maintain effective internal controls could have a material adverse effect on
our business, results of operations and the trading price of our ADSs.
    18




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We face risks related to health epidemics and other natural disasters.
  Risks Related to Doing Business in China
 Our business may be adversely affected by public opinion and government policies in China.
    19




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Adverse changes in economic and political policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could adversely affect our business.
   The laws and regulations governing the online game industry in China are developing and subject to
future changes. If we fail to obtain or maintain all applicable permits and approvals, our
business and operations could be materially and adversely affected.
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Intensified government regulation of Internet cafés could limit our ability to maintain or increase
our revenues and expand our customer base.
  Regulation and censorship of information disseminated over the Internet in China may adversely
affect our business, and we may be liable for information displayed on, retrieved from, or linked
to our Internet websites.
    21




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Future movements in exchange rates between the U.S. dollar and the RMB may adversely affect the
value of our ADSs.
   Restrictions on currency exchange in China limit our ability to utilize our revenues effectively,
make dividend payments and meet our foreign currency denominated obligations.
   22




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PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders or us to penalties and fines, and limit our
ability to inject capital into our PRC subsidiaries, limit our subsidiaries ability to increase
their registered capital, distribute profits to us, or otherwise adversely affect us.
     Uncertainties with respect to the PRC legal system could adversely affect us.
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The limited use of personal computers in China and the relatively high cost of Internet access with
respect to per capita gross domestic product may limit the development of the Internet in China and
impede our growth.
  The continued growth of Chinas Internet market depends on the establishment of adequate
telecommunications infrastructure.
  Risks Related to Our Shares and ADSs
 We were a passive foreign investment company for the taxable year ended December 31, 2010, which
could result in adverse United States federal income tax consequences to U.S. Holders of our ADSs
or ordinary shares.
   24




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The future sales or issuance of a substantial number of our ADSs or ordinary shares could adversely
affect the price of our ADSs.
   The market price for our ADSs may be volatile.
  
    
    actual or anticipated fluctuations in our quarterly operating results;
 
    
    announcements of new games by us or our competitors;
 
    
    changes in financial estimates by securities analysts;
 
    
    price fluctuations of publicly traded securities of other China-based companies
engaging in Internet-related services or other similar businesses;
 
    
    conditions in the Internet or online game industries;
 
    
    changes in the economic performance or market valuations of other Internet or online
game companies;
 
    
    announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
 
    
    fluctuations in the exchange rates between the U.S. dollar and the RMB;
 
    
    addition or departure of key personnel; and
 
    
    pending and potential litigation.
  You may face difficulties in protecting your interests, and our ability to protect our rights
through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands
law.
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Your ability to bring an action against us or against our directors and officers, or to enforce a
judgment against us or them, will be limited because we are incorporated in the Cayman Islands,
because we conduct a substantial portion of our operations in China and because the majority of our
directors and officers reside outside of the United States.
  You may not be able to exercise your right to vote.
  Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings.
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You may not receive distributions on ordinary shares or any value for them if it is illegal or
impractical to make them available to you.
  You may be subject to limitations on transfer of your ADSs.
  
 ITEM 4.
    
    INFORMATION ON THE COMPANY
 A.
    
    History and Development of the Company
   
    
    Shanghai IT, which holds Internet content provision, Internet culture operation and
Internet publishing licenses;
 
    
    Shanghai Jiucheng Advertisement, whose business license permits it to conduct
advertisement operations.
    27




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##### Table of Contents



Strategic Investment in Third-Party Companies
 Investment in Red 5.
 Investment in OpenFeint .
 B.
    
    Business Overview
   28




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##### Table of Contents



Products and Services
   
    
    sophisticated 2D, 2.5D or 3D graphics which expose players to captivating screen
scenes;
 
    
    player upgrading system which allows players to attain higher game attributes with
their characters as they develop experience and enhanced game capabilities over time;
and
 
    
    instant messaging system which allows players to communicate with each other during
the game and form groups with other players, thereby coordinating their game skills to
achieve collective objectives.
  29




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##### Table of Contents



Game
    
    Developer/Licensor
    
    Description
    
    StatusSUN
    
    Webzen, Inc.
    
    3D MMORPG
    
    Commercially launched in
China in May 2007EA Sports FIFA Online 2
    
    EA Swiss Sàrl
    
    Casual soccer game
    
    Commercially launched in
China in May 2009Atlantica
    
    Ndoors Corporation
    
    3D MMORPG
    
    Commercially launched in
China in June 2009World of Fighter
    
    The9
    
    2D MMORPG
    
    Commercially launched in
China in January 2010Kingdom Heroes 2 Online
    
    USERJOY Technology
Co., Ltd.
    
    3D MMORPG
    
    Commercially launched in
China in May 2010Winning Goal
    
    The9
    
    Web and SNS game
    
    Commercially launched in
China in July 2010ShenXianZhuan
    
    Hangzhou Fire Rain
Network Technology
Co., Ltd.
    
    2.5D MMORPG
    
    Preparing for beta testingPlanetside 2
    
    Sony Online
Entertainment LLC
    
    3D MMOFPS game
    
    In localization processFree Realms
    
    Sony Online
Entertainment LLC
    
    3D cartoon fairy
online game
    
    In localization processSeoyugi
    
    NNG Lab/ CJ
Internet
Corporation
    
    2D MMORPG
    
    In localization process
  License of SUN from Webzen.
 License of Atlantica from Ndoors.
 Licensing to Third-Parties of World of Fighter.
  30




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##### Table of Contents



License of Kingdom Heroes 2 Online from USERJOY.
 License of ShenXianZhuan from Fire Rain and Investment in Fire Rain.
 License of Seoyugi from CJ Internet Corporation and NNG Lab.
 Development of Winning Goal.
 License of EA Sports FIFA Online 2 from EA Swiss Sàrl.
 License of Free Realms and Planetside 2 from Sony Online Entertainment LLC.
 Web Game Platform .
    31




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##### Table of Contents



Other Products and Services.
 IPTV Services
 SMS.
 Licensing of Proprietary Games.
 Game Operating Support, Website Solutions and Advertising Services
 Mobile Game Platform.
 Membership Management and Payment System
   Customer Service
    32




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##### Table of Contents



Purchase of In-game Items
  Prepaid Cards.
 Prepaid Online Points.
 Online Payment.
 Pricing, Distribution and Marketing
 Pricing.
 Distribution.
 Marketing.
 Advertising and Online Promotion
 Cross-Marketing
 On-Site Promotion
 In-Game Marketing
 Game Development and Licensing
   33




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##### Table of Contents



Technology
  
    
    servers and network devices located in eleven internet data centers throughout China
as of the end of December 2010;
 
    
    proprietary software, including game monitor tools, that are integrated with our
websites and customer service center operations; and
 
    
    hardware platform and server sites primarily consisting of Lenovo,
Hewlett-Packard/Compaq, Dell and IBM servers; EMC, HP and Cisco storage systems; and
H3C network equipments.
  Competition
    Intellectual Property
   34




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##### Table of Contents



Legal Proceedings
  Government Regulations
    Regulations on Internet Content Provision Service, Online Gaming and Internet Publishing
  
    
    Telecommunications Regulations (2000);
 
    
    The Administrative Rules for Foreign Investments in Telecommunications Enterprises
(2001), as amended in 2008;
 
    
    The Administrative Measures for Telecommunications Business Operating License
(2009);
 
    
    The Internet Information Services Administrative Measures (2000);
  35




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##### Table of Contents




    
    The Tentative Measures for Administration of Internet Culture (2003), as amended and
reissued in 2011;
 
    
    The Notice on Several Issues Relating to the Implementation of The Tentative
Measures for Administration of Internet Culture (2003);
 
    
    The Tentative Measures for Administration of Internet Publication (2002);
 
    
    The Tentative Measures for Administration of Online Games (2010); and
 
    
    The Foreign Investment Industrial Guidance Catalogue (2007).
      36




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##### Table of Contents



Circular for Further Strengthening the Administration of
Internet Café and Online Games
     37




---



##### Table of Contents



Regulations on Internet Content
     Regulations on Internet Café
   38




---



##### Table of Contents



Regulations on Privacy Protection
  Import Regulations
  Regulations on Intellectual Property Rights
  Regulations on Foreign Currency Exchange and Dividend Distribution
 Foreign Currency Exchange
 
    
    Foreign Exchange Administration Rules (1996), as amended, or the Exchange Rules; and
 
    
    Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996),
or the Administration Rules.
   39




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##### Table of Contents



Dividend Distribution
 
    
    The Foreign Investment Enterprise Law (1986), as amended; and
 
    
    Administrative Rules under the Foreign Investment Enterprise Law (2001).
  Regulations on Foreign Exchange in Certain Onshore and Offshore Transactions
   
    
    prior to establishing or assuming control of an offshore company for the purposes of
financing that offshore company with assets or equity interests in an onshore
enterprise in the PRC, each PRC resident must complete the overseas investment foreign
exchange registration procedures with the local SAFE branch;
 
    
    an amendment to the registration with the local SAFE branch is required to be filed
by any PRC resident that directly or indirectly holds interests in that offshore
company upon either (1) the injection of equity interests or assets of an onshore
enterprise in the offshore company, or (2) the completion of any overseas fundraising
by such offshore company; and
 
    
    an amendment to the registration with the local SAFE branch is also required to be
filed by such PRC resident when there is any material change involving a change in the
capital of the offshore company.
    40




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##### Table of Contents



C.
    
    Organizational Structure
  
  41




---



##### Table of Contents



D.
    
    Property, Plant and Equipment
  
 ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
  
 ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  A.
    
    Overview
     
    
    our revenue composition and sources of revenue;
 
    
    our cost of services; and
 
    
    our operating expenses.
  42




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##### Table of Contents



For the Year Ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    %
    
    
    RMB
    
    
    %
    
    
    RMB
    
    
    US$
    
    
    %(in thousands, except percentages)Revenues:Online game
operation
    
    
    1,800,313
    
    
    
    99.7
    
    
    
    795,477
    
    
    
    99.1
    
    
    
    101,815
    
    
    
    15,426
    
    
    
    93.8Other revenues
    
    
    5,817
    
    
    
    0.3
    
    
    
    7,152
    
    
    
    0.9
    
    
    
    6,699
    
    
    
    1,015
    
    
    
    6.2Total revenues
    
    
    1,806,130
    
    
    
    100.0
    
    
    
    802,629
    
    
    
    100.0
    
    
    
    108,514
    
    
    
    16,441
    
    
    
    100.0
 Online Game Services
    Other Revenues
  43




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##### Table of Contents



Cost of Services .
 Operating Expenses .
 Product Development Expenses
 Sales and Marketing Expenses
 General and Administrative Expenses
 Impairment
 Impairment Provisions Related to the Non-renewal of the WoW License
  
    
    A provision on a receivable amounting to RMB18.0 million from a customer that
purchased WoW prepaid player cards from the company for distribution, as a result of
the expiration of the WoW license on June 7, 2009 and, among other things, the impact
on the ongoing relationship with the customer;
 
    
    A RMB3.9 million provision for prepaid royalties;
 
    
    A RMB22.7 million charge to increase the valuation allowance for deferred tax
assets, which represented incremental income taxes as a result of non-renewal of the
WoW license prior to the evaluation and recording of impairment charges as a result of
the non-renewal of the WoW license;
  44




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##### Table of Contents




    
    RMB68.4 million of additional depreciation expense related to computer equipment to
reflect the change to a shorter expected useful life of the underlying assets due to
non-renewal of the WoW license agreement;
 
    
    A RMB46.5 million provision for prepayment for equipment and a RMB8.7 million
provision on advances to suppliers mainly related to a vendor which had been the
primary supplier of computer servers and related computer equipment. With the
non-renewal of the WoW license, we evaluated a number of factors, including the status
of production of the assets underlying the advance prepayments, our ability to recover
the value of the advances through the possible sale of the fixed assets upon the
completion of production, the ability to utilize the servers upon completion of
production, as well as our ability to recover the amounts advanced to the vendor and as
a result of such assessment, and concluded that a full provision in connection with
such advances and prepayments was necessary;
 
    
    RMB7.0 million provisions on receivable and prepayments and other current assets in
connection with Game First International Corporation, or GFD, comprising: (i) a RMB5.6
million provision on prepayments and other current assets. We assessed the impact of
non-renewal of the WoW license on its ongoing relationship with GFD and the resulting
collectability of this receivable, and concluded collection to be unlikely; and (ii) a
RMB1.4 million provision on accounts receivable; and
 
    
    A RMB1.7 million provision on inventories.
  
    
    A RMB103.2 million provision for royalty prepayments including withholding taxes
that were paid in 2009 but not consumed prior to the expiration of the WoW license on
June 7, 2009;
 
    
    RMB40.0 million of additional depreciation expense related to computer equipment to
reflect the change to a shorter expected useful life of the underlying assets due to
the non-renewal of the WoW license agreement;
 
    
    A RMB30.2 million impairment for goodwill which was deemed recoverable as of
December 31, 2008 based on our companys impairment test that includes the operating
cash flow generated from WoW operation during the period from January 1 to June 6,
2009, but was no longer recoverable following the expiration of the WoW license on June
7, 2009; and
 
    
    A RMB22.1 million provision for additional cost of services related to the refund of
point cards, which is the difference between the face value of the point cards and the
net proceeds our company received in the sales of the respective point cards.
  Holding Company Structure
   45




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Regulations of Internet Business in China
      46




---



##### Table of Contents



Income and Sales Taxes
       47




---



##### Table of Contents



Consolidation of Variable Interest Entities, or VIEs.
   48




---



##### Table of Contents



Critical Accounting Policies
  Revenue Recognition .
 Online game services
   Virtual item / service consumption model  online game services except WoW services
    49




---



##### Table of Contents



Time consumption model  WoW services
   Other revenues
  IPTV services
  Short message services
  Game operating support, website solutions and advertisement
   50




---



##### Table of Contents



Other revenues
  Game development and licensing
   Product Development.
  Income Taxes.
   51




---



##### Table of Contents



Property, Equipment and Software.
  Intangible assets.
  Goodwill.
  52




---



##### Table of Contents



Share-Based Compensation.
     53




---



##### Table of Contents



Impairment of Equity Investment.
 Impairment of Long-lived Assets and Intangible Assets.
 Noncontrolling interest.
  54




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##### Table of Contents



Results of Operations
  Year Ended December 31,2008
    
    
    2009
    
    
    2010%
    
    
    %
    
    
    %Revenues:Online game services
    
    
    105.2
    
    
    
    104.6
    
    
    
    99.0Other revenues
    
    
    0.3
    
    
    
    0.9
    
    
    
    6.5Sales taxes
    
    
    (5.5
    )
    
    
    (5.5
    )
    
    
    (5.5
    )Net revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of services
    
    
    (58.3
    )
    
    
    (93.7
    )
    
    
    (100.4
    )Gross profit (loss)
    
    
    41.7
    
    
    
    6.3
    
    
    
    (0.4
    )Operating expenses:Product development
    
    
    (4.3
    )
    
    
    (15.0
    )
    
    
    (135.6
    )Sales and marketing
    
    
    (6.1
    )
    
    
    (14.8
    )
    
    
    (61.5
    )General and administrative
    
    
    (18.7
    )
    
    
    (29.6
    )
    
    
    (109.6
    )Impairment of equipment, intangible assets and
goodwill
    
    
    (4.8
    )
    
    
    (10.4
    )
    
    
    (36.9
    )Total operating expenses
    
    
    (33.8
    )
    
    
    (69.8
    )
    
    
    (343.6
    )Profit (loss) from operations
    
    
    7.9
    
    
    
    (63.5
    )
    
    
    (344.0
    )Interest income
    
    
    3.3
    
    
    
    4.0
    
    
    
    22.5Other (expenses) income, net
    
    
    (1.1
    )
    
    
    8.1
    
    
    
    18.8Income tax (expenses) benefit
    
    
    (2.8
    )
    
    
    0.7
    
    
    
    (7.2
    )Gain on investment disposal
    
    
    
    
    
    
    
    
    
    
    6.6Impairment loss on investments
    
    
    (1.5
    )
    
    
    (2.9
    )
    
    
    (190.7
    )Share of loss in equity investments, net of taxes
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (10.4
    )Net income (loss)
    
    
    5.6
    
    
    
    (53.9
    )
    
    
    (504.4
    )Net loss attributable to noncontrolling interest
    
    
    *
    
    
    
    (0.6
    )
    
    
    (18.6
    )Net Income (loss) attributable to holders of
ordinary shares
    
    
    5.7
    
    
    
    (53.3
    )
    
    
    (485.8
    )
 
 *
    
    Less than 0.1% Year 2010 Compared to Year 2009
 Revenues.
 Online Game Services.
 Other Revenues.
 Cost of Services.
 Operating Expenses.
 Product Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
  55




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Impairment of equipment, intangible assets and goodwill.
 Interest Income.
 Other Income (Expense).
 Income Tax Benefit (Expenses).
 Gain on Investment Disposal.
 Impairment Loss on Investment.
 Net Income (Loss) Attributable to Holders of Ordinary Shares.
 Year 2009 Compared to Year 2008
 Revenues.
 Online Game Services.
 Other Revenues.
 Cost of Services.
  56




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##### Table of Contents



Operating Expenses.
 Product Development Expenses.
 Sales and Marketing Expenses.
 General and Administrative Expenses.
 Impairment of equipment, intangible assets and goodwill.
 Interest Income.
 Other Income (Expense).
 Income Tax Benefit (Expenses).
 Impairment Loss on Investment.
  57




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##### Table of Contents



Net Income (Loss).
 Net Income (Loss) Attributable to Noncontrolling Interest.
 Net Income (Loss) Attributable to Holders of Ordinary Shares.
 B.
    
    Liquidity and Capital Resources
 Cash Flows and Working Capital
   Year Ended December 31,2008
    
    
    2009
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(in thousands)Net cash provided by (used in) operating activities
    
    
    692,634
    
    
    
    (106,086
    )
    
    
    (247,552
    )
    
    
    (37,508
    )Net cash used in investing activities
    
    
    (487,513
    )
    
    
    (16,276
    )
    
    
    (7,114
    )
    
    
    (1,078
    )Net cash provided by (used in) financing activities
    
    
    (235,734
    )
    
    
    (356,548
    )
    
    
    (507
   )
    
    
    (77
   )Effect of foreign exchange rate changes on cash
    
    
    (32,084
    )
    
    
    1,405
    
    
    
    (3,719
    )
    
    
    (563
    )Net increase (decrease) in cash and cash equivalents
    
    
    (62,696
    )
    
    
    (477,505
    )
    
    
    (258,892
    )
    
    
    (39,226
    )Cash and cash equivalents at beginning of year
    
    
    2,215,282
    
    
    
    2,152,586
    
    
    
    1,675,081
    
    
    
    253,800Cash and cash equivalents at end of year
    
    
    2,152,586
    
    
    
    1,675,081
    
    
    
    1,416,189
    
    
    
    214,574
 Operating Activities
  Investing Activities
   58




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##### Table of Contents



Financing Activities
    Capital Expenditures
 Capital Expenditures.
 C.
    
    Research and Development
  D.
    
    Trend Information
   59




---



##### Table of Contents



E.
    
    Off-Balance Sheet Arrangements
  F.
    
    Contractual Obligations
  Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-2 years
    
    
    3-5 years
    
    
    5 years(in RMB)Operating Lease Obligations
    
    
    11,200,749
    
    
    
    8,009,544
    
    
    
    1,729,965
    
    
    
    1,461,240
    
    
    
    
 G.
    
    Recent Accounting Pronouncements
     60




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##### Table of Contents



H.
    
    Safe Harbor
  
    
    our ability to successfully launch and operate additional online games licensed by
us in China;
 
    
    our ability to license, develop or acquire additional online games that are
attractive to users;
 
    
    the maintenance and expansion of our relationships with online game developers,
including our existing licensors;
 
    
    uncertainties in and the timeliness of obtaining necessary governmental approvals
and licenses for operating any new online game;
 
    
    risks inherent in the online game business;
 
    
    risks associated with our future acquisitions and investments;
 
    
    our ability to compete successfully against our competitors;
 
    
    risks associated with our corporate structure and the regulatory environment in
China; and
 
    
    other risks outlined in our filings with the SEC including this annual report on
Form 20-F.
   
 ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A.
    
    Directors and Senior Management
  Directors and Executive Officers(1)
    
    Age
    
    Position/TitleJun Zhu
    
    44
    
    Chairman of the Board and Chief Executive OfficerCheung Kin Au-Yeung
    
    62
    
    DirectorDavin Alexander Mackenzie(2)(3)
    
    50
    
    Independent DirectorChao Y. Wang(2)(3)
    
    46
    
    Independent DirectorKa Keung Yeung(2)(3)
    
    51
    
    Independent DirectorGeorge Lai
    
    34
    
    Chief Financial OfficerSwun Woo Park
    
    37
    
    Vice PresidentChris Shen
    
    42
    
    Vice PresidentYong Wang
    
    43
    
    Vice President
 
 (1)
    
    Our former president Xiaowei Chens employment contract with the company expired on May
16, 2010. Lingdong Huang, our former vice president, resigned on August 20, 2010. Xudong He,
our former vice president, resigned on November 30, 2010. Huanxin Jiang, our former vice
president, resigned on January 31, 2011.(2)
    
    Member of Compensation Committee.(3)
    
    Member of Audit Committee.  61




---



##### Table of Contents



Biographical Information
 Jun Zhu
 Cheung Kin Au-Yeung
 Davin Alexander Mackenzie
 Chao Y. Wang
  62




---



##### Table of Contents



Ka Keung Yeung
 George Lai
 Swun Woo (Tony) Park
 Chris Shen
 Yong Wang
 B.
    
    Compensation of Directors and Executive Officers
   63




---



##### Table of Contents



Amended 2004 Stock Option Plan
  Total Number of Ordinary
    
    
    ExerciseShares Underlying Options
    
    
    Price RangeGranted
    
    
    (in US$)
    
    Expiration dateJun Zhu
    
    
    1,600,000
    
    
    5.13
    
    August 27, 2015Yong Wang
    
    
    *
    
    
    5.13-6.07
    
    August 27, 2015  December 11, 2015Chris Shen
    
    
    *
    
    
    5.13-7.36
    
    March 6, 2012  December 11, 2015Chao Y. Wang
    
    
    *
    
    
    5.13-7.36
    
    March 6, 2012  December 11, 2015Ka Keung Yeung
    
    
    *
    
    
    5.13-7.36
    
    March 6, 2012  December 11, 2015Davin Alexander Mackenzie
    
    
    *
    
    
    5.13-7.36
    
    March 6, 2012  December 11, 2015Cheung Kin Au-Yeung
    
    
    *
    
    
    5.13-7.36
    
    November 17, 2013  December 11, 2015Swun Woo Park
    
    
    *
    
    
    5.13-6.07
    
    August 27, 2015  December 11, 2015George Lai
    
    
    *
    
    
    5.13-7.36
    
    November 17, 2013  December 11, 2015All Directors and Senior Executive Officers as a Group
    
    
    2,685,000
    
    
    5.13-7.36
    
    March 6, 2012  December 11, 2015Other Individuals as a Group (other than those listed above)
    
    
    1,218,651
    
    
    5.13-30.90
    
    March 6, 2012  December 11, 2015
 
 
    
    Excluding 1,746,359 options forfeited as of the date of this annual report
pursuant to the terms of our Amended 2004 Stock Option Plan.*
    
    The options held by each of these directors and officers represent less than 1% of our total
outstanding shares.  Termination of Options
 Administration
 Vesting Schedule
  64




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##### Table of Contents



Option Agreement
 Option Exercise
 Third-Party Acquisition
 Changes in Capitalization and Other Adjustments
 Termination of Plan
 C.
    
    Board Practices
 Board of Directors
  Committees of the Board of Directors
 Audit Committee.
  65




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##### Table of Contents




    
    selecting the independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by the independent auditors;
 
    
    reviewing and approving all proposed related-party transactions;
 
    
    discussing the annual audited financial statements with management and the
independent auditors;
 
    
    annually reviewing and reassessing the adequacy of our audit committee charter;
 
    
    meeting separately and periodically with management and the independent auditors;
 
    
    reporting regularly to the full board of directors; and
 
    
    such other matters that are specifically delegated to our audit committee by our
board of directors from time to time.
 Compensation Committee.
 
    
    reviewing and determining the compensation for our five most senior executives;
 
    
    reviewing the compensation of our other employees and recommending any proposed
changes to the management;
 
    
    reviewing and approving director and officer indemnification and insurance matters;
 
    
    reviewing and approving any employee loans in an amount equal to or greater than
US$60,000 (or such amount as from time to time announced by the relevant regulatory
bodies as requiring the approval of the Committee); and
 
    
    reviewing periodically and approving any long-term incentive compensation or equity
plans, programs or similar arrangements, annual bonuses, employee pensions and welfare
benefits plans.
 Duties of Directors
  Terms of Directors
   66




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##### Table of Contents



Voting Agreement
  D.
    
    Employees
  E.
    
    Share Ownership
  (1)
    
    each of our directors and executive officers who are also our shareholders; and
 (2)
    
    each person known to us to own beneficially more than 5% of our ordinary shares.
  67




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##### Table of Contents



Ordinary Shares Beneficially OwnedName
    
    Number(1)
    
    
    %(2)Directors and executive officers:Jun Zhu(3)
    
    
    6,755,086
    
    
    
    22.2
    %Cheung Kin Au-Yeung
    
    
    *
    
    
    
    *Davin Alexander Mackenzie
    
    
    *
    
    
    
    *Chao Y. Wang
    
    
    *
    
    
    
    *Ka Keung Yeung
    
    
    *
    
    
    
    *George Lai
    
    
    *
    
    
    
    *Swun Woo Park
    
    
    *
    
    
    
    *Chris Shen
    
    
    *
    
    
    
    *Yong Wang
    
    
    *
    
    
    
    *All Directors and Senior Executive Officers as a Group(4)
    
    
    7,081,550
    
    
    
    23.0
    %Principal shareholders:Incsight Limited(5)
    
    
    6,399,530
    
    
    
    21.3
    %Bosma Limited(6)
    
    
    4,612,522
    
    
    
    15.6
    %CRCM Institutional Master Fund (BVI), Ltd.(7)
    
    
    3,100,000
    
    
    
    10.5
    %QVT Financial LP(8)
    
    
    1,479,788
    
    
    
    5.0
    %
 
 *
    
    Less than 1% of our total outstanding shares.(1)
    
    Beneficial ownership is determined in accordance with the rules of the SEC, and includes
voting or investment power with respect to the securities. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person, we have included
shares that the person has the right to acquire within 60 days of March 10, 2011, including
through the exercise of any option, warrant or other right or the conversion of any other
security.(2)
    
    Percentage of beneficial ownership is based on 29,512,745 ordinary shares outstanding as of
March 10, 2011, as well as the shares underlying share options and warrants exercisable by
such person or group within 60 days from March 10, 2011.(3)
    
    Consists of (i) 5,847,334 ordinary shares held by Incsight Limited, a British Virgin Islands
company 100% owned by Mr. Zhu, as jointly reported by Incsight Limited and Jun Zhu, (ii)
options to purchase 355,556 shares held by Mr. Zhu and (iii) warrants to purchase 552,196
ordinary shares of our company that are also held by Incsight Limited. The business address
for Mr. Zhu is Building No. 3, 690 Bibo Road, Zhangjiang Hi-Tech Park, Pudong New Area,
Shanghai 201203, Peoples Republic of China.(4)
    
    Includes ordinary shares, ordinary shares issuable upon exercise of options and restricted
shares, held by all of our directors and executive officers as a group.(5)
    
    Consists of (i) 5,847,334 ordinary shares held by Incsight Limited, a British Virgin Islands
company 100% owned by Jun Zhu, our chairman and chief executive officer, as jointly reported
by Incsight Limited and Jun Zhu, and (ii) warrants to purchase 552,196 ordinary shares of our
company. The business address for Incsight Limited is Building No. 3, 690 Bibo Road,
Zhangjiang Hi-Tech Park, Pudong New Area, Shanghai 201203, Peoples Republic of China.(6)
    
    Consists of 4,612,522 ordinary shares held by Bosma Limited, as reported by Bosma Limited on
the Schedule 13G/A filed with the SEC on February 13, 2009. Bosma Limited, a British Virgin
Islands corporation, is wholly-owned by Morningside VC Limited, a British Virgin Islands
corporation, which is in turn wholly-owned by The HCB Trust, an Isle of Man trust, the trustee
of which is Dunn Investments Limited, an Isle of Man corporation. Dunn Investments Limited
controls indirectly, through The HCB Trust, a 100% interest in Bosma Limited, and as a result
has the sole power to vote and dispose of the shares of The9 Limited held by Bosma Limited.
Dunn Investments Limited is controlled by its board of directors, consisting of Lorna Irene
Cameron and Philip Alvaro Salazar, both of whom expressly disclaim beneficial ownership of the
shares held by Bosma Limited. The address for Bosma Limited is Pasea Estate, Road Town,
Tortola, British Virgin Islands.(7)
    
    Consists of 3,100,000 ADSs, each representing one ordinary share of our company, owned by
CRCM Institutional Master Fund (BVI), Ltd., or the Fund, a British Virgin Islands company, as
it reported on the Schedule 13G/A filed with the SEC on February 11, 2011. The Funds
investment manager with respect to the ADSs held by the Fund is CRCM LP, a Delaware limited
partnership, which in turn has ChinaRock Capital Management Limited, a Hong Kong company
limited by shares as its sub-investment adviser. CRCM LPs general partner is CRCM LLC, a
Delaware limited liability company. Chun R. Ding, a United
States citizen, is the managing partner of CRCM LP, the director of ChinaRock Capital
Management Limited and a member of CRCM LLC, with respect to the ADSs held by the Fund. The
address for CRCM is c/o Walkers (BVI) Limited, PO Box 92, Road Town, Tortola, British Virgin
Islands VG1110.(8)
    
    Consists of 1,337,038 ordinary shares held by QVT Fund LP and 142,750 ordinary shares held by
Quintessence Fund L.P., as reported by QVT Financial LP on the Schedule 13G/A filed with the
SEC on February 14, 2011. QVT Financial LP is the investment manager for QVT Fund LP and
Quintessence Fund LP and has the power to direct the vote and disposition of ordinary shares
held by each fund. QVT Financial LP is a Delaware limited liability company, with an address
at 1177 Avenue of the Americas, 9th Floor, New York, New York 10036.  68




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ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A.
    
    Major Shareholders
  B.
    
    Related Party Transactions
 Arrangements with Affiliated PRC Entities
    Domain Name License Agreement . www.the9.com
  69




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Exclusive Technical Service Agreement .
 Shareholder Voting Proxy Agreements .
 Call Option Agreements .
 Loan Agreements .
 Equity Pledge Agreements .
 Investments in Affiliated Companies
   70




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##### Table of Contents



Stock Option Grants
  C.
    
    Interests of Experts and Counsel
  
 ITEM 8.
    
    FINANCIAL INFORMATION
 A.
    
    Consolidated Statements and Other Financial Information
  Legal Proceedings
     Glaser v. The9 Ltd. et
al. ODea v. The9 Ltd. et al.
  71




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Dividend Policy
    B.
    
    Significant Changes
  
 ITEM 9.
    
    THE OFFER AND LISTING
 A.
    
    Offer and Listing Details
   72




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Sales PriceHigh
    
    
    LowAnnual Highs and Lows2006
    
    
    32.87
    
    
    
    15.502007
    
    
    52.44
    
    
    
    19.562008
    
    
    28.50
    
    
    
    9.972009
    
    
    16.64
    
    
    
    6.282010
    
    
    8.66
    
    
    
    3.70Quarterly Highs and LowsFirst Quarter 2009
    
    
    16.64
    
    
    
    9.16Second Quarter 2009
    
    
    15.90
    
    
    
    8.62Third Quarter 2009
    
    
    10.20
    
    
    
    7.08Fourth Quarter 2009
    
    
    8.97
    
    
    
    6.28First Quarter 2010
    
    
    8.66
    
    
    
    6.35Second Quarter 2010
    
    
    7.33
    
    
    
    3.70Third Quarter 2010
    
    
    5.78
    
    
    
    3.75Fourth Quarter 2010
    
    
    7.10
    
    
    
    5.04First Quarter 2011
    
    
    8.49
    
    
    
    6.03Monthly Highs and LowsOctober 2010
    
    
    5.70
    
    
    
    5.04November 2010
    
    
    7.10
    
    
    
    5.60December 2010
    
    
    6.99
    
    
    
    5.94January 2011
    
    
    8.49
    
    
    
    6.63February 2011
    
    
    8.20
    
    
    
    6.99March 2011
    
    
    7.52
    
    
    
    6.03April 2011 (through April 6, 2011)
    
    
    6.96
    
   
    
    6.50
 B.
    
    Plan of Distribution
  C.
    
    Markets
  D.
    
    Selling Shareholders
  E.
    
    Dilution
  F.
    
    Expenses of the Issue
  
 ITEM 10.
    
    ADDITIONAL INFORMATION
 A.
    
    Share Capital
   73




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B.
    
    Memorandum and Articles of Association
   Ordinary Shares
 General .
 Dividends .
 Voting Rights .
   Transfer of Shares
 Liquidation .
 Calls on Shares and Forfeiture of Shares .
  74




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Redemption of Shares .
 Variation of Rights of Shares .
 Inspection of Books and Records.
 Differences in Corporate Law
  Mergers and Similar Arrangements.
 
    
    a merger means the merging of two or more constituent companies and the vesting of
their undertaking, property and liabilities in one of such companies as the surviving
company; and
 
    
    a consolidation means the combination of two or more constituent companies into a
consolidated company and the vesting of the undertaking, property and liabilities of
such companies to the consolidated company.
  
    
    a special resolution of the shareholders of each constituent company voting together
as one class, if the shares to be issued to each shareholder in the consolidated or
surviving company will have the same rights and economic value as the shares held in
the relevant constituent company; or
 
    
    a shareholder resolution of each constituent company passed by a majority in number
representing 75% in value of the shareholders voting together as one class.
   75




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
    
    the statutory provisions as to majority vote have been met;
 
    
    the shareholders have been fairly represented at the meeting in question;
 
    
    the arrangement is such that a businessman would reasonably approve; and
 
    
    the arrangement is not one that would more properly be sanctioned under some other
provision of the Companies Law.
   Shareholders Suits . Foss v Harbottle
 Directors Fiduciary Duties
   76




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Shareholder Action by Written Consent
 Shareholder Proposals
 Cumulative Voting
 Removal of Directors
 Transactions with Interested Shareholders
  Dissolution; Winding Up
  77




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Variation of Rights of Shares
 Amendment of Governing Documents
 Anti-Takeover Provisions in Memorandum and Articles of Association.
 
    
    authorize our board of directors to issue preference shares in one or more series
and to designate the price, rights, preferences, privileges and restrictions of such
preference shares without any further vote or action by our shareholders; and
 
    
    create a classified board of directors pursuant to which our directors are elected
for staggered terms, which means that shareholders can only elect, or remove, a limited
number of directors in any given year.
  Rights of Non-Resident or Foreign Shareholders
 Inspection of Books and Records
 Shareholder Rights Plan
  C.
    
    Material Contracts
   78




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D.
    
    Exchange Controls
     E.
    
    Taxation
  Cayman Islands Taxation
   79




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United States Federal Income Taxation
   
    
    banks and other financial institutions;
 
    
    insurance companies;
 
    
    regulated investment companies;
 
    
    real estate investment trusts;
 
    
    broker-dealers;
 
    
    traders that elect to use a mark-to-market method of accounting;
 
    
    U.S. expatriates;
 
    
    tax-exempt entities;
 
    
    persons liable for alternative minimum tax;
 
    
    persons holding an ADS or ordinary share as part of a straddle, hedging, conversion
or integrated transaction;
 
    
    persons that actually or constructively own 10% or more of the total combined voting
power of all classes of our voting stock;
 
    
    partnerships or other pass-through entities, or persons holding ADSs or ordinary
shares through such entities; or
 
    
    persons who acquired ADSs or ordinary shares pursuant to the exercise of any
employee share option or otherwise as compensation.
 INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL TAX
RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.
  80




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
    
    an individual who is a citizen or resident of the United States;
 
    
    a corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes) organized under the laws of the United States, any State thereof or the
District of Columbia;
 
    
    an estate, the income of which is subject to U.S. federal income taxation regardless
of its source; or
 
    
    a trust that (1) is subject to the primary supervision of a court within the United
States and the control of one or more U.S. persons for all substantial decisions or (2)
has a valid election in effect under applicable U.S. Treasury regulations to be treated
as a U.S. person.
    Passive Foreign Investment Company
  
    
    at least 75% of its gross income for such year is passive income; or
 
    
    at least 50% of the value of its assets (based on an average of the quarterly values
of the assets) during such year is attributable to assets that produce passive income
or are held for the production of passive income (the asset test).
    81




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You are strongly urged to consult your tax advisors as to the possibility and consequences
of making a deemed sale election if we cease to be a PFIC and such election becomes available to
you.
  
    
    the excess distribution or recognized gain will be allocated ratably over your
holding period for the ADSs or ordinary shares;
 
    
    the amount allocated to the current taxable year, and any taxable years in your
holding period prior to the first taxable year in which we were a PFIC, will be treated
as ordinary income; and
 
    
    the amount allocated to each other taxable year will be subject to tax at the
highest tax rate in effect for individuals or corporations, as applicable, for each
such year and the interest charge generally applicable to underpayments of tax will be
imposed on the resulting tax attributable to each such year.
     82




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##### Table of Contents



de minimis
 pro rata
  YOU ARE STRONGLY URGED TO CONSULT YOUR TAX ADVISORS REGARDING THE IMPACT OF OUR BEING A PFIC
FOR 2010 ON YOUR INVESTMENT IN OUR ADSs AND ORDINARY SHARES AS WELL AS THE APPLICATION OF THE PFIC
RULES AND THE POSSIBILITY OF MAKING A MARK-TO-MARKET ELECTION.
 Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
    83




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Taxation of Disposition of the ADSs or Ordinary Shares
   Information Reporting and Backup Withholding
   84




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##### Table of Contents



F.
    
    Dividends and Paying Agents
  G.
    
    Statement by Experts
  H.
    
    Documents on Display
 www.sec.gov
   I.
    
    Subsidiary Information
  
 ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk.
  85




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##### Table of Contents



Foreign Exchange Risk.
   
 ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 A.
    
    Debt Securities
  B.
    
    Warrants and Rights
  C.
    
    Other Securities
  D.
    
    American Depositary Shares
  Persons depositing or withdrawing shares must pay:
    
    For:$5.00 (or less) per 100 ADSs (or portion of 100
ADSs)
    
         Issuance of ADSs, including issuances
resulting from a distribution of shares or
rights or other property     Cancellation of ADSs for the purpose of
withdrawal, including if the deposit agreement
terminates$.02 (or less) per ADS
    
         Any cash distribution to ADS registered holders
  86




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Persons depositing or withdrawing shares must pay:
    
    For:A fee equivalent to the fee that would be payable
if securities distributed to you had been shares
and the shares had been deposited for issuance of
ADSs
    
         Distribution of securities distributed to
holders of deposited securities that are
distributed by the depositary to ADS
registered holders$.02 (or less) per ADSs per calendar year
    
         Depositary servicesRegistration or transfer fees
    
         Transfer and registration of shares on our
share register to or from the name of the
depositary or its agent when you deposit or
withdraw sharesExpenses of the depositary
    
         Cable, telex and facsimile transmissions (when
expressly provided in the deposit agreement)     Converting foreign currency to U.S. dollarsTaxes and other governmental charges the
depositary or the custodian have to pay on any
ADS or share underlying an ADS, for example,
stock transfer taxes, stamp duty or withholding
taxes
    
         As necessaryAny charges incurred by the depositary or its
agents for servicing the deposited securities
    
       As necessary
  
 PART II
 
 ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 Shareholder Rights Plan
    87




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##### Table of Contents



Use of Proceeds
  
 ITEM 15.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
   
 Attestation Report of the Independent Registered Public Accounting Firm
    88




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Changes in Internal Control over Financial Reporting
  
 ITEM 16A.
    
    AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B.
    
    CODE OF ETHICS
   89




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ITEM 16C.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2009
    
    
    2010RMB
    
    
    RMB
    
    
    US$Audit fees(1)
    
    
    7,067,896
    
    
    
    3,754,970
    
    
    
    568,935Audit-related fees(2)
    
    
    1,652,614
    
    
    
    1,078,526
    
    
    
    163,413Tax fees(3)
    
    
    155,030
    
    
    
    230,786
    
    
    
    34,968All other fees
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Audit fees means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements.(2)
    
    Audit-related fees means the aggregate fees billed in each of the fiscal years listed for
assurance and related services by our principal auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not reported under
Audit fees. Services comprising the fees disclosed under the category of Audit-related
fees involve principally the issue of consent letters and other audit-related services for
the years ended December 31, 2009 and 2010.(3)
    
    Tax fees means the fees billed for tax compliance services, including the preparation of
tax returns and tax consultations. de minimus
 
 ITEM 16D.
    
    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E.
    
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
  
 ITEM 16F.
    
    CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
  
 ITEM 16G.
    
    CORPORATE GOVERNANCE
   90




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##### Table of Contents



PART III
 
 ITEM 17.
    
    FINANCIAL STATEMENTS
  
 ITEM 18.
    
    FINANCIAL STATEMENTS
  
 ITEM 19.
    
    EXHIBITS
 Exhibit Number
    
    Document1.1
    *
    
    Amended and Restated Memorandum and Articles of Association of The
Registrant as currently in effect2.1
    
    
    Specimen American Depositary Receipt of The Registrant (incorporated by
reference to Exhibit 4.1 from our Registration Statement on Form F-1
Amendment No.2 (file no. 333-120810) filed with the Securities and
Exchange Commission on December 9, 2004)2.2
    
    
    Specimen Certificate for Ordinary Shares of The Registrant (incorporated
by reference to Exhibit 4.2 from our Registration Statement on Form F-1
(file no. 333-120810) filed with the Securities and Exchange Commission on
November 26, 2004)2.3
    
    
    Form of Deposit Agreement dated as of December 20, 2004, as amended and
restated as of January 16, 2009, as further amended and restated as of
March 20, 2009, and as further amended and restated as of 2010 among The
Registrant, The Bank of New York Mellon as Depositary, and all Owners and
Beneficial Owners from time to time of American Depositary Shares issued
thereunder (incorporated by reference to Exhibit 1 of our Post-Effective
Amendment No. 2 to the Registration Statement on Form F-6 (file No.
333-156635) filed with the Securities and Exchange Commission on November
19, 2010)4.1
    
    
    Amended 2004 Stock Option Plan (incorporated by reference to Exhibit 10.1
from our Post-Effective Amendment No. 2 to our Registration Statement on
Form S-8 (file no. 333-127700) filed with the Securities and Exchange
Commission on December 16, 2010)4.2
    
    
    Form of Indemnification Agreement with the Registrants directors and
executive officers (incorporated by reference to Exhibit 10.2 from our
Registration Statement on Form F-1 Amendment No. 1 (file no. 333-120810)
filed with the Securities and Exchange Commission on November 30, 2004)4.3
    
    
    Form of Employment Agreement between the Registrant and a Senior Executive
Officer of the Registrant (incorporated by reference to Exhibit 10.3 from
our Registration Statement on Form F-1 Amendment No. 1 (file no.
333-120810) filed with the Securities and Exchange Commission on November
30, 2004)4.4
    
    
    Translation of Exclusive Technical Support Service Agreement, dated
January 14, 2004, between Shanghai IT and The9 Computer (incorporated by
reference to Exhibit 10.4 from our Registration Statement on Form F-1
(file no. 333-120810) filed with the Securities and Exchange Commission on
November 26, 2004)
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##### Table of Contents



Exhibit Number
    
    Document4.5
    
    
    Translation of Master Agreement, dated January 1, 2004, among 9Webzen
Shanghai, The9 Computer and Shanghai IT (incorporated by reference to
Exhibit 10.5 from our Registration Statement on Form F-1 (file no.
333-120810) filed with the Securities and Exchange Commission on November
26, 2004)4.6
    
    
    Translation of Form of Call Option Agreement among The9 Computer, Shanghai
IT and other parties therein (incorporated by reference to Exhibit 10.6
from our Registration Statement on Form F-1 Amendment No.1 (file no.
333-120810) filed with the Securities and Exchange Commission on November
30, 2004)4.7
    
    
    Translation of Form of Equity Pledge Agreement among The9 Computer,
Shanghai Advertisement and the other parties therein (incorporated by
reference to Exhibit 10.7 from our Registration Statement on Form F-1
(file no. 333-120810) filed with the Securities and Exchange Commission on
November 30, 2004)4.8
    
    
    Translation of Form of Loan Agreement between The9 Computer and a
shareholder of the Registrant (incorporated by reference to Exhibit 10.8
from our Registration Statement on Form F-1 Amendment No.1 (file no.
333-120810) filed with the Securities and Exchange Commission on November
30, 2004)4.9
    
    
    Translation of Domain Name License Agreement, dated January 1, 2004,
between GameNow.net (Hong Kong) Limited and Shanghai IT (incorporated by
reference to Exhibit 10.9 from our Registration Statement on Form F-1
(file no. 333-120810) filed with the Securities and Exchange Commission on
November 26, 2004)4.10
    
    
    Joint Venture Agreement, dated September 10, 2002, between Webzen Inc. and
GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit
10.10 from our Registration Statement on Form F-1 (file no. 000-53051)
filed with the Securities and Exchange Commission on November 26, 2004)4.11
    
    
    Subscription and Purchase Agreement, dated April 2, 2004, by and among The
Registrant, Object Software Limited and other parties thereto
(incorporated by reference to Exhibit 10.19 from our Registration
Statement on Form F-1 (file no. 333-120810) filed with the Securities and
Exchange Commission on November 26, 2004)4.12
    
    
    Shareholders Agreement, dated April 16, 2004, by and among The
Registrant, Object Software Limited and its shareholders party thereto
(incorporated by reference to Exhibit 10.20 from our Registration
Statement on Form F-1 (file no. 333-120810) filed with the Securities and
Exchange Commission on November 26, 2004)4.13
    
    
    Memorandum of Agreement, dated November 9, 2004, between The Registrant
and Object Software Limited (incorporated by reference to Exhibit 10.21
from our Registration Statement on Form F-1 (file no. 333-120810) filed
with the Securities and Exchange Commission on November 26, 2004)4.14
    
    
    Software License Agreement, dated September 20, 2004, among HanbitSoft,
Inc., IMC Games, Co., Ltd. and GameNow.net (Hong Kong) Limited
(incorporated by reference to Exhibit 10.22 from our Registration
Statement on Form F-1 (file no. 333- 120810) filed with the Securities and
Exchange Commission on November 26, 2004)4.15
    
    
    Translation of Mystina Online Cooperative Agreement, dated July 19, 2004,
between Lager (Beijing) Information Co., Ltd and The Registrant
(incorporated by reference to Exhibit 10.23 from our Registration
Statement on Form F-1 (file no. 333-120810) filed with the Securities and
Exchange Commission on November 26, 2004)
  92




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Exhibit Number
    
    Document4.16
    
    
    Translation of Capital Subscription Agreement, dated October 19, 2004,
among Beijing Wanwei Sky Technology Co., Ltd., its shareholders and
Shanghai IT (incorporated by reference to Exhibit 10.24 from our
Registration Statement on Form F-1 (file no. 333-120810) filed with the
Securities and Exchange Commission on November 26, 2004)4.17
    
    
    Translation of Shanghai Municipality Property Lease Commodity Housing
Pre-lease Contract, dated May 17, 2005, between The9 Computer and Shanghai
Zhangjiang Port of Microelectronics Co. Ltd., with respect to the premises
where the Registrants principal executive offices are located
(incorporated by reference to Exhibit 4.22 from our Annual Report on Form
20-F filed with the Securities and Exchange Commission on June 30, 2006)4.18
    
    
    Translation of Presale Agreement, dated March 17, 2005, between The9
Computer and Shanghai Zhangjiang Port of Microelectronics Co. Ltd
(incorporated by reference to Exhibit 4.23 from our Annual Report on Form
20-F filed with the Securities and Exchange Commission on June 30, 2006)4.19
    
    
    Loan Agreement, dated December 25, 2004, between China Interactive
(Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by
reference to Exhibit 4.24 from our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on June 30, 2006)4.20
    
    
    Share Purchase Agreement, dated December 25, 2004, between China
Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited
(incorporated by reference to Exhibit 4.25 from our Annual Report on Form
20-F filed with the Securities and Exchange Commission on June 30, 2006)4.21
    
    
    Loan Agreement, dated April 4, 2005, between China Interactive (Singapore)
Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by reference
to Exhibit 4.26 from our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on June 30, 2006)4.22
    
    
    Pledge of Shares, dated April 4, 2005, between China Interactive
(Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by
reference to Exhibit 4.27 from our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on June 30, 2006)4.23
    
    
    Option, dated April 4, 2005, between China Interactive (Singapore) Pte.
Ltd. and GameNow.net (Hong Kong) Limited (incorporated by reference to
Exhibit 4.28 from our Annual Report on Form 20-F filed with the Securities
and Exchange Commission on June 30, 2006)4.24
    
    
    Share Purchase Agreement, dated August 26, 2005, between China Interactive
(Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited (incorporated by
reference to Exhibit 4.29 from our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on June 30, 2006)4.25
    
    
    Share Purchase Agreement, dated December 14, 2005, between GameNow.net
(Hong Kong) Limited and Webzen Inc. (incorporated by reference to Exhibit
4.30 from our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 30, 2006)
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##### Table of Contents



Exhibit Number
    
    Document4.26
    
    
    Addendum to Joint Venture Agreement, dated December 16, 2005, between
Webzen Inc. and GameNow.net (Hong Kong) Limited (incorporated by reference
to Exhibit 4.31 from our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on June 30, 2006)4.27
    
    
    List of Counterparties and Translation of Form of Shanghai Municipality
Commodity Property Sale Contract (incorporated by reference to Exhibit
4.32 from our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 30, 2006)4.28
    
    
    Translation of Share Transfer Agreement, dated August 14, 2006, between
Qin Jie, Wang Yong, Zhu Jun and Shanghai IT (incorporated by reference to
Exhibit 4.33 from our Annual Report on Form 20-F filed with the Securities
and Exchange Commission on June 30, 2006)4.29
    
    
    Translation of Novation Agreement, dated August 14, 2006, between Qin Jie,
Wang Yong, Zhu Jun, The9 Computer and Shanghai IT (incorporated by
reference to Exhibit 4.34 from our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on June 30, 2006)4.30
    
    
    Translation of Supplementary Agreement between Wang Yong, Zhu Jun and The9
Computer (incorporated by reference to Exhibit 4.35 from our Annual Report
on Form 20-F filed with the Securities and Exchange Commission on June 30,
2006)4.31
    *
    
    Translation of Form of Shareholder Voting Proxy Agreement among The9
Computer, Shanghai IT and its shareholders4.32
    *
    
    Translation of Exclusive Technical Support Service Agreement dated
December 13, 2010 between Huopu Cloud and The9 Computer4.33
    *
    
    Translation of Exclusive Call Option Agreement dated December 13, 2010
among Junping Han, Wei Xiong and The9 Computer with respect to Huopu Cloud4.34
    *
    
    Translation of Equity Pledge Agreement dated January 6, 2011 among Junping
Han, Wei Xiong and The9 Computer with respect to Huopu Cloud4.35
    *
    
    Translation of Loan Agreement dated December 13, 2010 among Junping Han,
Wei Xiong and The9 Computer4.36
    *
    
    Translation of Shareholder Voting Proxy Agreement dated December 13, 2010
among Junping Han, Wei Xiong, Huopu Cloud and The9 Computer8.1
    *
    
    List of Subsidiaries of the Registrant11.1
    
    
    Amended Code of Business Conduct and Ethics of the Registrant
(incorporated by reference to Exhibit 11.1 to our annual report on Form
20-F filed with the Securities and Exchange Commission on June 30, 2005)12.1
    *
    
    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    *
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    *
    
    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
    *
    
    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1
    *
    
    Consent of Maples and Calder15.2
    *
    
    Consent of Fangda Partners15.3
    *
    
    Consent of Deloitte Touche Tohmatsu CPA Ltd.15.4
    *
    
    Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company
 
 *
    
    Filed with this Form 20-F.  94




---



##### Table of Contents



SIGNATURES
  THE9 LIMITEDBy:
    /s/ Jun ZhuName:
    Jun ZhuTitle:
    Chairman and Chief Executive Officer




---



##### Table of Contents



THE9 LIMITED
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Years ended December 31, 2008, 2009 and 2010
    
    
    F-4Consolidated Balance Sheets as of December 31, 2009 and 2010
    
    
    F-6Consolidated Statements of Changes in Equity for the Years
ended December 31, 2008, 2009 and 2010
    
    
    F-7Consolidated Statements of Cash Flows for the Years ended December 31, 2008, 2009 and 2010
    
    
    F-10Notes to Consolidated Financial Statements for the Years ended December 31, 2008, 2009 and 2010
    
    
    F-12
  F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      Internal Control  Integrated Framework
  
  F-2




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 TO THE SHAREHOLDERS OF THE9 LIMITED:
        F-3




---



##### Table of Contents



THE9 LIMITED
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
 Notes
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(Note 3)Revenues:Online game services
    
    
    
    
    
    
    1,800,313,225
    
    
    
    795,476,714
    
    
    
    101,815,232
    
    
    
    15,426,550Other revenues
    
    
    
    
    
    
    5,816,996
    
    
    
    7,152,637
    
    
    
    6,698,350
    
    
    
    1,014,9021,806,130,221
    
    
    
    802,629,351
    
    
    
    108,513,582
    
    
    
    16,441,452Sales taxes
    
    
    
    
    
    
    (94,639,527
    )
    
    
    (42,113,498
    )
    
    
    (5,675,992
    )
    
    
    (859,999
    )Net revenues
    
    
    
    
    
    
    1,711,490,694
    
    
    
    760,515,853
    
    
    
    102,837,590
    
    
    
    15,581,453Cost of services
    
    
    
    
    
    
    (997,948,540
    )
    
    
    (712,472,751
    )
    
    
    (103,256,343
    )
    
    
    (15,644,900
    )Gross profit (loss)
    
    
    
    
    
    
    713,542,154
    
    
    
    48,043,102
    
    
    
    (418,753
    )
    
    
    (63,447
    )Operating expenses:Product development
    
    
    
    
    
    
    (73,819,607
    )
    
    
    (114,443,552
    )
    
    
    (139,431,649
    )
    
    
    (21,126,008
    )Sales and marketing
    
    
    
    
    
    
    (103,725,123
    )
    
    
    (112,517,602
    )
    
    
    (63,290,886
    )
    
    
    (9,589,528
    )General and administrative
    
    
    
    
    
    
    (319,298,044
    )
    
    
    (225,051,424
    )
    
    
    (112,692,772
    )
    
    
    (17,074,662
    )Impairment of equipment,
intangible assets and goodwill
    
    
    9, 10, 11
    
    
    
    (82,149,755
    )
    
    
    (78,871,643
    )
    
    
    (37,949,452
    )
    
    
    (5,749,917
    )Total operating expenses
    
    
    
    
    
    
    (578,992,529
    )
    
    
    (530,884,221
    )
    
    
    (353,364,759
    )
    
    
    (53,540,115
    )Profit (loss) from operations
    
    
    
    
    
    
    134,549,625
    
    
    
    (482,841,119
    )
    
    
    (353,783,512
    )
    
    
    (53,603,562
    )Interest income
    
    
    
    
    
    
    56,690,807
    
    
    
    30,501,101
    
    
    
    23,183,239
    
    
    
    3,512,612Other (expenses) income, net
    
    
    
    
    
    
    (18,967,099
    )
    
    
    61,840,303
    
    
    
    19,258,286
    
    
    
    2,917,922Income (loss) before income tax (expense) benefit, gain on investment disposal, impairment loss on investments and
share of loss in equity investments
    
    
    
    
    
    
    172,273,333
    
    
    
    (390,499,715
    )
    
    
    (311,341,987
    )
    
    
    (47,173,028
    )Income tax (expense) benefit
    
    
    15
    
    
    
    (47,928,533
    )
    
    
    5,535,866
    
    
    
    (7,368,020
    )
    
    
    (1,116,367
    )Income (loss) before gain on investment disposal, impairment loss on investments and share of loss in equity investments
    
    
    
    
    
    
    124,344,800
    
    
    
    (384,963,849
    )
    
    
    (318,710,007
    )
    
    
    (48,289,395
    )Gain on investment disposal
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    6,827,900
    
    
    
    1,034,530Impairment loss on investments
    
    
    7, 8
    
    
    
    (25,922,363
    )
    
    
    (22,412,269
    )
    
    
    (196,115,321
    )
    
    
    (29,714,442
    )Share of loss in equity investments, net of taxes
    
    
    7
    
    
    
    (2,241,135
    )
    
    
    (2,555,515
    )
    
    
    (10,713,295
    )
    
    
    (1,623,227
    )Net income (loss)
    
    
    
    
    
    
    96,181,302
    
    
    
    (409,931,633
    )
    
    
    (518,710,723
    )
    
    
    (78,592,534
    )Less: Net loss attributable to noncontrolling interest
    
    
    
    
    
    
    (654,734
    )
    
    
    (4,779,226
    )
    
    
    (19,099,129
    )
    
    
    (2,893,807
    )Net income (loss) attributable to holders of ordinary shares
    
    
    
    
    
    
    96,836,036
    
    
    
    (405,152,407
    )
    
    
    (499,611,594
    )
    
    
    (75,698,727
    )Net income (loss)
    
    
    
    
    
    
    96,181,302
    
    
    
    (409,931,633
    )
    
    
    (518,710,723
    )
    
    
    (78,592,534
    )Other
comprehensive income (loss):Transfer to earnings of other-than-temporary impairment loss on available-for-sale investments
    
    
    8
    
    
    
    
    
    
    
    (13,643,131
    )
    
    
    
    
    
    
    Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,511,883
    )
    
    
    (380,588
    )Comprehensive income (loss)
    
    
    
    
    
    
    96,181,302
    
    
    
    (423,574,764
    )
    
    
    (521,222,606
    )
    
    
    (78,973,122
    )Less: Comprehensive income (loss) attributable to noncontrolling interest
    
    
    
    
    
    
    (654,734
    )
    
    
    (4,779,226
    )
    
    
    (19,514,314
    )
    
    
    (2,956,714
    )Comprehensive income (loss) attributable to holders of ordinary shares
    
    
    
    
    
    
    96,836,036
    
    
    
    (418,795,538
    )
    
    
    (501,708,292
    )
    
    
    (76,016,408
    )
  F-4




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##### Table of Contents



Notes
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(Note 3)Net income (loss) attributable to holders of ordinary shares per share
    
    
    23- Basic
    
    
    
    
    
    
    3.50
    
    
    
    (15.94
    )
    
    
    (19.89
    )
    
    
    (3.01
    )- Diluted
    
    
    23
    
    
    
    3.50
    
    
    
    (15.94
    )
    
    
    (19.89
    )
    
    
    (3.01
    )Weighted average number of shares outstanding
    
    
    23- Basic
    
    
    
    
    
    
    27,664,687
    
    
    
    25,414,620
    
    
    
    25,121,679
    
    
    
    25,121,679- Diluted
    
    
    23
    
    
    
    27,704,201
    
    
    
    25,414,620
    
    
    
    25,121,679
    
    
    
    25,121,679
   F-5




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##### Table of Contents



THE9 LIMITED
 
 CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2010
 December 31,
    
    
    December 31,
    
    
    December 31,Notes
    
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    US$(Note 3)ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    
    1,675,081,345
    
    
    
    1,416,189,294
    
    
    
    214,574,135Accounts receivable, net of
allowance for doubtful accounts of
2009: RMB22.2 million, 2010: RMB22.2
million (US$3.4 million)
    
    
    
    
    
    
    920,214
    
    
    
    10,712,252
    
    
    
    1,623,068Due from related party
    
    
    22
    
    
    
    1,110,424
    
    
    
    
    
    
    
    Advances to suppliers
    
    
    27
    
    
    
    44,132,089
    
    
    
    52,054,494
    
    
    
    7,887,045Prepayments and other current assets
    
    
    
    
    
    
    77,896,385
    
    
    
    63,969,737
    
    
    
    9,692,385Prepaid royalties
    
    
    6, 27
    
    
    
    
    
    
    
    15,615,493
    
    
    
    2,365,984Deferred costs
    
    
    6, 27
    
    
    
    1,516,601
    
    
    
    2,911,937
    
    
    
    441,203Deferred tax assets, current
    
    
    15
    
    
    
    2,139,896
    
    
    
    
    
    
    
    Total current assets
    
    
    
    
    
    
    1,802,796,954
    
    
    
    1,561,453,207
    
    
    
    236,583,820Investments in equity investees
    
    
    7
    
    
    
    308,806,125
    
    
    
    74,843,710
    
    
    
    11,339,957Property, equipment and software
    
    
    9
    
    
    
    75,977,200
    
    
    
    58,061,464
    
    
    
    8,797,192Goodwill
    
    
    10
    
    
    
    
    
    
    
    10,548,323
    
    
    
    1,598,231Intangible assets
    
    
    11
    
    
    
    51,628,286
    
    
    
    17,647,842
    
    
    
    2,673,915Land use right
    
    
    12
    
    
    
    79,877,847
    
    
    
    77,956,936
    
    
    
    11,811,657Other long-term assets
    
    
    
    
    
    
    603,910
    
    
    
    56,827,902
    
    
    
    8,610,288Deferred tax assets, non-current
    
    
    15
    
    
    
    5,267,185
    
    
    
    
    
    
    
    Total assets
    
    
    
    
    
    
    2,324,957,507
    
    
    
    1,857,339,384
    
    
    
    281,415,060LIABILITIESCurrent liabilities:Accounts payable (including accounts
payable of the consolidated VIEs
without recourse to the Group of
17,061,480 and 24,878,129 as of
December 31, 2009 and December 31,
2010, respectively)
    
    
    
    
    
    
    35,013,675
    
    
    
    46,948,658
    
    
    
    7,113,433Income tax payable(including income
tax payable of the consolidated VIEs
without recourse to the Group of nil
as of both December 31, 2009 and
December 31, 2010)
    
    
    
    
    
    
    29,947
    
    
    
    
    
    
    
    Other taxes payable (including other
taxes payable of the consolidated
VIEs without recourse to the Group
of 2,768,124 and 2,995,044 as of
December 31, 2009 and December 31,
2010, respectively)
    
    
    
    
    
    
    6,270,518
    
    
    
    5,437,764
    
    
    
    823,904Advances from customers (including
advances from customers of the
consolidated VIEs without recourse
to the Group of 10,628,644 and
6,574,768 as of December 31, 2009
and December 31, 2010, respectively)
    
    
    27
    
    
    
    11,154,437
    
    
    
    7,101,645
    
    
    
    1,076,007Deferred revenue (including deferred
revenue of the consolidated VIEs
without recourse to the Group of
8,330,989 and 13,757,771 as of
December 31, 2009 and December 31,
2010, respectively)
    
    
    27
    
    
    
    10,933,464
    
    
    
    18,508,169
    
    
    
    2,804,268Refund of game points (including
refund of game points of the
consolidated VIEs without recourse
to the Group of 196,401,437 and
195,993,716 as of December 31, 2009
and December 31, 2010, respectively)
    
    
    27
    
    
    
    196,401,440
    
    
    
    195,993,716
    
    
    
    29,696,018Other payables and accruals
(including other payables and
accruals of the consolidated VIEs
without recourse to the Group of
15,155,234 and 15,629,966 as of
December 31, 2009 and December 31,
2010, respectively)
    
    
    16
    
    
    
    51,704,425
    
    
    
    42,328,817
    
    
    
    6,413,457Total current liabilities
    
    
    
    
    
    
    311,507,906
    
    
    
    316,318,769
    
    
    
    47,927,087Deferred tax liabilities, non-current
(including deferred tax liabilities,
non-current of the consolidated VIEs
without recourse to the Group of nil
as of both December 31, 2009 and
December 31, 2010)
    
    
    15
    
    
    
    
    
    
    
    5,803,848
    
    
    
    879,371Total liabilities
    
    
    
    
    
    
    311,507,906
    
    
    
    322,122,617
    
    
    
    48,806,458Commitments and contingencies
    
    
    26EQUITYThe9 Limited shareholders equityOrdinary shares (US$0.01 par value;
100,000,000 shares authorized as of
December 31, 2009 and 250,000,000
shares authorized as of December 31,
2010, 25,121,645 shares issued and
outstanding as of December 31, 2009,
and 25,124,147 shares issued and
outstanding as of December 31, 2010)
    
    
    
    
    
    
    2,051,712
    
    
    
    2,051,878
    
    
    
    310,891Additional paid-in capital
    
    
    
    
    
    
    2,069,616,975
    
    
    
    2,091,113,883
    
    
    
    316,835,437Statutory reserves
    
    
    24
    
    
    
    28,071,982
    
    
    
    28,071,982
    
    
    
    4,253,331Accumulated other comprehensive income
    
    
    
    
    
    
    
    
    
    
    (2,096,698
    )
    
    
    (317,682
    )Accumulated deficit
    
    
    
    
    
    
    (88,364,685
    )
    
    
    (587,976,279
    )
    
    
    (89,087,315
    )Total The9 Limited shareholders equity
    
    
    
    
    
    
    2,011,375,984
    
    
    
    1,531,164,766
    
    
    
    231,994,662Noncontrolling interest
    
    
    25
    
    
    
    2,073,617
    
    
    
    4,052,001
    
    
    
    613,940Total equity
    
    
    
    
    
    
    2,013,449,601
    
    
    
    1,535,216,767
    
    
    
    232,608,602Total liabilities and equity
    
    
    
    
    
    
    2,324,957,507
    
    
    
    1,857,339,384
    
    
    
    281,415,060
   F-6




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##### Table of Contents



THE9 LIMITED
 
 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
 The9 Limited shareholders equityOrdinary shares
    
    
    Additional paid-in
    
    
    Statutory
    
    
    Accumulated other
    
    
    Retained
    
    
    Noncontrolling(US$0.01 par value)
    
    
    capital
    
    
    reserves
    
    
    comprehensive income
    
    
    earnings(deficit)
    
    
    interest
    
    
    Total equityNumber of shares
    
    
    Par valueRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBBalance as of December 31, 2007
    
    
    28,763,188
    
    
    
    2,350,463
    
    
    
    2,218,516,672
    
    
    
    20,745,422
    
    
    
    13,643,131
    
    
    
    550,834,861
    
    
    
    
    
    
    
    2,806,090,549Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,836,036
    
    
    
    (654,734
    )
    
    
    96,181,302Recognition of noncontrolling
interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654,734
    
    
    
    654,734Issuance of
ordinary shares
from stock option
exercise
    
    
    72,583
    
    
    
    5,067
    
    
    
    8,840,640
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,845,707Repurchase and
retirement of ADSs
(Note 18)
    
    
    (2,018,083
    )
    
    
    (164,885
    )
    
    
    (150,799,327
    )
    
    
    
    
    
    
    
    
    
    
    (93,615,638
    )
    
    
    
    
    
    
    (244,579,850
    )Employee share
based compensation
(Note 21)
    
    
    
    
    
    
    
    
    
    
    52,049,596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,049,596Appropriations to
statutory reserves
(Note 24)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,090,932
    
    
    
    
    
    
    
    (4,090,932
    )
    
    
    
    
    
    
    Balance as
of December 31, 2008
    
    
    26,817,688
    
    
    
    2,190,645
    
    
    
    2,128,607,581
    
    
    
    24,836,354
    
    
    
    13,643,131
    
    
    
    549,964,327
    
    
    
    
    
    
    
    2,719,242,038
  F-7




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##### Table of Contents



The9 Limited shareholders equityOrdinary shares
    
    
    Additional
    
    
    Statutory
    
    
    Accumulated other
    
    
    Retained
    
    
    Noncontrolling(US$0.01 par value)
    
    
    paid-in capital
    
    
    reserves
    
    

comprehensive income
    
    
    earnings (deficit)
    
    
    interest
    
    
    Total EquityNumber of shares
    
    
    Par valueRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405,152,407
    )
    
    
    (4,779,226
    )
    
    
    (409,931,633
    )Recognition of noncontrolling
interest in exchange for
product development expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,094,220
    
    
    
    3,094,220Dividend distribution (Note 17)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (201,028,477
    )
    
    
    
    
    
    
    (201,028,477
    )Issuance of ordinary shares
from stock option
exercise (Note 21)
    
    
    29,067
    
    
    
    1,985
    
    
    
    1,458,898
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,460,883Repurchase and retirement of
ADSs (Note 18)
    
    
    (1,725,110
    )
    
    
    (140,918
    )
    
    
    (127,927,178
    )
    
    
    
    
    
    
    
    
    
    
    (28,912,500
    )
    
    
    
    
    
    
    (156,980,596
    )Employee share based
compensation (Note 21)
    
    
    
    
    
    
    
    
    
    
    70,234,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,001,440
    
    
    
    71,236,297Appropriations to statutory
reserves (Note 24)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,235,628
    
    
    
    
    
    
    
    (3,235,628
    )
    
    
    
    
    
    
    Transfer to
earnings of other-than-temporary impairment loss on available-for-sale
investment (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,643,131
    )
    
    
    
    
    
    
    
    
    
    
    (13,643,131
    )Conversion of a loan into equity of a VIE
subsidiary
    
    
    
    
    
    
    
    
    
    
    (2,757,183
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,757,183
    
    
    
    Balance as of December 31, 2009
    
    
    25,121,645
    
    
    
    2,051,712
    
    
    
    2,069,616,975
    
    
    
    28,071,982
    
    
    
    
    
    
    
    (88,364,685
    )
    
    
    2,073,617
    
    
    
    2,013,449,601
  F-8




---



##### Table of Contents



The9 Limited shareholders equityOrdinary shares
    
    
    Additional
    
    
    Statutory
    
    
    Accumulated other
    
    
    Retained
    
    
    Noncontrolling(US$0.01 par value)
    
    
    paid-in capital
    
    
    reserves
    
    
    comprehensive income
    
    
    earnings (deficit)
    
    
    interest
    
    
    Total EquityNumber of shares
    
    
    Par valueRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (499,611,594
    )
    
    
    (19,099,129
    )
    
    
    (518,710,723
    )Recognition of noncontrolling
interest from an
acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,417,870
    
    
    
    15,417,870Issuance of
ordinary shares
from stock option
exercise (Note 21)
    
    
    2,502
    
    
    
    166
    
    
    
    84,838
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,004Employee share
based compensation
(Note 21)
    
    
    
    
    
    
    
    
    
    
    27,864,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,315,605
    
    
    
    30,179,917Purchase of shares
of a subsidiary
from holders of
noncontrolling
interest
    
    
    
    
    
    
    
    
    
    
    523,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,122,325
    )
    
    
    (598,739
    )Dissolution of
two VIEs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,100,946
    )
    
    
    (2,100,946
    )Capital
contribution to
subsidiaries
attributable to
noncontrolling
interest
    
    
    
    
    
    
    
    
    
    
    (6,981,392
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,981,392
    
    
    
    Issuance of
shares by a subsidiary upon exercise of stock options
    
    
    
    
    
    
    
    
    
    
    5,564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,102
    
    
    
    6,666Currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,096,698
    )
    
    
    
    
    
    
    (415,185
    )
    
    
    (2,511,883
    )Balance as of December 31, 2010
    
    
    25,124,147
    
    
    
    2,051,878
    
    
    
    2,091,113,883
    
    
    
    28,071,982
    
    
    
    (2,096,698
    )
    
    
    (587,976,279
    )
    
    
    4,052,001
    
    
    
    1,535,216,767Balance as of December 31, 2010
(US$ except share data, Note 3)
    
    
    25,124,147
    
    
    
    310,891
    
    
    
    316,835,437
    
    
    
    4,253,331
    
    
    
    (317,682
    )
    
    
    (89,087,315
    )
    
    
    613,940
    
    
    
    232,608,602
   F-9




---



##### Table of Contents



THE9 LIMITED
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
 Notes
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(Note 3)Cash flows from operating activities:Net income (loss)
    
    
    
    
    
    
    96,181,302
    
    
    
    (409,931,633
    )
    
    
    (518,710,723
    )
    
    
    (78,592,534
    )Adjustments for:Deferred taxes
    
    
    15
    
    
    
    34,474,878
    
    
    
    (7,407,081
    )
    
    
    7,407,081
    
    
    
    1,122,285Gain on disposal of property,
equipment and software
    
    
    
    
    
    
    (29,717
    )
    
    
    (490,369
    )
    
    
    (984,264
    )
    
    
    (149,131
    )Impairment of intangible assets
    
    
    11
    
    
    
    73,248,491
    
    
    
    27,507,199
    
    
    
    33,020,462
    
    
    
    5,003,100Impairment of goodwill
    
    
    10
    
    
    
    
    
    
    
    30,199,751
    
    
    
    
    
    
    
    Impairment loss on investments
    
    
    7, 8
    
    
    
    25,922,363
    
    
    
    22,412,269
    
    
    
    196,115,321
    
    
    
    29,714,442Impairment on equipment
    
    
    9
    
    
    
    8,901,264
    
    
    
    21,164,693
    
    
    
    4,928,990
    
    
    
    746,817Depreciation and amortization of
property, equipment and software
    
    
    9
    
    
    
    207,787,590
    
    
    
    123,028,739
    
    
    
    23,856,884
    
    
    
    3,614,679Amortization of land use right
    
    
    12
    
    
    
    1,920,910
    
    
    
    1,920,908
    
    
    
    1,920,911
    
    
    
    291,047Amortization of intangible assets
    
    
    11
    
    
    
    88,886,444
    
    
    
    49,481,516
    
    
    
    10,012,288
    
    
    
    1,517,013Share of loss in equity investments,
net of taxes
    
    
    7
    
    
    
    2,241,135
    
    
    
    2,555,515
    
    
    
    10,713,295
    
    
    
    1,623,227Gain on investment disposal
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (6,827,900
    )
    
    
    (1,034,530
    )Allowance for doubtful accounts
    
    
    
    
    
    
    20,733,448
    
    
    
    855,130
    
    
    
    
    
    
    
    Provision for prepaid royalties and
deferred costs
    
    
    6, 27
    
    
    
    3,882,516
    
    
    
    160,069,079
    
    
    
    5,518,917
    
    
    
    836,199Provision for due from related party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,285,845
    
    
    
    194,825Provision for advances to suppliers
and prepayment for equipment
    
    
    27
    
    
    
    55,191,282
    
    
    
    
    
    
    
    
    
    
    
    Provision for prepayments and other
current assets
    
    
    
    
    
    
    8,065,933
    
    
    
    
    
    
    
    200,000
    
    
    
    30,303Loss on deconsolidation of two VIEs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,082,591
    
    
    
    164,029Exchange loss (gain)
    
    
    
    
    
    
    31,657,480
    
    
    
    (1,405,166
    )
    
    
    4,527,477
    
    
    
    685,981Share based compensation expense
    
    
    21
    
    
    
    52,049,596
    
    
    
    71,236,297
    
    
    
    30,179,917
    
    
    
    4,572,715Recognition of noncontrolling
interest in exchange for product
development expenses
    
    
    
    
    
    
    654,734
    
    
    
    3,094,220
    
    
    
    
    
    
    
    Change in accounts receivable
    
    
    
    
    
    
    (6,999,641
    )
    
    
    6,547,740
    
    
    
    (9,792,038
    )
    
    
    (1,483,642
    )Change in due from related party
    
    
    
    
    
    
    (637,708
    )
    
    
    (472,716
    )
    
    
    (175,421
    )
    
    
    (26,579
    )Change in advances to suppliers
    
    
    
    
    
    
    (1,195,620
    )
    
    
    (42,696,308
    )
    
    
    (10,086,545
    )
    
    
    (1,528,264
    )Change in prepayments and other
current assets
    
    
    
    
    
    
    (38,849,005
    )
    
    
    32,128,649
    
    
    
    11,804,104
    
    
    
    1,788,501Change in prepaid royalties
    
    
    
    
    
    
    (70,788,361
    )
    
    
    17,227,594
    
    
    
    (21,134,410
    )
    
    
    (3,202,183
    )Change in deferred costs
    
    
    
    
    
    
    (7,989,724
    )
    
    
    15,778,691
    
    
    
    (1,395,336
    )
    
    
    (211,415
    )Change in other long-term assets
    
    
    
    
    
    
    454,212
    
    
    
    (603,910
    )
    
    
    (18,016,107
    )
    
    
    (2,729,713
    )Change in accounts payable
    
    
    
    
    
    
    (14,360,918
    )
    
    
    5,529,144
    
    
    
    4,163,941
    
    
    
    630,900Change in due to related parties
    
    
    
    
    
    
    (77,052
    )
    
    
    
    
    
    
    
    
    
    
    Change in income tax payable
    
    
    
    
    
    
    (2,272,777
    )
    
    
    (26,733
    )
    
    
    (29,947
    )
    
    
    (4,537
    )Change in other taxes payable
    
    
    
    
    
    
    44,182,027
    
    
    
    (93,146,297
    )
    
    
    (2,044,225
    )
    
    
    (309,731
    )Change in advances from customers
    
    
    
    
    
    
    25,308,833
    
    
    
    (104,601,759
    )
    
    
    (2,052,793
    )
    
    
    (311,029
    )Change in deferred revenue
    
    
    
    
    
    
    34,729,841
    
    
    
    (41,111,862
    )
    
    
    7,574,705
    
    
    
    1,147,682Change in other payables and accruals
    
    
    
    
    
    
    19,360,340
    
    
    
    5,071,097
    
    
    
    (10,614,609
    )
    
    
    (1,608,274
    )Net cash provided by (used in)
operating activities
    
    
    
    
    
    
    692,634,096
    
    
    
    (106,085,603
    )
    
    
    (247,551,589
    )
    
    
    (37,507,817
    )
  F-10




---



##### Table of Contents



2008
    
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(Note 3)Cash flows from investing activities:Acquisition, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (7,512,404
    )
    
    
    (1,138,243
    )Cash disposed of upon
deconsolidation of two VIEs
    
    
    
    
    
    
    
    
    
    
    (2,207,437
    )
    
    
    (334,460
    )Cash paid to acquire equity
investees and available-for-sale
investments
    
    
    (299,365,918
    )
    
    
    (26,837,000
    )
    
    
    (39,093,200
    )
    
    
    (5,923,212
    )Lending of loans receivable
    
    
    
    
    
    
    (13,660,000
    )
    
    
    (2,000,000
    )
    
    
    (303,030
    )Collection of loans receivable
    
    
    
    
    
    
    
    
    
    
    13,660,000
    
    
    
    2,069,697Proceeds from disposal of
available-for-sale investments
    
    
    
    
    
    
    
    
    
    
    6,827,900
    
    
    
    1,034,530Cash paid for short-term investments
    
    
    (795,162,471
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from maturities of
short-term investments
    
    
    728,000,000
    
    
    
    68,039,221
    
    
    
    
    
    
    
    Proceeds from disposal of property,
equipment and software
    
    
    184,110
    
    
    
    532,644
    
    
    
    1,500,000
    
    
    
    227,273Proceeds from refund of upfront
licensing fees
    
    
    
    
    
    
    
    
    
    
    41,873,102
    
    
    
    6,344,409Purchase of property, equipment and
software
    
    
    (96,515,362
    )
    
    
    (20,452,845
    )
    
    
    (7,856,721
    )
    
    
    (1,190,412
    )Purchase of intangible assets
    
    
    (24,652,900
    )
    
    
    (23,897,622
    )
    
    
    (12,305,541
    )
    
    
    (1,864,476
    )Net cash used in investing activities
    
    
    (487,512,541
    )
    
    
    (16,275,602
    )
    
    
    (7,114,301
    )
    
    
    (1,077,924
    )Cash flows from financing activities:Purchase of shares of a subsidiary from holders of noncontrolling interest
    
    
    
    
    
    
    
    
    
    
    (598,739
    )
    
    
    (90,718
    )Proceeds from stock option exercise
    
    
    8,845,707
    
    
    
    1,460,883
    
    
    
    85,004
    
    
    
    12,879Proceeds from exercise of stock options of a subsidiary
    
    
    
    
    
    
    
    
    
    
    6,666
    
    
    
    1,010Dividend paid
    
    
    
    
    
    
    (201,028,477
    )
    
    
    
    
    
    
    Repurchase of ADSs
    
    
    (244,579,850
    )
    
    
    (156,980,596
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (235,734,143
    )
    
    
    (356,548,190
    )
    
    
    (507,069
    )
    
    
    (76,829
    )Effect of foreign exchange rate changes on cash
    
    
    (32,083,695
    )
    
    
    1,405,166
    
    
    
    (3,719,092
    )
    
    
    (563,499
    )Net change in cash and cash equivalents
    
    
    (62,696,283
    )
    
    
    (477,504,229
    )
    
    
    (258,892,051
    )
    
    
    (39,226,069
    )Cash and cash equivalents, beginning of year
    
    
    2,215,281,857
    
    
    
    2,152,585,574
    
    
    
    1,675,081,345
    
    
    
    253,800,204Cash and cash equivalents, end of year
    
    
    2,152,585,574
    
    
    
    1,675,081,345
    
    
    
    1,416,189,294
    
    
    
    214,574,135Supplemental disclosure of cash flow information:Cash paid for income taxes
    
    
    23,405,934
    
    
    
    6,454,702
    
    
    
    1,839
    
    
    
    279Supplemental disclosure of non-cash investing and financing
activities:Accrual related to purchase of property, equipment and
software
    
    
    1,072,640
    
    
    
    736,608
    
    
    
    886,319
    
    
    
    134,291Accrual related to purchase of intangible assets and related
withholding taxes
    
    
    
    
    
    
    
    
    
    
    8,609,510
    
    
    
    1,304,471Conversion of a loan into equity of a VIE subsidiary
    
    
    
    
    
    
    2,757,183
    
    
    
    
    
    
    
    Receivable on refund of investment in an equity investee
    
    
    
    
    
    
    
    
    
    
    66,227,000
    
    
    
    10,034,394Receivable on refund of
upfront licensing fees
    
    
    
    
    
    
    31,410,422
    
    
    
    13,245,400
    
    
    
    2,006,879
   F-11




---



##### Table of Contents



THE9 LIMITED
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
 1. ORGANIZATION AND NATURE OF OPERATIONS
  Date of
    
    Place of
    
    
    
    Interest heldName of entity
    
    incorporation
    
    incorporation
    
    Relationship
    
    Direct
    
    
    IndirectGameNow.net (Hong Kong) Limited (GameNow
Hong Kong)
    
    January-00
    
    Hong Kong
    
    Subsidiary
    
    
    100
    %
    
    
    The9 Computer Technology Consulting
(Shanghai) Co., Ltd. (The9 Computer)
    
    June-00
    
    PRC
    
    Subsidiary
    
    
    
    
    
    
    100
    %China The9 Interactive Limited (C9I)
    
    October-03
    
    Hong Kong
    
    Subsidiary
    
    
    
    
    
    
    100
    %China The9 Interactive (Shanghai) Limited
(C9I Shanghai)
    
    February-05
    
    PRC
    
    Subsidiary
    
    
    
    
    
    
    100
    %9Dream
Limited (9Dream)
    
    July-05
    
    Hong Kong
    
    Subsidiary
    
    
    100
    %
    
    
    China The9 Interactive (Beijing) Limited
(C9I Beijing)
    
    March-07
    
    PRC
    
    Subsidiary
    
    
    
    
    
    
    100
    %Jiu Jing Era Information Technology
(Beijing) Limited (Jiu Jing)
    
    April-07
    
    PRC
    
    Subsidiary
    
    
    
    
    
    
    100
    %Jiu Tuo (Shanghai) Information Technology
Limited (Jiu Tuo)
    
    July-07
    
    PRC
    
    Subsidiary
    
    
    
    
    
    
    100
    %China Crown Technology Limited (China
Crown Technology)
    
    November-07
    
    Hong Kong
    
    Subsidiary
    
    
    100
    %
    
    
    Asian Way Development Limited (Asian Way)
    
    November-07
    
    Hong Kong
    
    Subsidiary
    
    
    100
    %
    
    
    New Star International Development Limited
(New Star)
    
    January-08
    
    Hong Kong
    
    Subsidiary
    
    
    100
    %
    
    
    The9 Development Center Limited (TDC)
    
    June-08
    
    Hong Kong
    
    Subsidiary
    
    
    100
    %
    
    
    
  F-12




---



##### Table of Contents



Date of
    
    Place of
    
    
    
    Interest heldName of entity
    
    incorporation
    
    incorporation
    
    Relationship
    
    Direct
    
    
    IndirectTDC (Asia) Limited (TDC Asia)
    
    April-09
    
    British Virgin Islands
    
    Subsidiary
    
    
    
    
    
    
    100
    %Red 5
Studios, Inc. (Red 5)
    
    June-05
    
    USA
    
    Subsidiary
    
    
    
    
    
    
    83
    %The9 Singapore Pte. Ltd. (The9 Singapore)
    
    April-10
    
    Singapore
    
    Subsidiary
    
    
    100
    %
    
    
    The9 Interactive, Inc. (The9 Interactive)
    
    June-10
    
    USA
    
    Subsidiary
    
    
    100
    %
    
    
    Shanghai The9 Information Technology Co.,
Ltd. (Shanghai IT)
    
    September-00
    
    PRC
    
    VIE subsidiary
    
    None (Note 4)Shanghai Jiucheng Advertisement Co., Ltd.
(Shanghai Jiucheng Advertisement)
    
    April-07
    
    PRC
    
    VIE subsidiary
    
    None (Note 4)Hangzhou Fire Rain Network Technology Co.,
Ltd. (Fire Rain)
    
    December-08
    
    PRC
    
    VIE subsidiary
    
    25% (Note 4)Shenzhen Wanyouyinli Technology Co., Ltd.
(Wanyouyl)*
    
    June-09
    
    PRC
    
    VIE subsidiary
    
    20% (Note 4)Shanghai Huopu Cloud Computing Terminal
Technology Co., Ltd. (Huopu Cloud)
    
    December-10
    
    PRC
    
    VIE subsidiary
    
    None (Note 4)
 *
    
    Previously named as Shenzheng Fatiaocheng Technology Co., Limited.     F-13




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##### Table of Contents



2. PRINCIPAL ACCOUNTING POLICIES
 <1> Basis of presentation
  <2> Consolidation
     F-14




---



##### Table of Contents



<3> Use of estimates
  <4> Foreign currency translation
   <5> Cash and cash equivalents
   F-15




---



##### Table of Contents



<6> Allowance for doubtful accounts
  <7> Prepaid royalties and deferred costs
  (i)
    
    Royalties paid to the licensors of games are initially recognized as prepaid royalties when
paid and subsequently recognized as deferred costs upon the customers online registration and
activation of their cards or online points, and then ultimately recognized as cost of services
in the consolidated statements of operations and comprehensive income (loss) based upon the
actual usage of the game playing time by the customers or when the likelihood that the Group
would provide further services to those customers becomes remote.
 (ii)
    
    Royalties payable to the licensors or receivable from collection agents upon customers
charging their accounts are initially recorded as deferred costs upon the customers online
registration and activation of their cards or online points. Deferred costs are recognized as
costs of services in the consolidated statements of operations and comprehensive income (loss)
based upon the actual usage of the game points by end customers.
  F-16




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##### Table of Contents



<8> Investments in equity investees
   <9> Available-for-sale investments
    F-17




---



##### Table of Contents



<10> Property, equipment and software
  Leasehold improvements
    
    Respective term of the leases or the estimated useful lives of the leasehold improvementsComputer and equipment
    
    3 to 4 yearsSoftware
    
    5 yearsOffice furniture and fixtures
    
    3 yearsMotor vehicles
    
    5 yearsOffice buildings
    
    10 to 20 years
  <11> Goodwill
   F-18




---



##### Table of Contents



<12> Intangible assets
    <13> Land use right
  <14> Impairment of long-lived assets
    F-19




---



##### Table of Contents



<15>Revenue recognition
 Online game services
  Virtual item / service consumption model  online game services except WoW services
   Time consumption model  WoW services
    F-20




---



##### Table of Contents



Other revenues
  IPTV services
  Short message services
  Game operating support, website solutions and advertisement
  Other revenues
   F-21




---



##### Table of Contents



Sales tax
  Game development and licensing
   16 Advances from customers, deferred revenue, and deferred costs
   F-22




---



##### Table of Contents



<17>Cost of services
  <18>Product development costs
    <19>Sales and marketing expenses
    F-23




---



##### Table of Contents



<20>Government grants
  <21>Share-based compensation
      F-24




---



##### Table of Contents



<22>Leases
  <23>Income taxes
   <24>Noncontrolling interest
   F-25




---



##### Table of Contents



<25>Earnings (loss) per share
  <26>Segment reporting
  <27>Comprehensive income (loss)
   F-26




---



##### Table of Contents



<28> Certain risks and concentration
    <29>Acquisition
   F-27




---



##### Table of Contents



<30>Fair value measurements
     <31>Financial instruments
  <32>Recent accounting pronouncements
   F-28




---



##### Table of Contents



3. CONVENIENCE TRANSLATION
  4. VARIABLE INTEREST ENTITIES
   F-29




---



##### Table of Contents



Shanghai IT and Huopu Cloud
    F-30




---



##### Table of Contents



R&D VIEs
      F-31




---



##### Table of Contents



December 31, 2009
    
    
    December 31, 2010
    
    
    December 31, 2010RMB
    
    
    RMB
    
    
    US$(Note 3)Total assets
    
    
    167,391,153
    
    
    
    141,428,028
    
    
    
    21,428,489Total liabilities
    
    
    251,945,913
    
    
    
    265,829,394
    
    
    
    40,277,181
 December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$ (Note 3)Revenues
    
    
    1,801,713,116
    
    
    
    802,074,406
    
    
    
    107,447,650
    
    
    
    16,279,947Net income(loss)
    
    
    14,501,809
    
    
    
    (79,376,759
    )
    
    
    (72,685,391
    )
    
    
    (11,012,938
    )
 5.
    
    ACQUISITION  RMBCash
    
    
    11,876,274Subscription receivable
    
    
    95,549,799Fixed assets
    
    
    3,650,947Identifiable intangible assets:In-process research and development
    
    
    12,285,000Backlog
    
    
    2,730,000Goodwill
    
    
    10,870,537Other assets
    
    
    1,968,347Liabilities assumed
    
    
    (2,599,092
    )Deferred tax liability
    
    
    (5,981,135
    )Noncontrolling interest at fair value
    
    
    (15,417,870
    )Total
    
    
    114,932,807
  F-32




---



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F-33




---



##### Table of Contents



Revenues
    
    
    Net LossRMB
    
    
    RMBPro forma for 2009
    
    
    802,629,351
    
    
    
    (491,679,970
    )Pro forma for 2010
    
    
    108,513,582
    
    
    
    (532,673,479
    )
  6. PREPAID ROYALTIES AND DEFERRED COSTS
  7. INVESTMENTS IN EQUITY INVESTEES
  December 31,
    
    
    December 31,
    
    
    December 31,Note
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    US$(Note 3)Investments accounted for under equity method:Object Software Limited (Object Software)
    
    7.1<1>
    
    
    4,218,795
    
    
    
    894,361
    
    
    
    135,509Beijing Zhongqing Shenglian Internet
Technology Co., Ltd. (BZSIT)
    
    7.1<2>
    
    
    18,564,513
    
    
    
    
    
    
    
    Beijing Linkage Technology Co., Ltd.
(BLT)
    
    7.1<3>
    
    
    
    
    
    
    11,963,228
    
    
    
    1,812,6109 Webzen Limited (9Webzen Hong Kong)
    
    7.1<4>
    
    
    
    
    
    
    
    
    
    
    Ideas Corporation (Ideas)
    
    7.1<5>
    
    
    
    
    
    
    
    
    
    
    Investments accounted for under cost method:Shanghai Institute of Visual Art of
Fudan University (SIVA)
    
    7.2<1>
    
    
    10,000,000
    
    
    
    10,000,000
    
    
    
    1,515,152G10 Entertainment Corporation (G10)
    
    7.2<2>
    
    
    276,022,817
    
    
    
    24,892,921
    
    
    
    3,771,656OpenFeint Inc. (formerly named Aurora
Feint Inc., OpenFeint)
    
    7.2<3>
    
    
    
    
    
    
    27,093,200
    
    
    
    4,105,030Total
    
    
    
    
    308,806,125
    
    
    
    74,843,710
    
    
    
    11,339,957
  F-34




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##### Table of Contents



7.1 Investments accounted for under the equity method
  ObjectSoftware
    
    
    BZSIT
    
    
    BLT
    
    
    Total<1>
    
    
    <2>
    
    
    <3>Balance at December 31, 2008 (RMB)
    
    
    5,338,823
    
    
    
    
    
    
    
    
    
    
    
    5,338,823Investments
    
    
    
    
    
    
    20,000,000
    
    
    
    
    
    
    
    20,000,000Share of loss in equity investments, net of taxes
    
    
    (1,120,028
    )
    
    
    (1,435,487
    )
    
    
    
    
    
    
    (2,555,515
    )Balance at December 31, 2009 (RMB)
    
    
    4,218,795
    
    
    
    18,564,513
    
    
    
    
    
    
    
    22,783,308Investments
    
    
    
    
    
    
    
    
    
    
    12,000,000
    
    
    
    12,000,000Share of loss in equity investments, net of taxes
    
    
    (3,324,434
    )
    
    
    (7,352,089
    )
    
    
    (36,772
    )
    
    
    (10,713,295
    )Impairment
    
    
    
    
    
    
    (11,212,424
    )
    
    
    
    
    
    
    (11,212,424
    )Balance at December 31, 2010 (RMB)
    
    
    894,361
    
    
    
    
    
    
    
    11,963,228
    
    
    
    12,857,589Balance at December 31, 2010 (US$, Note 3)
    
    
    135,509
    
    
    
    
    
    
    
    1,812,610
    
    
    
    1,948,120
 <1> Object Software
  <2> BZSIT
   F-35




---



##### Table of Contents



<3> BLT
  <4> 9Webzen Hong Kong
  <5> Ideas
   F-36




---



##### Table of Contents



7.2 Investments accounted for under the cost method
 <1> SIVA
  <2> G10
    F-37




---



##### Table of Contents



<3> OpenFeint
   8. AVAILABLE-FOR-SALE INVESTMENTS
 <1> Investment in Infocomm Asia Holdings Pte Ltd. (IAH)
     F-38




---



##### Table of Contents



<2> Investment in Ideas preferred shares
  9. PROPERTY, EQUIPMENT AND SOFTWARE
  December
31, 2009
    
    
    December 31, 2010
    
    
    December 31, 2010RMB
    
    
    RMB
    
    
    US$(Note 3)Office buildings
    
    
    58,835,873
    
    
    
    59,911,552
    
    
    
    9,077,508Computer and equipment
    
    
    581,259,400
    
    
    
    223,054,013
    
    
    
    33,796,063Leasehold improvements
    
    
    6,399,643
    
    
    
    8,860,119
    
    
    
    1,342,442Office furniture and fixtures
    
    
    7,219,856
    
    
    
    13,822,926
    
    
    
    2,094,383Motor vehicles
    
    
    10,411,896
    
    
    
    10,251,896
    
    
    
    1,553,318Software
    
    
    13,690,415
    
    
    
    16,366,922
    
    
    
    2,479,837Less: accumulated
depreciation and amortization
    
    
    (571,773,926
    )
    
    
    (248,627,064
    )
    
    
    (37,670,767
    )Impairment provision
    
    
    (30,065,957
    )
    
    
    (25,578,900
    )
    
    
    (3,875,592
    )Net book value
    
    
    75,977,200
    
    
    
    58,061,464
    
    
    
    8,797,192
    F-39




---



##### Table of Contents



10. GOODWILL
  AccumulatedGross
    
    
    Impairment
    
    
    NetNote
    
    
    Amount
    
    
    Loss
    
    
    AmountRMB
    
    
    RMB
    
    
    RMBBalance at January 1, 2009
    
    
    
    
    
    
    30,199,751
    
    
    
    
    
    
    
    30,199,751Impairment loss recognized
    
    
    27
    
    
    
    
    
    
    
    (30,199,751
    )
    
    
    (30,199,751
    )Balance at December 31, 2009
    
    
    
    
    
    
    30,199,751
    
    
    
    (30,199,751
    )
    
    
    Acquisition
    
    
    5
    
    
    
    10,870,537
    
    
    
   
    
    
    
    10,870,537Translation difference
    
    
    
    
    
    
    (322,214
    )
    
    
    
    
    
    
    (322,214
    )Balance at December 31, 2010
    
    
    
    
    
    
    40,748,074
    
    
    
    (30,199,751
    )
    
    
    10,548,323Balance at
December 31, 2010 (US$, Note 3)
    
    
    
    
    
    
    6,173,951
    
    
    
    (4,575,720
    )
    
    
    1,598,231
   11. INTANGIBLE ASSETS
  <1> Intangible assets subject to amortization
 December 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    US$(Note 3)Backlog
    
    
    
    
    
    
    2,730,000
    
    
    
    413,636Upfront licensing fees
    
    
    275,860,798
    
    
    
    237,258,342
    
    
    
    35,948,234Less: Accumulated amortization
    
    
    (66,779,481
    )
    
    
    (76,791,769
    )
    
    
    (11,635,117
    )Impairment provision
    
    
    (126,042,609
    )
    
    
    (130,683,870
    )
    
    
    (19,800,586
    )Licensing fee refunds transferred to
prepayments and other current assets
    
    
    (31,410,422
    )
    
    
    (26,704,800
    )
    
    
    (4,046,182
    )Translation difference
    
    
    
    
    
    
    (80,920
    )
    
    
    (12,261
    )51,628,286
    
    
    
    5,726,983
    
    
    
    867,724Intangible assets from an acquisition relating to C9I
    
    
    283,701,360
    
    
    
    283,701,360
    
    
    
    42,985,055Less: accumulated amortization
    
    
    (283,701,360
    )
    
    
    (283,701,360
    )
    
    
    (42,985,055
    )
    
    
    
    
    
    
    
    Net book value of intangible assets subject to
amortization
    
    
    51,628,286
    
    
    
    5,726,983
    
    
    
    867,724
  F-40




---



##### Table of Contents



<2> Intangible assets not subject to amortization
 December 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    US$(Note 3)In-process research and development
    
    
    
    
    
    
    12,285,000
    
    
    
    1,861,364Translation difference
    
    
    
    
    
    
    (364,141
    )
    
    
    (55,173
    )Net book value of intangible assets not
subject to amortization
    
    
    
    
    
    
    11,920,859
    
    
    
    1,806,191
   RMB
    
    
    US$(Note 3)2011
    
    
    1,844,544
    
    
    
    279,4762012
    
    
    1,093,913
    
    
    
    165,7442013
    
    
    413,254
    
    
    
    62,6142014
    
    
    377,143
    
    
    
    57,1432015
    
    
    377,143
    
    
    
    57,143Total
    
    
    4,105,997
    
    
    
    622,120
  12. LAND USE RIGHT
  December
31, 2009
    
    
    December 31, 2010
    
    
    December 31, 2010RMB
    
    
    RMB
    
    
    US$(Note 3)Land use right
    
    
    85,160,349
    
    
    
    85,160,349
    
    
    
    12,903,083Less: accumulated amortization
    
    
    (5,282,502
    )
    
    
    (7,203,413
    )
    
    
    (1,091,426
    )Net book value
    
    
    79,877,847
    
    
    
    77,956,936
    
    
    
    11,811,657
   F-41




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##### Table of Contents



13. IMPAIRMENT OF LONG-LIVED ASSETS
   (i)
    
    Due to weaker than expected operating performance of certain games, the Group recognized
impairment provisions on computer equipment and upfront licensing fees of RMB8.9 million and
RMB7.1 million, respectively, in 2008 and RMB7.6 million and RMB26.7 million, respectively, in
2009. Impairment provisions on computer equipment and upfront licensing fees of RMB4.9 million
(US$0.7 million) and RMB21.5 million (US$3.3 million), respectively, were recognized in 2010.
A significant factor for the internally developed income approach is forecasting performance
and revenue from the games. The Group continued to monitor the actual revenue performance
versus forecast revenue. Due to the lower than expected market acceptance of the games and the
following the content updates, certain games experienced significantly lower than expected
user levels and revenue.
  F-42




---



##### Table of Contents



(ii)
    
    The Group has been monitoring its licensed games that have not commercially launched,
including but not limited to their market acceptance and operational performance in other
regions where they are commercially launched and operated by other operators. Such information
includes ceased operation in certain regions where games were commercially launched, delayed
or unsuccessful commercial launch, and user number significantly below the expectation despite
the launching of patches. The Group incorporated these results and experience into it
continuous evaluation of the forecasted results of the respective games and taking into
account the Groups expected commercial launch and cash flows in the evaluation of impairment
testing for the carrying value of upfront licensing fees. Based on the Groups impairment
tests, impairment provisions on upfront licensing fees of RMB66.1 million, RMB0.8 million and
RMB11.5 million (US$1.7 million) were recognized in 2008, 2009 and 2010, respectively.
 (iii)
    
    During the year ended December 31, 2009, impairment provisions on idle computer equipment of
RMB13.6 million was recognized in view of the low possibility to reuse the idle computer
equipment in the foreseeable future.
 14. FAIR VALUE MEASUREMENTS
 Assets and Liabilities Measured at Fair Value on a Recurring Basis
   Fair Value Measurements Using SignificantUnobservable Inputs(Level 3)2008
    
    
    2009RMB
    
    
    RMBBalance at the beginning of the year
    
    
    29,218,400
    
    
    
    29,218,400Purchases
    
    
    14,634,730
    
    
    
    6,837,000Reversal of unrealized gain previously
recognized in other comprehensive income
    
    
    
    
    
    
    (13,643,131
    )Impairment losses included in earnings
    
    
    (14,634,730
    )
    
    
    (22,412,269
    )Balance at the end of the year
    
    
    29,218,400
    
    
    
    
  F-43




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##### Table of Contents



Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
  Fair Value Measurements at Reporting Date UsingQuoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantYear Ended
    
    
    Markets for
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsNote
    
    
    2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Total LossesRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBComputers and equipment
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,164,693Upfront licensing fees
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,507,199Goodwill
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,199,751Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,871,643
   Fair Value Measurements at Reporting Date UsingQuoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantYear Ended
    
    
    Markets for
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsNote
    
    
    2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Total LossesRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBInvestments in
equity investees
    
    
    7.2
    
    
    
    24,892,921
    
    
    
    
    
    
    
    
    
    
    
    24,892,921
    
    
    
    196,115,321Computers and equipment
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,928,991Upfront licensing fees
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,020,462Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,892,921
    
    
    
    234,064,774
  F-44




---



##### Table of Contents



Significant unobservable inputs (Level 3) were used in measuring the fair value of the Groups
investments in equity investees based on which the other-than-temporary impairment losses were
calculated. The Group measured the fair value of its investment in BZSIT as of December 31, 2010
using the income approach based on a weighted average of multiple discounted cash flow scenarios,
which required the use of unobservable inputs including assumptions of projected revenue, expenses,
capital spending, and other costs, as well as a discount rate calculated based on the risk profile
of the online game industry and company-specific risk adjustments. As a result of the impairment
test, the investment in BZSIT with a carrying amount of RMB11.2 million (US$1.7 million) was fully
impaired. Using the valuation technique described in 7.2<2>, the Group measured the fair
value of its investment in G10 at RMB24.9 million (US$3.8 million) as of December 31, 2010. The
investment in G10 with a carrying amount of RMB276.0 million (US$41.8 million), after reduction of
RMB66.2 million (US$10.0 million) receivable, was impaired by the amount of RMB184.9 million
(US$28.0 million). The above impairment charges were included in impairment loss on investments on
the consolidated statement of operations and comprehensive income (loss) for the year ended
December 31, 2010.
  15. TAXATION
 Cayman Islands and British Virgin Islands
  Hong Kong
   F-45




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The PRC
    United States
   F-46




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##### Table of Contents



Composition of income tax benefit (expense)
  For the year ended December 31,2008
    
    
    2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(Note 3)Current income tax
(expense) benefit
    
    
    (13,453,655
    )
    
    
    (1,871,215
    )
    
    
    39,061
    
    
    
    5,918China
    
    
    (13,453,655
    )
    
    
    (1,871,215
    )
    
    
    39,061
    
    
    
    5,918Other jurisdictions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred taxation
    
    
    15,831,538
    
    
    
    69,182,452
    
    
    
    131,458,011
    
    
    
    19,917,880China
    
    
    15,831,538
    
    
    
    69,182,452
    
    
    
    56,671,847
    
    
    
    8,586,643Other jurisdictions
    
    
    
    
    
    
    
    
    
    
    74,786,164
    
    
    
    11,331,237Change in valuation allowance
    
    
    (50,306,416
    )
    
    
    (61,775,371
    )
    
    
    (138,865,092
    )
    
    
    (21,040,165
    )China
    
    
    (50,306,416
    )
    
    
    (61,775,371
    )
    
    
    (64,078,928
    )
    
    
    (9,708,928
    )Other jurisdictions
    
    
    
    
    
    
    
    
    
    
    (74,786,164
    )
    
    
    (11,331,237
    )Income tax (expense) benefit
    
    
    (47,928,533
    )
    
    
    5,535,866
    
    
    
    (7,368,020
    )
    
    
    (1,116,367
    )
 Reconciliation of the differences between statutory tax rate and the effective tax rate
  For the year ended
    
    
    For the year  ended
    
    
    For the year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2009
    
    
    2010PRC Statutory EIT rate
    
    
    25
    %
    
    
    25
    %
    
    
    25
    %Effect of different tax rates in other jurisdictions
    
    
    24
    %
    
    
    (15
    %)
    
    
    (4
    %)Change of valuation allowance
    
    
    35
    %
    
    
    (15
    %)
    
    
    (15
    %)Income not subject to tax and non-deductible expenses, net
    
    
    
    
    
    
    (8
    %)
    
    
    (9
    %)Effect of tax holidays
    
    
    (49
    %)
    
    
    3
    %
    
    
    (1
    %)Effect of future tax rate change
    
    
    
    
    
    
    11
    %
    
    
    3
    %Other
    
    
    (2
    %)
    
    
    
    
    
    
    Effective EIT rate
    
    
    33
    %
    
    
    1
    %
    
    
    (1
    %)
 Significant components of deferred tax assets
 December 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    US$(Note 3)Temporary differences related to expenses and accruals
    
    
    4,985,989
    
    
    
    4,719,640
    
    
    
    715,097Temporary differences related to provision for advances to suppliers
    
    
    1,912,082
    
    
    
    2,085,908
    
    
    
    316,047Temporary differences related to provision for doubtful accounts
    
    
    3,744,950
    
    
    
    6,080,201
    
    
    
    921,243Temporary differences related to prepaid royalties
    
    
    5,564,504
    
    
    
    7,795,758
    
    
    
    1,181,175Other
    
    
    
    
    
    
    939,162
    
    
    
    142,297Total current deferred tax assets
    
    
    16,207,525
    
    
    
    21,620,669
    
    
    
    3,275,859Less: Valuation allowance
    
    
    (14,067,629
    )
    
    
    (21,620,669
    )
    
    
    (3,275,859
    )Net current deferred tax assets
    
    
    2,139,896
    
    
    
    
    
    
    
    
  F-47




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##### Table of Contents



December 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    US$(Note 3)Temporary
differences related to depreciation, amortization, and impairment of equipment and intangible assets
    
    
    49,732,344
    
    
    
    19,516,778
    
    
    
    2,957,088Startup expenses and advertising fee
    
    
    2,483,828
    
    
    
    5,929,990
    
    
    
    898,483Temporary differences related to research and development credits
    
    
    
    
    
    
    2,916,809
    
    
    
    441,941Foreign tax credits
    
    
    
    
    
    
    16,358,069
    
    
    
    2,478,495Temporary differences related to provision for prepayment for equipment
    
    
    11,625,000
    
    
    
    11,625,000
    
    
    
    1,761,364Tax loss carry forwards
    
    
    45,621,033
    
    
    
    179,160,426
    
    
    
    27,145,519Total non-current deferred tax assets
    
    
    109,462,205
    
    
    
    235,507,072
    
    
    
    35,682,890Less: Valuation allowance
    
    
    (104,195,020
    )
    
    
    (235,507,072
    )
    
    
    (35,682,890
    )Net non-current deferred tax assets
    
    
    5,267,185
    
    
    
    
    
    
    
    Total deferred tax assets
    
    
    7,407,081
    
    
    
    
    
    
    
    
 Significant components of deferred tax liabilities
 December 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    US$(Note 3)Temporary differences
related to amortization
of intangible assets
    
    
    
    
    
    
    5,803,848
    
    
    
    879,371
 Movement of valuation allowance on deferred tax assets
 For the year ended
    
    
    For the year ended
    
    
    For the year endedDecember 31, 2009
    
    
    December 31, 2010
    
    
    December 31, 2010RMB
    
    
    RMB
    
    
    US$(Note 3)Balance at January 1
    
    
    56,487,278
    
    
    
    118,262,649
    
    
    
    17,918,583Increase in valuation allowance
    
    
    70,599,298
    
    
    
    138,865,092
    
    
    
    21,040,166Reversal of valuation allowance
    
    
    (8,823,927
    )
    
    
    
    
    
    
    Balance at December 31
    
    
    118,262,649
    
    
    
    257,127,741
    
    
    
    38,958,749
   F-48




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F-49




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##### Table of Contents



16. OTHER PAYABLES AND ACCRUALS
  December 31,
    
    
    December 31,
    
    
    December 31,2009
    
    
    2010
    
    
    2010RMB
    
    
    RMB
    
    
    US$(Note 3)Staff cost related payables
    
    
    23,944,309
    
    
    
    20,037,102
    
    
    
    3,035,925Professional services
    
    
    16,721,169
    
    
    
    12,761,093
    
    
    
    1,933,499Product development services
    
    
    2,665,366
    
    
    
    2,665,366
    
    
    
    403,843Marketing and promotion
    
    
    2,045,100
    
    
    
    1,034,855
    
    
    
    156,796Others
    
    
    6,328,481
    
    
    
    5,830,401
    
    
    
    883,39451,704,425
    
    
    
    42,328,817
    
    
    
    6,413,457
 17. SPECIAL AND NON-RECURRING CASH DIVIDENDS
  18. SHARE REPURCHASE PROGRAM
   F-50




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19. SHAREHOLDER RIGHTS PLAN
   20. EMPLOYEE BENEFITS
   F-51




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##### Table of Contents



21. SHARE-BASED COMPENSATION
 21.1 Stock options granted by the Company
    F-52




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##### Table of Contents



Weighted-AverageRemainingNumber of
    
    
    Weighted-Average
    
    
    Contractual Term
    
    
    Aggregate IntrinsicOptions
    
    
    Exercise Price
    
    
    (years)
    
    
    ValueOutstanding at
January 1, 2010
    
    
    1,304,100
    
    
    US$
    8.07
    
    
    
    2.63
    
    
    NilGranted
    
    
    3,887,382
    
    
    US$
    5.35Exercised
    
    
    (2,502
    )
    
    US$
    5.13Forfeited
    
    
    (1,193,098
    )
    
    US$
    7.33Outstanding at
December 31, 2010
    
    
    3,995,882
    
    
    US$
    5.65
    
    
    
    4.57
    
    
    US$
    6,061,473Vested and expected
to vest at December
31, 2010
    
    
    3,538,957
    
    
    US$
    5.68
    
    
    
    4.55
    
    
    US$
    5,341,379Exercisable at
December 31, 2010
    
    
    527,389
    
    
    US$
    7.37
    
    
    
    3.57
    
    
    US$
    584,692
   For the year
    
    
    For the yearended December 31, 2008
    
    
    ended December 31, 2010Risk-free interest rate
    
    
    1.53
    %
    
    
    0.77%-1.03
    %Expected life (years)
    
    
    2.90
    
    
    
    3.25Expected dividend yield
    
    
    
    
    
    
    Volatility
    
    
    54
    %
    
    
    59.24%-60.71
    %Fair value of options at grant date
    
    
    US$4.46
    
    
    
    US$2.13-US$2.58
  For the yearended December 31, 2009Risk-free interest rate
    
    
    0.08%-1.44
    %Expected remaining life (years)
    
    
    0.13-3.14Expected dividend yield
    
    
    Volatility
    
    
    49%-67
    %Fair value of incremental cost
    
    
    US$0.06-US$2.03
   F-53




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##### Table of Contents



21.2 Equity warrants granted to Incsight Limited (Incsight)
   Risk-free interest rate
    
    
    1.22
    %Expected life (years)
    
    
    1.81Expected dividend yield
    
    
    Volatility
    
    
    57
    %
  21.3 Ordinary shares granted to Incsight Limited (Incsight)
   F-54




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21.4 Stock options granted by The9 Development Center Limited (TDC)
   Weighted-AverageWeighted-Average
    
    
    RemainingNumber of
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    AggregateOptions
    
    
    per Option
    
    
    (years)
    
    
    Intrinsic ValueOutstanding at January 1, 2010
    
    
    18,901,000
    
    
    HK$
    0.10
    
    
    
    6.0
    
    
    RMB
    414,915Forfeited
    
    
    (2,026,000
    )
    
    HK$
    0.10Outstanding at December 31, 2010
    
    
    16,875,000
    
    
    HK$
    0.10
    

    
    
    5.0
    
    
    NilVested and expected to vest at December 31, 2010
    
    
    16,875,000
    
    
    HK$
    0.10
    

    
    
    5.0
    
    
    NilExercisable at December 31, 2010
    
    
    12,656,250
    
    
    HK$
    0.10
    

    
    
    5.0
    
    
    Nil
   Risk-free interest rate
    
    
    3.75
    %Expected life (years)
    
    
    5.00Expected dividend yield
    
    
    Volatility
    
    
    53
    %
   F-55




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##### Table of Contents



21.5 Stock options granted by Red 5
   Weighted-AverageWeighted-Average
    
    
    RemainingNumber of
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    AggregateOptions
    
    
    per Option
    
    
    (years)
    
    

Intrinsic ValueOutstanding at April 6, 2010
    
    
    3,168,201
    
    
    US$
    0.190
    
    
    
    3.08
    
    
    US$
    85,185Granted
    
    
    7,235,874
    
    
    US$
    0.137Exercised
    
    
    (122,355
    )
    
    US$
    0.038Forfeited
    
    
    (1,891,848
    )
    
    US$
    0.236Outstanding at December 31, 2010
    
    
    8,389,872
    
    
    US$
    0.136
    
    
    
    4.86
    
    
    US$
    78,375Vested and expected to vest at December 31, 2010
    
    
    8,246,548
    
    
    US$
    0.136
    
    
    
    4.88
    
    
    US$
    69,670Exercisable at December 31, 2010
    
    
    2,354,921
    
    
    US$
    0.136
    
    
    
    4.05
    
    
    US$
    53,269
   F-56




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##### Table of Contents



Risk-free interest rate
    
    
    1.70%-5.00
    %Expected life (years)
    
    
    5.00-6.00Expected dividend yield
    
    
    Volatility
    
    
    38.89%-69.36
    %
    22. RELATED PARTY TRANSACTIONS AND BALANCES
    F-57




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##### Table of Contents



23. EARNINGS PER SHARE
  For the year
    
    
    For the year
    
    
    For the year
    
    
    For the yearended December
    
    
    ended December
    
    
    ended December
    
    
    ended December31, 2008
    
    
    31, 2009
    
    
    31, 2010
    
    
    31, 2010RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(Note 3)Numerator:Net income (loss) attributable to ordinary
shareholders
    
    
    96,836,036
    
    
    
    (405,152,407
    )
    
    
    (499,611,594
    )
    
    
    (75,698,727
    )Denominator:Denominator for basic earnings (loss) per
share  weighted-average shares outstanding
    
    
    27,664,687
    
    
    
    25,414,620
    
    
    
    25,121,679
    
    
    
    25,121,679Dilutive effect of share options and warrants
    
    
    39,514
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted earnings (loss) per
share
    
    
    27,704,201
    
    
    
    25,414,620
    
    
    
    25,121,679
    
    
    
    25,121,679Earnings per share- Basic
    
    
    3.50
    
    
    
    (15.94
    )
    
    
    (19.89
    )
    
    
    (3.01
    )- Diluted
    
    
    3.50
    
    
    
    (15.94
    )
    
    
    (19.89
    )
    
    
    (3.01
    )
  24. RESTRICTED NET ASSETS
    F-58




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##### Table of Contents



25. Noncontrolling interest
  December 31, 2008
    
    
    December 31, 2009
    
    
    December 31, 2010RMB
    
    
    RMB
    
    
    RMBNet income
(loss) attributable
to The9 Limited
    
    
    96,836,036
    
    
    
    (405,152,407
    )
    
    
    (499,611,594
    )Transfers (to) from
the noncontrolling
interestIncrease in The9
Limiteds
additional
paid-in capital
for issuance of
shares by Red 5
upon stock
option exercise
    
    
    
    
    
    
    
    
    
    
    5,564Increase in The9
Limiteds
additional
paid-in capital
for purchase of
common stock of
Red 5 from
holders of
noncontrolling
interest
    
    
    
    
    
    
    
    
    
    
    523,586Decrease in The9
Limiteds
additional
paid-in capital
for conversion
of a loan into
equity of Fire
Rain
    
    
    
    
    
    
    (2,757,183
    )
    
    
    Decrease in The9
Limiteds
additional
paid-in capital
for capital
contribution to
Red 5, Fire Rain
and Wanyouyl
    
    
    
    
    
    
    
    
    
    
    (6,981,392
    )Change from net
income attributable
to The9 Limited and
transfers (to) from
noncontrolling
interest
    
    
    96,836,036
    
    
    
    (407,909,590
    )
    
    
    (506,063,836
    )
  F-59




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##### Table of Contents



26. COMMITMENTS AND CONTINGENCIES
 26.1 Operating lease commitments
  RMB
    
    
    US$(Note 3)2011
    
    
    8,009,544
    
    
    
    1,213,5672012
    
    
    1,729,965
    
    
    
    262,1162013
    
    
    1,461,240
    
    
    
    221,40011,200,749
    
    
    
    1,697,083
  26.2 Contingencies
   F-60




---



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F-61




---



##### Table of Contents



27. IMPAIRMENT AND CHARGES RELATED TO EXPRIRATION OF WOW LICENSE
   
    
    A provision on a receivable amounting to RMB18.0 million from a customer that purchased
WoW prepaid player cards from the Group for distribution, as a result of the expiration of
the Groups WoW license on June 7, 2009 and, among other things, the impact on the ongoing
relationship with the customer.
 
    
    A RMB3.9 million provision for prepaid royalties.
 
    
    A RMB22.7 million charge to increase the valuation allowance for deferred tax assets,
which represented incremental income taxes as a result of non-renewal of the WoW license
prior to the evaluation and recording of impairment charges as a result of non-renewal of the
WoW license.
    
    A RMB68.4 million additional depreciation expense related to computer equipment to reflect
the change to a shorter expected useful life of the underlying assets due to non-renewal of
the WoW license agreement. The Group assessed the alternative uses for equipment used in
connection with the operation of WoW, taking into consideration future expected game
operations, as well as expected value at the WoW license expiration date. As a result, the
Group adjusted the expected useful life of the servers and related equipment, and the
expected value of the servers and related equipment at the end of the WoW license. This
change in accounting estimate has been accounted for prospectively from January 1, 2008. As a
result, the Group recorded additional depreciation expense as a component of cost of service
in the amount of RMB68.4 million in 2008 to reflect the change to a shorter expected useful
life of the underlying assets. Depreciation expense relating to this change is to decrease
both profit from operations and net income by RMB68.4 million, and to decrease both basic and
diluted net income attributable to holders of ordinary shares per share by RMB2.47 in 2008.
  F-62




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##### Table of Contents




    
    A full provision for prepayments to a vendor, whom had been the Groups primary supplier
of computer servers and related computer equipment, in connection with its purchase of
certain fixed assets, including RMB46.5 million originally recorded as prepayments for
equipment and RMB8.7 million originally recorded as advances to suppliers. With the
non-renewal of WoW license, the Company evaluated a number of factors, including the status
of production of the assets underlying the advance prepayments, ability to recover the value
of the advances through the possible sale of the fixed assets upon the completion of
production, the ability to utilize the servers upon completion of production, as well as the
ability to recover the amounts advanced to the vendor and as a result of such assessment, and
concluded that a full provision in connection with such advances and prepayments was
necessary. The provision was recorded as general and administrative expenses for the year
ended December 31, 2008.
 
    
    A RMB7.0 million provision on receivables and prepayments and other current assets in
connection with Game First International Corporation (GFD)  As of December 31, 2008, the
Groups outstanding receivable from selling of 100% of its interest in Spring Asia Limited, a
wholly owned subsidiary to a third party in 2006, amounted to RMB7.0 million, including
RMB1.4 million recorded in accounts receivable and RMB5.6 million recorded in prepayments and
other current assets. The Group assessed the impact of the non-renewal of the WoW license on
its ongoing relationship with GFD, whose equity interest is 30% held by Spring Asia Limited,
and resulting collectability of this receivable and concluded collection to be unlikely
resulting in the recording of impairment charge in the amount of RMB7.0 million recorded in
general and administrative expenses for the year ended December 31, 2008.
 
    
    A RMB1.7 million provision on inventories.
   F-63




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##### Table of Contents




    
    The Group continued to make prepayment of royalties for WoW until the expiration of the
WoW license. As a result of the non-renewal of the WoW license, the Group recognized an
impairment loss for prepaid royalties, deferred cost and related prepaid withholding taxes of
RMB60.7 million, RMB38.1 million and RMB4.4 million, respectively, for the year ended
December 31, 2009.
 
    
    As a result of change in accounting estimate on the useful life of computer equipment
through the end of the WoW license, the Group recorded additional depreciation expense as a
component of cost of service in the amount of RMB40.0 million in 2009. Depreciation expense
relating to this change is to increase both loss from operations and net loss by RMB40.0
million, and to increase both basic and diluted net loss per share by RMB1.57 in 2009.
 
    
    A RMB30.2 million impairment of goodwill following the expiration of the WoW license on
June 7, 2009. The Group determined the fair value of the reporting unit related to WoW using
the income approach. The income approach included the use of a discounted cash flow model,
which required assumptions of projected revenue expenses, capital expenditures and other
costs, as well as a discount rate calculated based on the risk profile of the online game
industry. The Group does not expect any revenue from WoW reporting unit after expiration of
the WoW license and assessed the fair value of the WoW reporting unit to be zero.
Accordingly, the assigned value for goodwill related to WoW was zero and a full impairment
was recognized.
 
    
    As a result of non-renewal of WoW license beyond June 7, 2009, the Group announced a
refund plan in connection with unactivated WoW game point cards, which the Group recorded as
advance from customers. According to the plan, unactivated WoW game point card holders are
eligible to receive a cash refund from the Group. In connection with the settlement of both
unactivated points cards and activated but unconsumed point cards, the maximum refund the
Group may potentially make amounts to approximately RMB200.4 million, of which RMB4.0 million
was refunded in 2009. The difference between the face value of the point cards and the net
proceeds the Group received in the sales of the respective point cards was recorded as
additional cost of
services, amounting to RMB22.1 million for the year ended December 31, 2009. The advances from
customers and deferred revenue relating to these WoW game point cards will be recorded as
revenue after the release of legal liability to refund under the respective laws. The Group
has engaged an agent to settle the liability with the game point card holders who have claimed
a refund. As of December 31, 2009, the balance of the advance payment to the agent was RMB43.3
million. In 2010, RMB0.4 million (US$0.1 million) was refunded to game point card holders.
 
    
    As of December 31, 2009, the WoW related computer and equipment and intangible assets have
been fully depreciated and no additional impairment was recognized in 2009.
 For the year ended December 31, 2010, there was no additional impairment and charges provided
related to the expiration of WoW license.
  F-64