##### 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number: 000-51053
 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)
 
 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 þ o
  þ o o
 o þ
 o þ




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TABLE OF CONTENTS
 PageINTRODUCTION
    
    
    1FORWARD-LOOKING INFORMATION
    
    
    1PART I
    
    
    3ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    3ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3. KEY INFORMATION
    
    
    3ITEM 4. INFORMATION ON THE COMPANY
    
    
    26ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    40ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    59ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    67ITEM 8. FINANCIAL INFORMATION
    
    
    70ITEM 9. THE OFFER AND LISTING
    
    
    71ITEM 10. ADDITIONAL INFORMATION
    
    
    72ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    78ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    78PART II
    
    
    79ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    79ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    79ITEM 15. CONTROLS AND PROCEDURES
    
    
    79ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    80ITEM 16B. CODE OF ETHICS
    
    
    80ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    80ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    80ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
    
    
    80PART III
    
    
    80ITEM 17. FINANCIAL STATEMENTS
    
    
    81ITEM 18. FINANCIAL STATEMENTS
    
    
    81ITEM 19. EXHIBITS
    
    
    81EX-4.37 INVESTMENT AGREEMENTEX-12.1 CEO CERTIFICATION PURSUANT TO SECTION 302EX-12.2 CFO CERTIFICATION PURSUANT TO SECTION 302EX-13.1 CEO CERTIFICATION PURSUANT TO SECTION 906EX-13.2 CFO CERTIFICATION PURSUANT TO SECTION 906EX-15.1 CONSENT OF MAPLES AND CALDEREX-15.2 CONSENT OF PRC COUNSELEX-15.3 CONSENT OF PRICEWATERHOUSECOOPERS




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INTRODUCTION
    
 FORWARD-LOOKING INFORMATION
  
    
    our ability to retain existing users and attract new users for the World of
Warcraft®, or WoW, game;
    
    our ability to successfully renew the license agreement granting our subsidiary
exclusive rights to operate WoW in China;
    
    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;
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
    
    risks associated with our corporate structure and the regulatory environment in
China; and
    
    other risks outlined in our filings with the Securities and Exchange Commission, or
the SEC, including this annual report on Form 20-F.
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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
 Selected Financial Data
  For the Year Ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$(1)(unaudited)(in thousands, except for per share and per ADS data)Consolidated Statement of
Operation Data:Revenues
    
    
    17,268
    
    
    
    36,636
    
    
    
    489,191
    
    
    
    1,038,328
    
    
    
    1,350,129
    
    
    
    185,086Sales taxes
    
    
    (883
    )
    
    
    (1,913
    )
    
    
    (24,164
    )
    
    
    (52,502
    )
    
    
    (70,522
    )
    
    
    (9,668
    )Net revenues
    
    
    16,385
    
    
    
    34,723
    
    
    
    465,027
    
    
    
    985,826
    
    
    
    1,279,607
    
    
    
    175,418Cost of services
    
    
    (6,492
    )
    
    
    (9,139
    )
    
    
    (240,416
    )
    
    
    (524,032
    )
    
    
    (700,047
    )
    
    
    (95,968
    )Gross profit
    
    
    9,893
    
    
    
    25,584
    
    
    
    224,611
    
    
    
    461,794
    
    
    
    579,560
    
    
    
    79,450Operating expenses
    
    
    (15,930
    )
    
    
    (35,347
    )
    
    
    (164,898
    )
    
    
    (191,639
    )
    
    
    (343,695
    )
    
    
    (47,116
    )(Loss) profit from operations
    
    
    (6,037
    )
    
    
    (9,763
    )
    
    
    59,713
    
    
    
    270,155
    
    
    
    235,865
    
    
    
    32,334Interest (expenses) income, net
    
    
    (1,381
    )
    
    
    81
    
    
    
    10,022
    
    
    
    9,136
    
    
    
    50,656
    
    
    
    6,944Other income (expense), net
    
    
    165
    
    
    
    15,792
    
    
    
    14,467
    
    
    
    28,417
    
    
    
    (30,054
    )
    
    
    (4,120
    )(Loss) income before income
tax benefit (expense), gain on
investment disposal,
impairment loss on investment,
profit (loss) on equity
investments and minority
interests
    
    
    (7,253
    )
    
    
    6,110
    
    
    
    84,202
    
    
    
    307,708
    
    
    
    256,467
    
    
    
    35,158Income tax benefit (expense)
    
    
    5,850
    
    
    
    (5,073
    )
    
    
    (168
    )
    
    
    2,670
    
    
    
    (9,269
    )
    
    
    (1,271
    )(Loss) income before gain on
investment disposal,
impairment loss on investment,
profit (loss) on equity
investments and minority
interests
    
    
    (1,403
    )
    
    
    1,037
    
    
    
    84,034
    
    
    
    310,378
    
    
    
    247,198
    
    
    
    33,887Gain on investment disposal
    
    
    
    
    
    
    
    
    
    
    6,716
    
    
    
    23,409
    
    
    
    
    
    
    
    Impairment loss on investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,402
    )
    
    
    (627
    )
    
    
    (86
    )Profit
(loss) on equity
investments, net of taxes
    
    
    49,877
    
    
    
    16,571
    
    
    
    (13,737
    )
    
    
    (908
    )
    
    
    (5,679
    )
    
    
    (778
    )Minority interests
    
    
    
    
    
    
    6,871
    
    
    
    (4,541
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    48,474
    
    
    
    24,479
    
    
    
    72,472
    
    
    
    312,477
    
    
    
    240,892
    
    
    
    33,023Net income attributable to
ordinary shareholders
    
    
    31,699
    
    
    
    12,047
    
    
    
    72,472
    
    
    
    312,477
    
    
    
    240,892
    
    
    
    33,023
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##### Table of Contents



For
the Year Ended December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$(1)(unaudited)(in thousands, except for per share and per ADS data)Earnings per share- Basic
    
    
    3.21
    
    
    
    1.17
    
    
    
    3.00
    
    
    
    12.78
    
    
    
    8.79
    
    
    
    1.20- Diluted
    
    
    1.94
    
    
    
    0.87
    
    
    
    2.92
    
    
    
    12.72
    
    
    
    8.72
    
    
    
    1.19Earnings per ADS(2)- Basic
    
    
    3.21
    
    
    
    1.17
    
    
    
    3.00
    
    
    
    12.78
    
    
    
    8.79
    
    
    
    1.20- Diluted
    
    
    1.94
    
    
    
    0.87
    
    
    
    2.92
    
    
    
    12.72
    
    
    
    8.72
    
    
    
    1.19
 As
of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$(1)(unaudited)(in thousands, except for per share and per ADS data)Consolidated Balance Sheet Data:Cash and cash equivalents
    
    
    62,766
    
    
    
    793,405
    
    
    
    488,245
    
    
    
    937,846
    
    
    
    2,215,282
    
    
    
    303,688Non-current assets
    
    
    60,801
    
    
    
    171,565
    
    
    
    602,744
    
    
    
    537,492
    
    
    
    831,342
    
    
    
    113,967Total assets
    
    
    155,798
    
    
    
    1,026,595
    
    
    
    1,213,735
    
    
    
    1,624,585
    
    
    
    3,246,101
    
    
    
    445,001Total current liabilities
    
    
    134,210
    
    
    
    149,265
    
    
    
    271,750
    
    
    
    288,427
    
    
    
    440,011
    
    
    
    60,320Minority interests
    
    
    
    
    
    
    12,165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Series A
convertible preferredshares(3)
    
    
    34,242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
shareholders (deficit) equity
    
    
    (12,654
    )
    
    
    865,165
    
    
    
    941,985
    
    
    
    1,336,158
    
    
    
    2,806,090
    
    
    
    384,681Total liabilities and shareholders
equity
    
    
    155,798
    
    
    
    1,026,595
    
    
    
    1,213,735
    
    
    
    1,624,585
    
    
    
    3,246,101
    
    
    
    445,001
 
 (1)
    
    Translation from RMB amounts into U.S. dollars was made at a rate of RMB7.2946 to US$1.00.
See Exchange Rate Information.(2)
    
    Each ADS represents one ordinary share.(3)
    
    Series A convertible preferred shares were not included as part of shareholders equity as
such shares were redeemable at the option of the holders thereof. Exchange Rate Information
   Noon Buying RatePeriod
    
    Period End
    
    Average (1)
    
    Low
    
    High(RMB per US$1.00)2002
    
    
    8.2800
    
    
    
    8.2770
    
    
    
    8.2800
    
    
    
    8.26692003
    
    
    8.2767
    
    
    
    8.2772
    
    
    
    8.2800
    
    
    
    8.2765
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Noon Buying RatePeriod
    
    Period End
    
    Average (1)
    
    Low
    
    High(RMB per US$1.00)2004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2771
    
    
    
    8.27652005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9723
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.2946December 2007
    
    
    7.2946
    
    
    
    7.3682
    
    
    
    7.4120
    
    
    
    7.29462008January 2008
    
    
    7.1818
    
    
    
    7.2405
    
    
    
    7.2946
    
    
    
    7.1818February 2008
    
    
    7.1115
    
    
    
    7.1644
    
    
    
    7.1973
    
    
    
    7.1100March 2008
    
    
    7.0120
    
    
    
    7.0722
    
    
    
    7.1110
    
    
    
    7.0105April 2008
    
    
    6.9870
    
    
    
    6.9997
    
    
    
    7.0185
    
    
    
    6.9840May 2008
    
    
    6.9400
    
    
    
    6.9725
    
    
    
    7.0000
    
    
    
    6.9377June 2008 (through June 25)
    
    
    6.8653
    
    
    
    6.9057
    
    
    
    6.9633
    
    
    
    6.8653
 
 (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 IndebtednessNot Applicable.C.
    
    Reasons for the Offer and Use of ProceedsNot Applicable.D.
    
    Risk Factors
 Risks Related to Our Company
 Our limited relevant operating history and the unproven long-term potential of our online game
business model make evaluating our business and prospects difficult.
  
    
    retain existing customers and attract new customers;
    
    successfully launch and operate new online games licensed by us;
    
    license and maintain licensing rights, acquire or develop additional online games
that are appealing to customers;
    
    anticipate and adapt to changing consumer preferences;
    
    adapt to competitive market conditions;
    
    timely respond to technological changes or resolve unexpected network delays or
interruptions;
    
    adequately and efficiently operate, upgrade and develop our transaction and service
platform; or
 
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
    
    maintain adequate control of our expenses.
  As we expect that WoW will continue to comprise most of our revenues in the near future, any
adverse developments relating to WoW may materially and adversely affect our results of operations.
    If we are unable to renew our licensing rights for WoW or cannot do so on terms favorable to us our
future results of operations may suffer.
  If we are unable to maintain a satisfactory relationship with Blizzard or any other online game
developer that has licensed a game to us, our future results of operations or the growth of our
business may suffer.
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We have incurred net losses in the past and may experience earnings declines or net losses in the
future.
  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.
   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.
  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.
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If we are unable to license, develop or acquire additional online games, our future revenues and
profitability will decline.
  We face the risks of changing consumer preferences and uncertainty about market acceptance of our
new products.
  
    
    the popularity of WoW and other new online games operated by us;
    
    Blizzards timely upgrades of WoW to extend WoWs life span and to maintain WoWs
competitive position in the online game market in China;
    
    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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We may not be able to maintain our market share and profitability as we operate in a highly
competitive industry and compete against many companies.
  Future acquisitions may have an adverse effect on our ability to manage our business.
   Future equity investments may have an adverse effect on our ability to manage our business.
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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.
  We rely on services from third parties to carry out our businesses and to deliver our prepaid cards
to customers, and if there is any interruption or deterioration in the quality of these services,
our customers may cease using our products and services.
  We obtain WoW playing time information from a third party and use that information in connection
with our recognition of revenues from the sale of WoW playing time in China.
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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.
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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.
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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, including the New MII Notice issued in July 2006, restrict foreign
ownership of the 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.
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We depend on Shanghai IT to hold certain operating licenses. If Shanghai IT violates our
contractual arrangements with it, our business could be disrupted and our reputation may be harmed.
  The principal shareholders of Shanghai IT 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.
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Our business could suffer if we do not successfully manage current growth and potential future
growth.
  We may not be able to successfully implement our growth strategies.
  The recurrence of SARS, or similar adverse public health developments in China, may materially and
adversely affect our business and operating results.
  Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic
events.
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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.
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We may become a passive foreign investment company, which could result in adverse United States
federal income tax consequences to U.S. Holders.
  Our articles of association contain anti-takeover provisions that could adversely affect the rights
of holders of our ordinary shares and ADSs.
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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.
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Risks Related to Doing Business in China
 Our business may be adversely affected by public opinion and government policies in China.
   Adverse changes in the political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
services and adversely affect our competitive position.
  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 would 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.
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Future movements in exchange rates between the U.S. dollar and RMB may adversely affect the value
of our ADSs.
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Restrictions on currency exchange in China limit our ability to utilize our revenues effectively,
make dividend payments and meet our foreign currency denominated obligations.
  Recent 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 subsidiary, limit our subsidiarys ability to increase its
registered capital, distribute profits to us, or otherwise adversely affect us.
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Uncertainties with respect to the PRC legal system could adversely affect us.
  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 an adequate
telecommunications infrastructure.
  Risks Related to Our Shares and ADSs
 The future sales or issuance of a substantial number of our ADSs or ordinary shares could adversely
affect the price of our ADSs.
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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 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.
  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.
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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.
  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.
  25




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##### Table of Contents



ITEM 4. INFORMATION ON THE COMPANY
 History and Development of the Company
     
    
    Shanghai IT, which holds Internet content provision, Internet culture operation and
Internet publishing licenses;
    
    Shanghai The9 Advertisement Co., Ltd., or Shanghai Advertisement, whose business
license permits it to conduct advertisement operations, liquidated in 2007; and
    
    Shanghai The9 Advertisement Co., Ltd., or Shanghai Jiucheng Advertisement, whose
business license permits it to conduct advertisement operations.
   26




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##### Table of Contents



Recent Developments
 Developments Relating to Our Business
 License of Games
  Game
    
    Developer
    
    Description
    
    StatusEmil Chronicle Online
    
    Gravity Co., Ltd.
    
    2.5D MMORPG
    
    Commercial launch in
Japan and preparing for
beta testing in ChinaRagnarok Online 2
    
    Gravity Co., Ltd.
    
    3D MMORPG
    
    In open beta testing in
Korea and preparing for
beta testing in ChinaHuxley
    
    Webzen, Inc.
    
    3D first-person
shooting MMORPG
    
    Preparing for beta testingEA Sports FIFA Online
    
    Electronic Arts Inc.
    
    Casual soccer game
    
    Commercial launch in
Korea and preparing for
beta testing in ChinaAudition 2
    
    G10 Entertainment
Korea Corp
    
    Casual dancing game
    
    Preparing for beta testingBurn the Floor
    
    Ideas Corporation
    
    Casual dancing game
    
    In developmentHellgate: London
    
    Flagship Studios, Inc.
    
    3D MMORPG
    
    Ready for initial
customer testingSUN
    
    Webzen, Inc.
    
    3D MMORPG
    
    Commercially launched in
China in 2007Granado Espada
    
    Hanbitsoft Inc. and
IMC Games Co., Ltd.
    
    3D MMORPG
    
    Commercially launched in
China in 2007WoW
    
    Blizzard Entertainment
    
    3D MMORPG
    
    Commercially launched in
China in June 2005MU
    
    Webzen, Inc.
    
    2.5D quarter-view
MMORPG
    
    Commercially launched in
China in February 2003Field of Honor
    
    Beijing Gameworld
Tech. Co. Ltd.
    
    3D MMORSS
    
    In development
  License and Investment by Electronic Arts, Inc.
  Investment in Ideas Corporation and G10 Entertainment Corp.
 27




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##### Table of Contents



Licensing to Third Parties of Proprietary Games
  Developments Relating to Stock Repurchase Program
  Business Overview
    ®
  
    
    an exclusive license obtained from Hanbitsoft, Inc., in 2006 to operate Hellgate:
London, an action role-playing game;
 28




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##### Table of Contents




    
    an exclusive license obtained from Webzen in 2005 to operate Soul of the Ultimate
Nation®, or SUN, a 3D MMORPG;
    
    an exclusive license obtained from Gravity Co. Ltd. in 2007 to operate Ragnarok
Online 2, a 3D MMORPG, and Email Chronicle Online, a 2.5D MMORPG;
    
    an exclusive license obtained from Webzen Inc. in 2007 to operate Huxley, a 3D
first-person shooting game;
    
    an exclusive license obtained from G10 Entertainment in 2007 to operate Audition 2,
a casual dancing game;
    
    an exclusive license obtained from EA in 2007 to operate EA Sports FIFA Online, a
casual soccer game; and
    
    an exclusive license obtained from Ideas Corp. in 2007 to operate Burn the Floor, a
casual dancing game.
     Products and Services
  MMORPGs .
 
    
    sophisticated 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
 29




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##### Table of Contents




    
    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.
  Game
    
    Developer
    
    Description
    
    StatusWoW
    
    Blizzard Entertainment
    
    3D MMORPG
    
    Commercially launched in
China in June 2005MU
    
    Webzen, Inc.
    
    2.5D quarter-view
MMORPG
    
    Commercially launched in
China in February 2003Granado Espada
    
    Hanbitsoft Inc. and
IMC Games Co., Ltd.
    
    3D MMORPG
    
    Commercially launched in
China in 2007SUN
    
    Webzen, Inc.
    
    3D MMORPG
    
    Commercially launched in
China in 2007Joyful Journey West
    
    The9
    
    2D MMORPG
    
    Commercially launched in
China in September 2006Hellgate: London
    
    Flagship Studios, Inc.
    
    3D MMORPG
    
    Ready for initial
customer testingEmail Chronicle Online
    
    Gravity Co., Ltd.
    
    2.5D MMORPG
    
    Commercial launch in
Japan and preparing for
beta testing in ChinaRagnarok Online 2
    
    Gravity Co., Ltd.
    
    3D MMORPG
    
    In open beta testing in
Korea and preparing for
beta testing in ChinaHuxley
    
    Webzen, Inc.
    
    3D first-person
shooting MMORPG
    
    Preparing for beta testing
 
   Other Products and Services.
 The9 City
 30




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Game Operating Support, Website Solutions and Advertisement Services
 SMS
 Pass9
 Licensing
to Third Parties
 Membership Management and Payment System
    Customer Service
  31




---



##### Table of Contents



Purchase of Game Playing Time and Gaming Features
  Prepaid Cards .
 Prepaid Online Points .
 Online Payment .
  Pricing, Distribution and Marketing
 Pricing .
 Distribution .
 32




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##### Table of Contents



Marketing .
 Advertising and Online Promotion
 Cross-Marketing
 On-Site Promotion
 In-Game Marketing
 Game Development and Licensing
   Technology
  
    
    servers and network devices located in nine internet data centers throughout China,
including, for WoW, as of the end of December 2007, eight dedicated server sites with
each site comprised of approximately 40 high-performance server sets, located in
Shanghai, Beijing, Chengdu and Shenzhen, with uninterruptible power supply and diesel
power generator backup;
    
    proprietary software, including game monitor tools, that are integrated with our
websites and customer service center operations; and
    
    hardware platform primarily consisting of Lenovo, Hewlett-Packard/Compaq, Dell, IBM
and Cisco servers.
 33




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Competition
   Intellectual Property
  
 Legal Proceedings
  Government Regulations
  34




---



##### Table of Contents



Internet Content Provision Service, Online Gaming and Internet Publishing
  
    
    Telecommunications Regulations (2000);
    
    The Administrative Rules for Foreign Investments in Telecommunications Enterprises
(2001);
    
    The Administrative Measures for Telecommunications Business Operating Licenses
(2001);
    
    The Internet Information Services Administrative Measures (2000);
    
    The Tentative Measures for Administration of Internet Culture (2003);
    
    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); and
    
    The Foreign Investment Industrial Guidance Catalogue (2007).
  35




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Circular for Further Strengthening the Administration of
Internet Café and Online Games
   Regulation of Internet Content
  36




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##### Table of Contents



Regulation of Information Security
   Import Regulation
  37




---



##### Table of Contents



Intellectual Property Rights
  Internet Café Regulation
  Privacy Protection
  Regulation of 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.
  38




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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).
  Regulation of 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, whether a natural person or a legal entity,
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, such as (1) an increase or decrease in its capital,
(2) a transfer or swap of shares, (3) a merger or division,
(4) a long-term equity or
debt investment, or (5) the creation of any security interests over the relevant assets
located in China.
    39




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Organizational Structure
  
 Property, Plant and Equipment
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  40




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Overview
       
    
    our revenue composition and sources of revenue growth;
    
    our cost of services;
    
    our operating expenses; and
    
    arrangements with online game developers.
  41




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##### Table of Contents



Revenue Composition and Sources of Revenue Growth.
  Online Game Services
 Time Consumption Model
 Virtual Items and Services Consumption Model
  Game Operating Support, Website Solutions and Advertisement
 Short Message Services
 Other Revenues
 42




---



##### Table of Contents



Cost of Services .
 Operating Expenses .
 Product Development
 Sales and Marketing
 General and Administrative
 Impairment of Intangible Assets
 Arrangements with Online Game Developers .
   43




---



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Holding Company Structure
  Regulation of Internet Business in China
    44




---



##### Table of Contents



Income and Sales Taxes
   45




---



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Internal Control Over Financial Reporting
  46




---



##### Table of Contents



Critical Accounting Policies
  Revenue Recognition .
  47




---



##### Table of Contents



Product Development . Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed
 Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use Accounting for Website Development Costs
  Income Taxes . Accounting
for Income Taxes
  48




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Property, Equipment and Software .
 49




---



##### Table of Contents



Intangible assets .
  Goodwill .
 Share-Based Compensation .
  50




---



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Impairment of Investment in Equity Investments .
 Impairment of Long-lived Assets and Intangible Assets .
 Results of Operations
  51




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##### Table of Contents



Year Ended December 31,2005
    
    2006
    
    2007Revenues:Online game services
    
    
    100.4
    %
    
    
    104.2
    %
    
    
    104.0
    %Game
operating support, website solutions and advertisement
    
    
    1.3
    %
    
    
    0.5
    %
    
    
    0.7
    %Short message services
    
    
    0.7
    %
    
    
    0.1
    %
    
    
    0.1
    %Other revenues
    
    
    2.8
    %
    
    
    0.5
    %
    
    
    0.7
    %Sales taxes
    
    
    (5.2
    )%
    
    
    (5.3
    )%
    
    
    (5.5
    )%Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services
    
    
    (51.7
    )%
    
    
    (53.2
    )%
    
    
    (54.7
    )%Gross profit
    
    
    48.3
    %
    
    
    46.8
    %
    
    
    45.3
    %Operating expenses:Product development
    
    
    (8.7
    )%
    
    
    (3.1
    )%
    
    
    (3.2
    )%Sales and marketing
    
    
    (13.3
    )%
    
    
    (6.0
    )%
    
    
    (8.1
    )%General and administrative
    
    
    (12.2
    )%
    
    
    (10.2
    )%
    
    
    (14.1
    )%Impairment of intangible assets
    
    
    (1.3
    )%
    
    
    (0.1
    )%
    
    
    (1.5
    )%Total operating expenses
    
    
    (35.5
    )%
    
    
    (19.4
    )%
    
    
    (26.9
    )%Profit from operations
    
    
    12.8
    %
    
    
    27.4
    %
    
    
    18.4
    %Interest income, net
    
    
    2.2
    %
    
    
    0.9
    %
    
    
    4.0
    %Other income (expense), net
    
    
    3.2
    %
    
    
    2.9
    %
    
    
    (2.4
    )%Income tax (expense) benefit
    
    
    0.0
    %
    
    
    0.3
    %
    
    
    (0.7
    )%Gain on investment disposal
    
    
    1.4
    %
    
    
    2.4
    %
    
    
    Impairment loss on investment
    
    
    
    
    
    
    (2.1
    )%
    
    
    (0.1
    )%Loss on equity investments, net of taxes
    
    
    (3.0
    )%
    
    
    (0.1
    )%
    
    
    (0.4
    )%Minority interests
    
    
    (1.0
    )%
    
    
    
    
    
    
    Net income
    
    
    15.6
    %
    
    
    31.7
    %
    
    
    18.8
    %
 Year 2007 Compared to Year 2006
 Revenues .
 Online Game Services
 Game
Operating Support, Website Solutions and Advertisement
 Short
Message Services
 Other Revenues
 Cost of Services .
 52




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##### Table of Contents



Operating Expenses .
 Product Development
 Sales and Marketing
 General and Administrative
 Impairment of Intangible Assets
 Interest Income, Net .
 Other Income (Expense), Net .
 Income Tax Benefit (Expense) .
 Gain on Investment Disposal .
 Loss on Equity Investments, Net of Taxes .
 53




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##### Table of Contents



Impairment Loss on Investment .
 Net Income .
 Year 2006 Compared to Year 2005
 Revenues .
 Online Game Services
 Game operating support, website solutions and advertisement
 Short message services
 Other Revenues
 Cost of Services .
 Operating Expenses .
 Product Development
 Sales and Marketing
 General and Administrative
 Impairment of Intangible Assets
 Interest Income, Net .
 54




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##### Table of Contents



Other Income, Net .
 Income
Tax (Expense) Benefit .
 Gain on Investment Disposal .
 Impairment
Loss on Investment .
 Loss on Equity Investments, Net of Taxes .
 Net income .
 Liquidity and Capital Resources
  Year Ended December 31,2005
    
    2006
    
    2007RMB
    
    RMB
    
    RMB
    
    US$(unaudited)(in thousands)Net cash provided by operating activities
    
    
    184,541
    
    
    
    598,910
    
    
    
    616,596
    
    
    
    84,528Net cash used in investing activities
    
    
    (483,651
    )
    
    
    (204,827
    )
    
    
    (461,585
    )
    
    
    (63,277
    )Net cash provided by financing activities
    
    
    3,832
    
    
    
    58,040
    
    
    
    1,174,645
    
    
    
    161,029Effect of foreign exchange rate changes on cash
    
    
    (9,882
    )
    
    
    (2,522
    )
    
    
    (52,220
    )
    
    
    (7,159
    )Net (decrease) increase in cash and cash equivalents
    
    
    (305,160
    )
    
    
    449,601
    
    
    
    1,277,436
    
    
    
    175,121Cash and cash equivalents at beginning of year
    
    
    793,405
    
    
    
    488,245
    
    
    
    937,846
    
    
    
    128,567Cash and cash equivalents at end of year
    
    
    488,245
    
    
    
    937,846
    
    
    
    2,215,282
    
    
    
    303,688
    55




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##### Table of Contents



Capital Expenditures
 Capital
Expenditures .
 Research and Development
  Trend Information
  Off-Balance Sheet Arrangements
  Contractual Obligations
  Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 years(in US$)Operating Lease Obligations
    
    
    6,813,886
    
    
    
    5,985,335
    
    
    
    828,551
    
    
    
    
    
    
    
    
 56




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##### Table of Contents



Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 years(in US$)Advance payment of
WoW minimum
royalties
    
    
    10,312,474
    
    
    
    5,156,237
    
    
    
    5,156,237
    
    
    
    
    
    
    
    
   US$License fees
    
    
    10,900,000Minimum royalty fees
    
    
    69,948,134Guaranteed
marketing expenses
    
    
    20,000,000100,848,134
   Game
    
    Developer
    
    DescriptionRagnarok Online 2
    
    Gravity Co. Ltd.
    
    3D MMORPGEmail Chronicle Online
    
    Gravity Co. Ltd.
    
    2.5D MMORPGHuxley
    
    Webzen Inc.
    
    3D first-person shooting MMORPGAudition 2
    
    G10 Entertainment
    
    Casual dancing gameEA Sports FIFA Online
    
    Electronic Arts, Inc.
    
    Casual soccer gameBurn the Floor
    
    Ideas Corporation
    
    Casual dancing game
  Quantitative and Qualitative Disclosures about Market Risk
 Interest Rate Risk .
 57




---



##### Table of Contents



Foreign Exchange Risk .
   Recent Accounting Pronouncements
    58




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##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Senior Management
  Directors, Director Nominees and Executive Officers
    
    Age
    
    Position/TitleJun Zhu
    
    
    41
    
    
    Chairman of the Board and Chief Executive OfficerCheung Kin Au-Yeung(1)
    
    
    60
    
    
    DirectorDavin Alexander Mackenzie(2)(3)
    
    
    47
    
    
    Independent DirectorChao Y. Wang(2)(3)
    
    
    43
    
    
    Independent Director
 59




---



##### Table of Contents



Directors, Director Nominees and Executive Officers
    
    Age
    
    Position/TitleKa Keung Yeung(2)(3)
    
    
    49
    
    
    Independent DirectorXiaowei Chen(4)
    
    
    40
    
    
    PresidentTony Tse(5)
    
    
    38
    
    
    Chief Financial OfficerXudong He(5)
    
    
    36
    
    
    Vice PresidentAlan Chen(6)
    
    
    47
    
    
    Vice President and Chief Technology OfficerLingdong Huang
    
    
    31
    
    
    Vice PresidentFumin Lin
    
    
    41
    
    
    Vice PresidentSwun Woo Park
    
    
    35
    
    
    Vice PresidentChris Shen
    
    
    39
    
    
    Vice President  MarketingYong Wang
    
    
    41
    
    
    Vice PresidentJun Yao
    
    
    38
    
    
    Vice PresidentDonglei Fang
    
    
    32
    
    
    Vice President
 
 (1)
    
    Cheung Kin Au-Yeung is appointed as a non-executive director to replace the retiring Stephen
Cheuk Kin Law effective December 14, 2007.(2)
    
    Member of Compensation Committee.(3)
    
    Member of Audit Committee.(4)
    
    Xiaowei Chen was appointed as President effective May 16, 2008.(5)
    
    Hannah Lee resigned as Senior Vice President and Chief Financial Officer, effective as of the
end of February 2008. Xudong He was appointed as an Acting Chief Financial Officer effective
March 1, 2008. Tony Tse, who was appointed as Chief Financial Officer effective April 7,
2008, resigned from this position for personal and family reasons effective July 2008. George
Lai has been appointed Chief Financial Officer of our company and will assume responsibilities
in July 2008.(6)
    
    Alan Chen resigned as Vice President effective June 2007.  Biographical Information
 Jun Zhu
 Cheung Kin Au-Yeung
 Davin Alexander Mackenzie
 60




---



##### Table of Contents



Chao Y. Wang
 Ka Keung Yeung
 Xiaowei Chen
 Tony Tse
 Xudong (Oliver) He
 Lingdong Huang
 Fumin (Benjamin) Lin
 61




---



##### Table of Contents



Swun Woo (Tony) Park
 Chris Shen
 Yong Wang
 Jun Yao
 Dong Lei Fang
 Compensation of Directors and Executive Officers
  Amended 2004 Stock Option Plan
  62




---



##### Table of Contents



Total Number of Ordinary
    
    ExerciseShares Underlying Options
    
    Price RangeGranted*
    
    (in US$)Jun Zhu
    
    
    950,000
    
    
    38.54Hannah Lee
    
    
    138,324
    
    
    17.00-19.96Jun Yao
    
    
    112,272
    
    
    17.00-30.90Yong Wang
    
    
    96,102
    
    
    17.00Chris Shen
    
    
    40,000
    
    
    19.96-30.90Stephen Law**
    
    
    14,300
    
    
    17.00Chao Y. Wang
    
    
    39,300
    
    
    17.00 -38.54Ka Keung Yeung
    
    
    39,300
    
    
    17.50 -38.54Davin Alexander Mackenzie
    
    
    39,300
    
    
    17.50 -38.54Lingdong Huang
    
    
    36,450
    
    
    17.00 -30.90Other individuals as a group
    
    
    756,360
    
    
    17.00 -30.90
 
 *
    
    Excluding 355,483 options forfeited as of June 30, 2008 pursuant to the terms of our Amended
2004 Stock Option Plan.**
    
    Stephen Laws option vesting period was extended until June 13, 2008. Mr. Law exercised
1,788 options on May 28, 2008, at an exercise price of US$24.56, for an aggregate of
US$43,913.28.  Termination of Options
 Administration
 Vesting Schedule
 Option Agreement
 Option Exercise
 63




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##### Table of Contents



Third-Party Acquisition
 Changes in Capitalization and Other Adjustments
 Termination of Plan
 Board Practices
  Board of Directors
  Committees of the Board of Directors
 Audit Committee .
  
    
    selecting the independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by the independent auditors;
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##### Table of Contents




    
    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 seven 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 as 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 pension and welfare
benefit plans.
 Option Administrative Committee .
 Duties of Directors
  Terms of Directors
  65




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##### Table of Contents



Voting Agreement
  Employees
  Share Ownership
    Ordinary Shares Beneficially OwnedName
    
    Number(1)
    
    %(2)Directors and executive officers:Jun Zhu(3)
    
    
    6,007,334
    
    
    
    20.50All Directors and Senior Executive Officers as a Group(4)
    
    
    6,097,334
    
    
    
    20.81Principal shareholders:Bosma Limited(5)
    
    
    5,145,065
    
    
    
    17.56EA International Studio and Publishing Ltd.(6)
    
    
    4,506,829
    
    
    
    15.38
 
 (1)
    
    Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission, and includes voting or investment power with respect to the securities.(2)
    
    Percentage of beneficial ownership is based on 29,606,629 ordinary shares outstanding as of
May 31, 2008, excluding shares underlying outstanding options as
of that date and shares repurchased pursuant to our share repurchase
program but not yet accounted for in our member register. Under §37(3)(g)
of the Cayman Islands Companies Law (2007 Revision), shares redeemed or purchased under §37 shall be treated as canceled on redemption or purchase, and
the amount of a companys share capital shall be diminished by the nominal value of those shares accordingly. It is, however,
the register of members which determines whether shares have been validly issued, transferred or repurchased. Board resolutions
approving and executing the repurchase of shares pursuant to our share repurchase program have been adopted, but such purchases have not yet been reflected
in our register of members. For purposes of this annual report on Form 20-F, we have determined beneficial ownership based upon the
number of outstanding shares reflected in our register of members, but have calculated earnings per share and other financial metrics to
take into account repurchases made pursuant to our share repurchase program.(3)
    
    Consists of 6,000,000 ordinary shares held by Incsight Limited, a British Virgin Islands
company 100% owned by Mr. Zhu and 7,334 ordinary shares beneficially owned by Mr. Zhu. The
business address for Mr. 
 66




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##### Table of Contents



Zhu is Building No. 3, 690 Bibo Road, Zhangjiang Hi-tech Park, Pudong New Area, Shanghai
201203, Peoples Republic of China.(4)
    
    Shares owned by all of our directors and executive officers as a group include shares
beneficially owned by Jun Zhu and Xudong He, and exclude shares underlying options held by our
directors and officers.(5)
    
    Consists of 5,145,065 ordinary shares held by Bosma. 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.(6)
    
    Consists of 4,506,829 shares owned by EA International Studio and Publishing Ltd., a Bermuda
corporation. The address for EA International Studio and Publishing Ltd. is LOM Building, 27
Reid Street, Hamilton, HM 11, Bermuda. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Major Shareholders
  Related Party Transactions
 Arrangements with Affiliated PRC Entities
     67




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##### Table of Contents



Master Agreement for MU www.muchina.com
 Master Agreement for WoW
 Domain Name License Agreement www.the9.com
 Exclusive Technical Service Agreement
 Shareholder Voting Proxy Agreements
 Call Option Agreements
 Loan Agreements
 68




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##### Table of Contents



Equity Pledge Agreements
 Transactions with China Interactive
   Investments in Affiliated Companies
     69




---



##### Table of Contents



Stock Option Grants
  Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 Consolidated Statements and Other Financial Information
  Legal Proceedings
  Dividend Policy
    70




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##### Table of Contents



Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
 Offering and Listing Details
    Sales PriceHigh
    
    LowAnnual Highs and Lows2006
    
    
    32.87
    
    
    
    15.502007
    
    
    52.44
    
    
    
    19.56Quarterly Highs and LowsFirst Quarter 2006
    
    
    31.94
    
    
    
    15.50Second Quarter 2006
    
    
    31.77
    
    
    
    21.56Third Quarter 2006
    
    
    27.15
    
    
    
    20.75Fourth Quarter 2006
    
    
    32.87
    
    
    
    20.80First Quarter 2007
    
    
    39.73
    
    
    
    29.80Second Quarter 2007
    
    
    46.98
    
    
    
    33.34Third Quarter 2007
    
    
    52.44
    
    
    
    31.66Fourth Quarter 2007
    
    
    36.25
    
    
    
    19.56First Quarter 2008
    
    
    23.75
    
    
    
    15.05Second Quarter 2008 (through June 25)
    
    
    27.80
    
    
    
    18.70Monthly Highs and LowsDecember 2007
    
    
    25.85
    
    
    
    21.15January 2008
    
    
    23.75
    
    
    
    15.05February 2008
    
    
    22.90
    
    
    
    16.36March 2008
    
    
    21.72
    
    
    
    17.07April 2008
    
    
    22.16
    
    
    
    18.70May 2008
    
    
    27.80
    
    
    
    20.77June 2008 (through June 25)
    
    
    26.54
    
    
    
    21.92
 Plan of Distribution
  Markets
  Selling Shareholders
 71




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##### Table of Contents



Dilution
  Expenses of the Issue
  
 ITEM 10. ADDITIONAL INFORMATION
 Share Capital
  Memorandum and Articles of Association
  Material Contracts
  Exchange Controls
   72




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##### Table of Contents



Taxation
  Cayman Islands Taxation
  United States Federal Income Taxation
   
    
    banks;
    
    financial institutions;
    
    insurance companies;
    
    broker dealers;
    
    traders that elect to mark to market;
    
    tax-exempt entities;
 
 73




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##### Table of Contents




    
    persons liable for alternative minimum tax;
    
    persons holding an ADS or ordinary share as part of a straddle, hedging, conversion
or integrated transaction;
    
    holders that actually or constructively own 10% or more of our voting stock;
    
    persons holding ADSs or ordinary shares through partnerships or other pass-through
entities; or
    
    persons who acquired ADSs or ordinary shares pursuant to the exercise of any
employee share option or otherwise as consideration.
   
    
    a citizen or individual resident of the United States;
    
    a corporation or partnership organized under the laws of the United States, any
State or the District of Columbia;
    
    an estate whose income is subject to United States federal income taxation
regardless of its source;
    
    a trust that (1) is subject to the supervision of a court within the United States
and the control of one or more United States persons or (2) has a valid election in
effect under applicable U.S. Treasury regulations to be treated as a United States
person.
    U.S. Holders
 Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
  74




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##### Table of Contents



Taxation of Disposition of Shares
  Passive Foreign Investment Company
  75




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##### Table of Contents




    
    at least 75% of its gross income is passive income (the income test), or
    
    at least 50% of the value of its assets (based on an average of the quarterly values
of the assets during a taxable year) is attributable to assets that produce or are held
for the production of passive income (the asset test).
    
    
    the excess distribution or 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 year prior to the
first taxable year in which we were a passive foreign investment company, will be
treated as ordinary income, and
    
    the amount allocated to each other year will be subject to tax at the highest tax
rate in effect for that year and the interest charge generally applicable to
underpayments of tax will be imposed on the resulting tax attributable to each such
year.
    76




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##### Table of Contents



Non-U.S. Holders
    Information Reporting and Backup Withholding
   
    
    fails to provide an accurate taxpayer identification number,
    
    is notified by the Internal Revenue Service that backup withholding will be
required, or
 77




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##### Table of Contents




    
    fails to comply with applicable certification requirements.
   Dividends and Paying Agents
  Statement by Experts
  Documents on Display
     Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  78




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##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
     Managements Plan for Remediation of Material Weaknesses
  79




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##### Table of Contents



Changes in Internal Control
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2005
    
    2006
    
    2007RMB
    

RMB
    


RMB
    

US$Audit fees(1)
    
    3,066,676
    
    
    4,565,399
    
    
    8,537,214
    
    
    1,170,347Audit-related fees(2)
    
    Nil
    
    Nil
    
    Nil
    
    NilTax fees
    
    Nil
    
    Nil
    
    
    951,423
    
    
    130,428All other fees
    
    Nil
    
    
    11,706
    
    
    10,942
    
    
    1,500
 
 (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 comfort letter, rendering of listing advice, and other
audit-related services for the years ended December 31, 2005, 2006 and 2007. 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
  
 PART III
 80




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##### Table of Contents



ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 Exhibit Number
    
    Document1.1
    
    Amended and Restated Memorandum and Articles of Association of The9
Limited (incorporated by reference to Exhibit 3.2 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)2.1
    
    Specimen American Depositary Receipt of The9 Limited (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 The9 Limited (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)4.1
    
    Form of The9 Limited Stock Option Plans (incorporated by reference to
Exhibit 10.1 from our Registration Statement on Form F-1 (file no.
333-120810) on November 26, 20044.2
    
    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)4.5
    
    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
 81




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##### Table of Contents



Exhibit Number
    
    DocumentAmendment 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
    
    Shareholders Agreement, dated March 10, 2004, by and between China
Interactive (Singapore) Pte Ltd. and GameNow.net (Hong Kong) Limited
(incorporated by reference to Exhibit 10.13 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
    
    License and Distribution Agreement, dated February 3, 2004, by and between
Vivendi Universal Games Inc. and China The9 Interactive (incorporated by
reference to Exhibit 10.14 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
    
    Term Sheet, dated March 10, 2004, by and among C9I, China Interactive
(Singapore) Pte Ltd. and GameNow.net (Hong Kong) Limited (incorporated by
reference to Exhibit 10.15 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
    
    Amendment to Term Sheet, dated September 29, 2004, by and between China
Interactive (Singapore) Pte Ltd. and GameNow.net (Hong Kong) Limited
(incorporated by reference to Exhibit 10.16 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 Shanghai Municipality Property Lease Commodity Housing
Pre-lease Contract, dated July 4, 2003, between The9 Computer Technology
Consulting (Shanghai) Co., Ltd. and Shanghai CITIC Square Co., Ltd. with
respect to the premises where the Registrants principal executive offices
are located (incorporated by reference to Exhibit 10.18 from our
Registration Statement on Form F-1 (file no. 333-120810) filed with the
Securities and Exchange Commission on November 26, 2004)4.16
    
    Subscription and Purchase Agreement, dated April 2, 2004, by and among
The9 Limited, 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)4.17
    
    Shareholders Agreement, dated April 16, 2004, by and among The9 Limited,
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)4.18
    
    Memorandum of Agreement, dated November 9, 2004, between The9 Limited 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)4.19
    
    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)
 82




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##### Table of Contents



Exhibit Number
    
    Document4.20
    
    Translation of Mystina Online Cooperative Agreement, dated July 19, 2004,
between Lager (Beijing) Information Co., Ltd and The9 Limited
(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)4.21
    
    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)4.22
    
    Translation of Shanghai Municipality Property Lease Commodity Housing
Pre-lease Contract, dated May 17, 2005, between The9 Computer Technology
Consulting (Shanghai) Co., Ltd. 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)4.23
    
    Translation of Presale Agreement, dated March 17, 2005, between The9
Computer Technology Consulting (Shanghai) Co., Ltd. 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)4.24
    
    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)4.25
    
    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)4.26
    
    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)4.27
    
    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)4.28
    
    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)4.29
    
    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)4.30
    
    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)4.31
    
    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)4.32
    
    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).
 83




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##### Table of Contents



Exhibit Number
    
    Document4.33
    
    Translation of Share Transfer Agreement, dated August 14, 2006, between
Qin Jie, Wang Yong, Zhu Jun and Shanghai The9 Information Technology Co.,
Limited (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)4.34
    
    Translation of Novation Agreement, dated August 14, 2006, between Qin Jie,
Wang Yong, Zhu Jun, The9 Computer Technology Consulting (Shanghai) Co.,
Limited and Shanghai The9 Information Technology Co., Limited
(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)4.35
    
    Translation of Supplementary Agreement between Wang Yong, Zhu Jun and The9
Computer Technology Consulting (Shanghai) Co., Limited (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)4.36
    
    Amended 2004 Stock Option Plan (incorporated by reference to Exhibit 4.36
from our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on June 30, 2006)4.37*
    
    Investment Agreement by and between The9 Limited and EA International
(Studio and Publishing) Ltd.8.1
    
    Subsidiaries of The9 Limited
(incorporated by reference to Exhibit 8.1 from our Annual Report
on Form 20-F filed with the Securities and Exchange Commission
on June 28, 2007)11.1
    
    Amended Code of Business Conduct and Ethics of The9 Limited (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 PRC Counsel15.3*
    
    Consent of PricewaterhouseCoopers
 
 *
    
    Filed with this Form 20-F. 84




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##### 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
  Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statement of Operations and Comprehensive Income for the Years ended December 31, 2005, 2006 and 2007
    
    
    F-4Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    
    F-5Consolidated Statements of Changes in Shareholders Equity for the Years ended December 31, 2005, 2006 and 2007
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2006 and 2007
    
    
    F-8Notes to Consolidated Financial Statements for the Years Ended December 31, 2005, 2006 and 2007
    
    
    F-10
  F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 TO THE SHAREHOLDERS OF THE9 LIMITED:
   F-2




---



##### Table of Contents



F-3




---



##### Table of Contents



THE9 LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 Note
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(Unaudited,Note3)Revenues:Online game services
    
    
    
    
    
    
    466,554,760
    
    
    
    1,027,963,574
    
    
    
    1,330,977,217
    
    
    
    182,460,617Game operating support, website
solutions and advertisement
    
    
    
    
    
    
    6,050,065
    
    
    
    4,800,019
    
    
    
    8,544,472
    
    
    
    1,171,342Short message services
    
    
    
    
    
    
    3,429,315
    
    
    
    444,196
    
    
    
    602,705
    
    
    
    82,623Other revenues
    
    
    
    
    
    
    13,156,712
    
    
    
    5,119,990
    
    
    
    10,005,050
    
    
    
    1,371,570489,190,852
    
    
    
    1,038,327,779
    
    
    
    1,350,129,444
    
    
    
    185,086,152Sales taxes
    
    
    
    
    
    
    (24,164,182
    )
    
    
    (52,501,980
    )
    
    
    (70,522,616
    )
    
    
    (9,667,784
    )Net revenues
    
    
    
    
    
    
    465,026,670
    
    
    
    985,825,799
    
    
    
    1,279,606,828
    
    
    
    175,418,368Cost of services
    
    
    
    
    
    
    (240,415,737
    )
    
    
    (524,031,705
    )
    
    
    (700,046,829
    )
    
    
    (95,967,816
    )Gross profit
    
    
    
    
    
    
    224,610,933
    
    
    
    461,794,094
    
    
    
    579,559,999
    
    
    
    79,450,552Operating expenses:Product development
    
    
    
    
    
    
    (40,642,275
    )
    
    
    (30,781,632
    )
    
    
    (41,430,087
    )
    
    
    (5,679,556
    )Sales and marketing
    
    
    
    
    
    
    (61,805,046
    )
    
    
    (59,574,787
    )
    
    
    (103,263,236
    )
    
    
    (14,156,120
    )General and administrative
    
    
    
    
    
    
    (56,721,646
    )
    
    
    (100,429,543
    )
    
    
    (180,297,691
    )
    
    
    (24,716,597
    )Impairment of intangible assets
    
    
    11
    
    
    
    (5,729,338
    )
    
    
    (853,165
    )
    
    
    (18,704,416
    )
    
    
    (2,564,146
    )Total operating expenses
    
    
    
    
    
    
    (164,898,305
    )
    
    
    (191,639,127
    )
    
    
    (343,695,430
    )
    
    
    (47,116,419
    )Profit from operations
    
    
    
    
    
    
    59,712,628
    
    
    
    270,154,967
    
    
    
    235,864,569
    
    
    
    32,334,133Interest income, net
    
    
    
    
    
    
    10,021,605
    
    
    
    9,136,273
    
    
    
    50,655,699
    
    
    
    6,944,274Other income (expenses), net
    
    
    5
    
    
    
    14,467,150
    
    
    
    28,416,722
    
    
    
    (30,053,620
    )
    
    
    (4,119,982
    )Income before income tax (expense)
benefit, gain on investment
disposal, impairment loss on
investments, loss on equity
investments and minority interests
    
    
    
    
    
    
    84,201,383
    
    
    
    307,707,962
    
    
    
    256,466,648
    
    
    
    35,158,425Income tax (expense) benefit
    
    
    13
    
    
    
    (168,255
    )
    
    
    2,669,763
    
    
    
    (9,268,632
    )
    
    
    (1,270,616
    )Income before gain on investment
disposal, impairment loss on
investments, loss on equity
investments and minority interests
    
    
    
    
    
    
    84,033,128
    
    
    
    310,377,725
    
    
    
    247,198,016
    
    
    
    33,887,809Gain on investment disposal
    
    
    7
    
    
    
    6,715,917
    
    
    
    23,409,702
    
    
    
    
    
    
    
    Impairment loss on investments
    
    
    7
    
    
    
    
    
    
    
    (20,401,915
    )
    
    
    (627,380
    )
    
    
    (86,006
    )Loss on equity investments, net of
taxes
    
    
    7
    
    
    
    (13,736,790
    )
    
    
    (908,464
    )
    
    
    (5,678,682
    )
    
    
    (778,478
    )Minority interests
    
    
    
    
    
    
    (4,540,568
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    72,471,687
    
    
    
    312,477,048
    
    
    
    240,891,954
    
    
    
    33,023,325Other comprehensive income (loss):Translation adjustments
    
    
    
    
    
    
    73,963
    
    
    
    (59,346
    )
    
    
    
    
    
    
    Unrealized gain on
available-for-sale investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,643,131
    
    
    
    1,870,306Comprehensive income
    
    
    
    
    
    
    72,545,650
    
    
    
    312,417,702
    
    
    
    254,535,085
    
    
    
    34,893,631Earnings per share
    
    
    20- Basic
    
    
    
    
    
    
    3.00
    
    
    
    12.78
    
    
    
    8.79
    
    
    
    1.20- Diluted
    
    
    
    
    
    
    2.92
    
    
    
    12.72
    
    
    
    8.72
    
    
    
    1.19Weighted average shares outstanding
    
    
    20- Basic
    
    
    
    
    
    
    24,192,113
    
    
    
    24,456,507
    
    
    
    27,406,263
    
    
    
    27,406,263- Diluted
    
    
    
    
    
    
    24,804,997
    
    
    
    24,565,947
    
    
    
    27,640,626
    
    
    
    27,640,626
  F-4




---



##### Table of Contents



THE9 LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2006 AND 2007
 December 31,
    
    December 31,
    
    December 31,Note
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    US$(Unaudited,Note 3)ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    937,845,817
    
    
    
    2,215,281,857
    
    
    
    303,687,914Accounts receivable
    
    
    
    
    10,174,484
    
    
    
    26,654,274
    
    
    
    3,653,973Advances to suppliers
    
    
    
    
    9,036,620
    
    
    
    8,943,273
    
    
    
    1,226,013Prepayments and other current assets
    
    
    
    
    69,153,131
    
    
    
    39,064,809
    
    
    
    5,355,304Prepaid royalties
    
    12
    
    
    27,558,207
    
    
    
    71,937,382
    
    
    
    9,861,731Deferred costs
    
    12,2<13>
    
    
    33,324,942
    
    
    
    47,759,013
    
    
    
    6,547,174Deferred tax assets, current
    
    13
    
    
    
    
    
    
    5,118,345
    
    
    
    701,662Total current assets
    
    
    
    
    1,087,093,201
    
    
    
    2,414,758,953
    
    
    
    331,033,771Investments in equity investees
    
    7
    
    
    14,542,336
    
    
    
    18,236,274
    
    
    
    2,499,969Available-for-sale investment
    
    8
    
    
    15,575,269
    
    
    
    29,218,400
    
    
    
    4,005,484Property, equipment and software
    
    9
    
    
    227,512,006
    
    
    
    344,393,472
    
    
    
    47,212,112Goodwill
    
    6
    
    
    30,199,751
    
    
    
    30,199,751
    
    
    
    4,140,015Intangible assets
    
    11
    
    
    244,271,279
    
    
    
    277,264,136
    
    
    
    38,009,505Land use right
    
    10
    
    
    
    
    
    
    83,719,665
    
    
    
    11,476,937Prepayment for equipments
    
    
    
    
    
    
    
    
    18,500,000
    
    
    
    2,536,123Long-term deposits
    
    
    
    
    
    
    
    
    454,212
    
    
    
    62,267Deferred tax assets, non-current
    
    13
    
    
    5,391,123
    
    
    
    29,356,533
    
    
    
    4,024,420Total assets
    
    
    
    
    1,624,584,965
    
    
    
    3,246,101,396
    
    
    
    445,000,603LIABILITIESCurrent liabilities:Accounts payable
    
    
    
    
    12,692,978
    
    
    
    48,946,062
    
    
    
    6,709,903Due to related parties
    
    19
    
    
    332,797
    
    
    
    77,052
    
    
    
    10,563Income tax payable
    
    
    
    
    
    
    
    
    2,329,457
    
    
    
    319,340Other taxes payable
    
    
    
    
    23,589,754
    
    
    
    55,234,788
    
    
    
    7,572,011Advances from customers
    
    2<13>
    
    
    88,040,975
    
    
    
    118,156,157
    
    
    
    16,197,757Deferred revenue
    
    2<13>
    
    
    111,302,531
    
    
    
    166,916,111
    
    
    
    22,882,147Other payables and accruals
    
    14
    
    
    52,467,643
    
    
    
    48,351,220
    
    
    
    6,628,358Total current liabilities
    
    
    
    
    288,426,678
    
    
    
    440,010,847
    
    
    
    60,320,079Commitments and contingencies
    
    22Shareholders equityOrdinary shares(US$0.01 par value;
100,000,000 shares authorized,
24,688,038 and 28,763,188 shares
issued and outstanding as of December
31, 2006 and 2007, respectively)
    
    
    
    
    2,041,673
    
    
    
    2,350,463
    
    
    
    322,220Additional paid-in capital
    
    
    
    
    941,786,807
    
    
    
    2,218,516,672
    
    
    
    304,131,367Statutory reserves
    
    2<22>
    
    
    20,745,422
    
    
    
    20,745,422
    
    
    
    2,843,942Accumulated other comprehensive income
    
    8
    
    
    
    
    
    
    13,643,131
    
    
    
    1,870,306Retained earnings
    
    
    
    
    371,584,385
    
    
    
    550,834,861
    
    
    
    75,512,689Total shareholders equity
    
    
    
    
    1,336,158,287
    
    
    
    2,806,090,549
    
    
    
    384,680,524Total liabilities and shareholders equity
    
    
    
    
    1,624,584,965
    
    
    
    3,246,101,396
    
    
    
    445,000,603
  F-5




---



##### Table of Contents



THE9 LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 Deferred
    
    
    
    
    
    Accumulated otherOrdinary shares
    
    Additional paid-in
    
    stock-based
    
    Statutory
    
    comprehensive
    
    
    
    
    
    Total shareholders(US$0.01 par value)
    
    capital
    
    compensation
    
    reserves
    
    (loss) income
    
    Retained earnings
    
    equityNumber ofshares
    
    Par valueRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBBalance as of
December 31, 2004
    
    
    24,186,250
    
    
    
    2,001,781
    
    
    
    855,797,000
    
    
    
    
    
    
    
    54,172
    
    
    
    (14,617
    )
    
    
    7,326,900
    
    
    
    865,165,236Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,471,687
    
    
    
    72,471,687Cumulative
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,963
    
    
    
    
    
    
    
    73,963Issuance of
ordinary shares
from stock option
exercise
    
    
    27,880
    
    
    
    2,252
    
    
    
    3,829,387
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,831,639Options granted to
9Webzens employees
    
    
    
    
    
    
    
    
    
    
    372,981
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    372,981Employee share
based compensation
    
    
    
    
    
    
    
    
    
    
    214,974
    
    
    
    (214,974
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
deferred
stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,110Balance as of
December 31, 2005
    
    
    24,214,130
    
    
    
    2,004,033
    
    
    
    860,214,342
    
    
    
    (145,864
    )
    
    
    54,172
    
    
    
    59,346
    
    
    
    79,798,587
    
    
    
    941,984,616Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312,477,048
    
    
    
    312,477,048Appropriations to
statutory reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,691,250
    
    
    
    
    
    
    
    (20,691,250
    )
    
    
    Cumulative
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,346
    )
    
    
    
    
    
    
    (59,346
    )Adoption of SFAS
123R (Note 2<17>)
    
    
    
    
    
    
    
    
    
    
    (145,864
    )
    
    
    145,864
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of
ordinary shares
from stock option
exercise (Note 18)
    
    
    473,908
    
    
    
    37,640
    
    
    
    63,978,786
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,016,426Employee share
based compensation
    
    
    
    
    
    
    
    
    
    
    17,739,543
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,739,543Balance as of
December 31, 2006
    
    
    24,688,038
    
    
    
    2,041,673
    
    
    
    941,786,807
    
    
    
    
    
    
    
    20,745,422
    
    
    
    
    
    
    
    371,584,385
    
    
    
    1,336,158,287
 F-6




---



##### Table of Contents



Deferred
    
    
    
    
    
    
    Accumulated otherOrdinary shares
    
    
    Additional paid-in
    
    
    stock-based
    
    
    Statutory
    
    
    comprehensive
    
    
    
    
    
    
    Total shareholders(US$0.01 par value)
    
    
    capital
    
    
    compensation
    
    
    reserves
    
    
    income
    
    
    Retained earnings
    
    
    equityNumber ofshares
    
    Par valueRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    240,891,954
    
    
    
    240,891,954Issuance of
ordinary shares to
Electronic Arts
Inc. (EA) (Note 16)
    
    
    4,506,829
    
    
    
    344,944
    
    
    
    1,251,501,403
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,251,846,347Issuance of
ordinary shares
from stock option
exercise
    
    
    179,436
    
    
    
    13,785
    
    
    
    24,136,264
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,150,049Repurchase and
retirement of ADSs
(Note 15)
    
    
    (611,115
    )
    
    
    (49,939
    )
    
    
    (45,635,968
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61,641,478
    )
    
    
    (107,327,385
    )Employee share
based compensation
(Note 18)
    
    
    
    
    
    
    
    
    
    
    46,728,166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,728,166Unrealized gain on
available-for-sale
investment (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,643,131
    
    
    
    
    
    
    
    13,643,131Balance as of
December 31, 2007
    
    
    28,763,188
    
    
    
    2,350,463
    
    
    
    2,218,516,672
    
    
    
    
    
    
    
    20,745,422
    
    
    
    13,643,131
    
    
    
    550,834,861
    
    
    
    2,806,090,549Balance as of
December 31, 2007
(US$ except for number of shares, unaudited,
Note 3)
    
    
    28,763,188
    
    
    
    322,220
    
    
    
    304,131,367
    
    
    
    
    
    
    
    2,843,942
    
    
    
    1,870,306
    
    
    
    75,512,689
    
    
    
    384,680,524
  F-7




---



##### Table of Contents



THE9 LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 Note
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$(Unaudited,Note 3)Cash flows from operating activities:Net income
    
    
    
    
    
    
    72,471,687
    
    
    
    312,477,048
    
    
    
    240,891,954
    
    
    
    33,023,325Adjustments for:Deferred taxes
    
    
    
    
    
    
    (437,755
    )
    
    
    (3,286,659
    )
    
    
    (29,083,755
    )
    
    
    (3,987,025
    )(Gain) loss on disposal of property and
equipment
    
    
    
    
    
    
    (38,280
    )
    
    
    119,534
    
    
    
    (275
    )
    
    
    (38
    )Gain on disposal of investment
    
    
    7
    
    
    
    (6,715,917
    )
    
    
    (23,409,702
    )
    
    
    
    
    
    
    Impairment of intangible asset
    
    
    11
    
    
    
    5,729,338
    
    
    
    853,164
    
    
    
    18,704,416
    
    
    
    2,564,146Impairment on investment
    
    
    7
    
    
    
    
    
    
    
    20,401,915
    
    
    
    627,380
    
    
    
    86,006Depreciation and amortization of
property, equipment and software
    
    
    9
    
    
    
    39,463,381
    
    
    
    76,158,886
    
    
    
    122,658,272
    
    
    
    16,814,942Amortization of land use right
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    1,440,684
    
    
    
    197,500Amortization of intangible assets
    
    
    11
    
    
    
    33,792,069
    
    
    
    90,286,523
    
    
    
    87,865,492
    
    
    
    12,045,279Loss on equity investments, net of taxes
    
    
    7
    
    
    
    49,378,930
    
    
    
    908,464
    
    
    
    5,678,682
    
    
    
    778,478Minority interests
    
    
    
    
    
    
    4,540,568
    
    
    
    
    
    
    
    
    
    
    
    Non-cash interest expense
    
    
    
    
    
    
    2,057,996
    
    
    
    803,605
    
    
    
    
    
    
    
    Exchange loss
    
    
    5
    
    
    
    9,719,514
    
    
    
    2,480,729
    
    
    
    51,039,667
    
    
    
    6,996,911Non-cash share-based compensation
    
    
    18
    
    
    
    69,110
    
    
    
    17,739,543
    
    
    
    46,728,166
    
    
    
    6,405,857Change in accounts receivable
    
    
    
    
    
    
    6,092,213
    
    
    
    419,382
    
    
    
    (12,029,785
    )
    
    
    (1,649,136
    )Change in advances to suppliers
    
    
    
    
    
    
    (1,530,002
    )
    
    
    637,141
    
    
    
    924,191
    
    
    
    126,695Change in prepayments and other current
assets
    
    
    
    
    
    
    2,756,493
    
    
    
    (421,071
    )
    
    
    (14,820,065
    )
    
    
    (2,031,649
    )Change in prepaid royalties
    
    
    
    
    
    
    (43,013,672
    )
    
    
    15,437,739
    
    
    
    (44,379,175
    )
    
    
    (6,083,839
    )Change in deferred costs
    
    
    
    
    
    
    (24,075,214
    )
    
    
    (9,249,728
    )
    
    
    (14,434,071
    )
    
    
    (1,978,734
    )Change in long-term deposits
    
    
    
    
    
    
    (2,817,872
    )
    
    
    3,132,338
    
    
    
    (454,212
    )
    
    
    (62,267
    )Change in accounts payable
    
    
    
    
    
    
    8,488,462
    
    
    
    (4,773,853
    )
    
    
    38,986,999
    
    
    
    5,344,639Change in due to related parties
    
    
    
    
    
    
    (123,510,090
    )
    
    
    (429,690
    )
    
    
    (255,745
    )
    
    
    (35,059
    )Change in income tax payable
    
    
    
    
    
    
    (607,560
    )
    
    
    
    
    
    
    2,329,457
    
    
    
    319,340Change in other taxes payable
    
    
    
    
    
    
    6,823,675
    
    
    
    15,466,398
    
    
    
    31,645,034
    
    
    
    4,338,145Change in advances from customers
    
    
    
    
    
    
    60,162,789
    
    
    
    26,389,708
    
    
    
    30,115,182
    
    
    
    4,128,421Change in deferred revenue
    
    
    
    
    
    
    74,292,656
    
    
    
    34,787,591
    
    
    
    55,613,580
    
    
    
    7,623,938Change in other payables and accruals
    
    
    
    
    
    
    11,448,761
    
    
    
    21,981,757
    
    
    
    (3,195,793
    )
    
    
    (438,104
    )Net cash provided by operating activities
    
    
    
    
    
    
    184,541,280
    
    
    
    598,910,762
    
    
    
    616,596,280
    
    
    
    84,527,771Cash flows from investing activities:Cash paid for acquisition of C9I minority
interest
    
    
    
    
    
    
    (209,857,681
    )
    
    
    (80,025,757
    )
    
    
    
    
    
    
    Cash paid for investments in equity
investees
    
    
    
    
    
    
    (41,794,726
    )
    
    
    (7,978,454
    )
    
    
    (10,000,000
    )
    
    
    (1,370,877
    )Proceeds from investment disposal
    
    
    
    
    
    
    22,193,050
    
    
    
    7,900,977
    
    
    
    38,691,099
    
    
    
    5,304,074Proceeds
from disposal of property and
equipment
    
    
    
    
    
    
    94,887
    
    
    
    48,452
    
    
    
    8,415
    
    
    
    1,154Purchase of property, equipment and
software
    
    
    
    
    
    
    (242,725,812
    )
    
    
    (78,396,860
    )
    
    
    (269,214,504
    )
    
    
    (36,906,000
    )Purchase of land use right
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    (85,160,349
    )
    
    
    (11,674,437
    )Purchase of intangible assets
    
    
    
    
    
    
    (11,561,284
    )
    
    
    (46,375,740
    )
    
    
    (135,910,465
    )
    
    
    (18,631,654
    )Net cash used in investing activities
    
    
    
    
    
    
    (483,651,566
    )
    
    
    (204,827,382
    )
    
    
    (461,585,804
    )
    
    
    (63,277,740
    )Cash flows from financing activities:Proceeds from stock option exercise
    
    
    
    
    
    
    3,831,639
    
    
    
    58,040,116
    
    
    
    30,126,359
    
    
    
    4,129,954Proceeds from issuance of ordinary shares
to EA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,251,846,347
    
    
    
    171,612,747Repurchase of ADSs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107,327,385
    )
    
    
    (14,713,265
    )Net cash provided by financing activities
    
    
    
    
    
    
    3,831,639
    
    
    
    58,040,116
    
    
    
    1,174,645,321
    
    
    
    161,029,436Effect of foreign exchange rate changes on
cash
    
    
    
    
    
    
    (9,881,974
    )
    
    
    (2,522,346
    )
    
    
    (52,219,757
    )
    
    
    (7,158,687
    )Net (decrease) increase in cash and cash
equivalents
    
    
    
    
    
    
    (305,160,621
    )
    
    
    449,601,150
    
    
    
    1,277,436,040
    
    
    
    175,120,780Cash and cash equivalents, beginning of
year
    
    
    
    
    
    
    793,405,288
    
    
    
    488,244,667
    
    
    
    937,845,817
    
    
    
    128,567,134Cash and cash equivalents, end of year
    
    
    
    
    
    
    488,244,667
    
    
    
    937,845,817
    
    
    
    2,215,281,857
    
    
    
    303,687,914
 F-8




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##### Table of Contents



Note
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$(Unaudited,Note 3)Supplemental disclosure of cash flow
information:Cash paid during the year for income tax
    
    
    
    
    
    
    607,560
    
    
    
    616,896
    
    
    
    36,739,365
    
    
    
    5,036,515Supplemental disclosure of non-cash
investing activities:Accrual related to purchase of
property, equipment and software
    
    
    
    
    
    
    8,062,091
    
    
    
    7,451,744
    
    
    
    1,615,962
    
    
    
    221,529Accrual related to the purchase of
intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,652,300
    
    
    
    500,685Conversion of loan receivable to
investment in affiliated companies
    
    
    
    
    
    
    
    
    
    
    15,917,000
    
    
    
    
    
    
    
    Settlement of loan receivable upon the
acquisition of minority interest
    
    
    
    
    
    
    38,386,260
    
    
    
    
    
    
    
    
    
    
    
    Supplemental disclosure of non-cash
financing activities:Receivable from stock option exercise
    
    
    
    
    
    
    
    
    
    
    5,976,310
    
    
    
    
    
    
    
    
  F-9




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 1. ORGANIZATION AND NATURE OF OPERATIONS
 Company VIE subsidiaries
 Date of
    
    
    
    
    
    Interest heldName of entity
    
    incorporation
    
    Relationship
    
    Direct
    
    IndirectGameNow.net (Hong Kong) Limited (GameNow
Hong Kong)
    
    January 2000
    
    Subsidiary
    
    
    100
    %
    
    
    City GameNet Limited (City GameNet)
    
    January 2000
    
    Subsidiary
    
    
    100
    %
    
    
    The9 Computer Technology Consulting
(Shanghai) Co., Limited. (The9 Computer)
    
    June 2000
    
    Subsidiary
    
    
    
    
    
    
    100
    %China The9 Interactive Limited (C9I)
    
    October 2003
    
    Subsidiary
    
    
    
    
    
    
    100
    %Spring Asia Limited(Spring Asia)
    
    June 2004
    
    Subsidiary *
    
    
    
    
    
    
    China The9 Interactive (Shanghai) Co.,
Limited (C9I Shanghai)
    
    February 2005
    
    Subsidiary
    
    
    
    
    
    
    100
    %Shanghai The9 Information Technology Co.,
Limited. (Shanghai IT)
    
    September 2000
    
    VIE subsidiary
    
    None (Note 2<2>)Shanghai Jiucheng Advertisement Co., Limited. (Shanghai Advertisement)
    
    September 2001
    
    VIE subsidiary
    
    None (Note 2<2>)Shanghai Jiucheng Advertisement Co.,
Limited. (Shanghai Jiucheng
Advertisement)
    
    April 2007
    
    VIE subsidiary
    
    None (Note 2<2>)Well City Limited
    
    November 2005
    
    Subsidiary
    
    
    100
    %
    
    
    Global Star International Development
Limited (Global Star)
    
    March 2006
    
    Subsidiary
    
    
    100
    %
    
    
    City Rise Investments Limited (City Rise)
    
    January 2006
    
    Subsidiary
    
    
    
    
    
    
    100
    %Jiu Chuang Information
Technology(Beijing), Co., Limited (C9I
Beijing)
    
    March 2007
    
    Subsidiary
    
    
    
    
    
    
    100
    %Jiu Jing Information Technology
(Beijing),Co., Limited (Jiu Jing)
    
    April 2007
    
    Subsidiary
    
    
    
    
    
    
    100
    %
 
 *
    
    Spring Asia Limited was disposed to a third party in December 2006 (note 19). F-10




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
  the
Group
 the PRC
 WoW MMORPG
    JJW SUN GE
 MU
  F-11




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
  2. PRINCIPAL ACCOUNTING POLICIES
 <1> Basis of presentation
 US GAAP
  <2> Consolidation
    F-12




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
  <3> Use of estimates
  <4> Foreign currency translation
 RMB PBOC
 <5> Cash and cash equivalents
  <6> 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
  F-13




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
  <7> Goodwill
 SFAS Goodwill and Intangible Assets SFAS 142
 <8> Intangible assets
  Business Combination SFAS 141 contractual-legal separability Accounting for the Impairment
or Disposal of Long-lived Assets SFAS 144
  <9> Equity investments
  F-14




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
   <10> Available-for-sale investment
  <11> Impairment of long-lived assets and intangible assets
  F-15




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 <12>Revenue recognition
 Online game services
       Game operating support, website solutions and advertisement
   F-16




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 Short message services
  Other revenues
  Sales tax
  <13>Advances from customers, deferred revenue and deferred costs
  F-17




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
   <14>Cost of services
  <15>Product development
 Accounting for Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed
 Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, Accounting for Website Development
Costs,
  <16>Sales and marketing costs
  F-18




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 <17>Share-based compensation
       F-19




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 For the yearendedDecember 31, 2005RMBNet income attributable to ordinary shareholders as reported
    
    
    72,471,687Add: share-based compensation expense under APB No. 25
    
    
    69,110Less: share-based compensation expense under SFAS 123
    
    
    (16,799,570
    )Pro forma net income attributable to ordinary shareholders
    
    
    55,741,227Basic earnings per shareAs reported
    
    
    3.00Pro forma
    
    
    2.30Diluted earnings per shareAs reported
    
    
    2.92Pro forma
    
    
    2.25
   For the year
    
    
    For the year
    
    
    For the yearended
    
    
    ended
    
    
    endedDecember 31, 2005
    
    
    December 31, 2006
    
    
    December 31, 2007Risk-free interest rate
    
    
    4.5
    %
    
    
    4.55
    %
    
    
    4.52%-4.88
    %Expected life (years)
    
    
    2.67
    
    
    
    2.71
    
    
    
    2.42-3.33Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Volatility
    
    
    55
    %
    
    
    55
    %
    
    
    50
    %Fair value of options
at grant date
    
    US$
    6.30
    
    
    US$
    7.78
    
    
    US$
    11.71-US$18.15
  F-20




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
  <18>Leases
  <19>Taxation
 Accounting for
Income Taxes
    <20>Employee benefits
  F-21




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
  <21>Repurchase of shares
   <22>Statutory reserves
        F-22




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 <23>Earnings per share
 Computation of Earnings Per Share Participating Securities and the Two-Class Method under FABS Statement No. 128
  <24>Segment reporting
  <25>Comprehensive income
  <26>Dividends
    F-23




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
  <27>Business combination
  3. CONVENIENCE TRANSLATION
  4. VARIABLE INTEREST ENTITIES
   F-24




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
    Master Agreements.
  F-25




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
   Exclusive Technical Service Agreement.
 Shareholder Voting Rights Proxy Agreements
 Call Option Agreements.
 Loan Agreement.
 Equity Pledge Agreements.
 F-26




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 5. OTHER INCOME (EXPENSES), NET
    6. GOODWILL
    
    
    GameNow Hong Kong extended a loan of US$600,000 to China Interactive, active
immediately upon the signing of the term sheet.
    
    China Interactive will be required to transfer 14.9% of the total issued shares of
C9I held by China Interactive to GameNow Hong Kong at the per share price equal to the
aggregate invested amount per share, or approximately US$745,000 in total.
    
    GameNow Hong Kong will be required to lend a further US$4,000,000 upon
completion of the transfer of 14.9% of the total issued shares of C9I held by China
Interactive to GameNow Hong Kong.
  F-27




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 
    
    GameNow Hong Kong entered into a loan agreement with China Interactive. Pursuant to
the agreement, an additional loan of US$4,000,000 was extended to China Interactive.
    At August 26, 2005US$000Net working capital
    
    
    (6,570
    )Net fixed assets
    
    
    6,807Other non-current assets
    
    
    523Intangible assets
    
    
    35,040Goodwill
    
    
    4,200Consideration given
    
    
    40,000
 7. INVESTMENTS IN EQUITY INVESTEES
 Object
Software GFD Beijing
Wanwei Sunmi Rise SIVA
 F-28




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##### Table of Contents



7.1 Investments accounted for under the equity method
  9Webzen
    
    Object
    
    
    
    
    
    BeijingHong Kong
    
    Software
    
    GFD
    
    Wanwei
    
    Sunmi Rise<1>
    
    <2>
    
    <3>
    
    <4>
    
    <5>
    
    TotalBalance at December
31, 2005 (RMB)
    
    
    7,574,259
    
    
    
    28,433,275
    
    
    
    9,466,732
    
    
    
    1,361,727
    
    
    
    
    
    
    
    46,835,993Investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,932,804
    
    
    
    7,932,804Sale of investment
    
    
    
    
    
    
    
    
    
    
    (19,257,813
    )
    
    
    
    
    
    
    
    
    
    
    (19,257,813
    )Share of (loss)
income on equity
investments
    
    
    (4,731,579
    )
    
    
    (2,068,745
    )
    
    
    9,791,081
    
    
    
    (1,361,727
    )
    
    
    (2,195,763
    )
    
    
    (566,733
    )Impairment
    
    
    
    
    
    
    (20,401,915
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,401,915
    )Balance at December
31, 2006 (RMB)
    
    
    2,842,680
    
    
    
    5,962,615
    
    
    
    
    
    
    
    
    
    
    
    5,737,041
    
    
    
    14,542,336Share of (loss)
income on equity
investments
    
    
    (883,108
    )
    
    
    314,087
    
    
    
    
    
    
    
    
    
    
    
    (5,109,661
    )
    
    
    (5,678,682
    )Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (627,380
    )
    
    
    (627,380
    )Balance at December
31, 2007 (RMB)
    
    
    1,959,572
    
    
    
    6,276,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,236,274Balance at December
31, 2007 (US$,
unaudited, Note 3)
    
    
    268,633
    
    
    
    860,459
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,129,092
 F-29




---



##### Table of Contents



<1> Investment in 9Webzen Hong Kong
 Investors Accounting for an Investee When the Investor Has a
Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval
or Veto Rights The Equity Method of Accounting for
Investment in Common Stock,
    December 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    US$(Unaudited)
    
    (Unaudited)
    
    (Unaudited, Note 3)Current assets
    
    
    16,991,436
    
    
    
    18,781,199
    
    
    
    2,574,672Non-current assets
    
    
    4,597,084
    
    
    
    2,523,446
    
    
    
    345,933Current liabilities
    
    
    12,112,917
    
    
    
    14,772,728
    
    
    
    2,025,159Shareholders equity
    
    
    9,475,603
    
    
    
    6,531,917
    
    
    
    895,446
  F-30




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 For the year ended
    
    For the year ended
    
    For the year ended
    
    For the year endedDecember 31, 2005
    
    December 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    RMB
    
    US$(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited, Note 3)Net revenues
    
    
    46,602,500
    
    
    
    9,941,497
    
    
    
    14,224,327
    
    
    
    1,949,980Gross (loss) profit
    
    
    (2,197,925
    )
    
    
    (4,696,730
    )
    
    
    4,064,880
    
    
    
    557,245Net loss
    
    
    (12,237,316
    )
    
    
    (15,803,830
    )
    
    
    (2,943,686
    )
    
    
    (403,543
    )
  <2> Investment in Object Software
   December 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    US$(Unaudited)
    
    (Unaudited)
    
    (Unaudited, Note3)Current assets
    
    
    1,205,023
    
    
    
    9,802,206
    
    
    
    1,343,762Non-current assets
    
    
    5,705,882
    
    
    
    4,446,547
    
    
    
    609,567Current liabilities
    
    
    21,081,145
    
    
    
    26,064,569
    
    
    
    3,573,132Shareholders deficits
    
    
    (14,170,240
    )
    
    
    (11,815,816
    )
    
    
    (1,619,803
    )
  F-31




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 For the year ended
    
    For the year ended
    
    For the year ended
    
    For the year endedDecember 31, 2005
    
    December 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    RMB
    
    US$(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited, Note3)Net revenues
    
    
    13,229,213
    
    
    
    13,528,478
    
    
    
    27,562,610
    
    
    
    3,778,495Operating loss
    
    
    (22,198,691
    )
    
    
    (12,731,000
    )
    
    
    (1,874,574
    )
    
    
    (256,981
    )Net (loss) income
    
    
    (18,012,160
    )
    
    
    (10,144,230
    )
    
    
    1,535,076
    
    
    
    210,440
  <3>Investment in GFD
    For the period from
    
    For the yearJuly 25, 2005 to
    
    endedDecember 31, 2005
    
    Decmeber 31, 2006RMB

    
    RMB(Unaudited)
    
    (Unaudited)Net revenues
    
    
    45,185,978
    
    
    
    163,773,963Operating
(loss) profit
    
    
    (8,578,897
    )
    
    
    40,712,538Net (loss) income
    
    
    (8,907,643
    )
    
    
    38,546,541
 <4> Investment in Beijing Wanwei
  F-32




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
   <5> Investment in Sunmi Rise
 .
  December 31,
    
    December 31,
    
    December 31,2006
    
    2007
    
    2007RMB
    
    RMB
    
    US$(Unaudited)
    
    (Unaudited )
    
    (Unaudited, Note 3)Current assets
    
    
    5,261,126
    
    
    
    4,455,386
    
    
    
    610,779Non-current assets
    
    
    4,244,668
    
    
    
    6,205,314
    
    
    
    850,672Current liabilities
    
    
    8,983,693
    
    
    
    27,245,560
    
    
    
    3,735,031Shareholders
equity (deficit)
    
    
    522,101
    
    
    
    (16,584,860
    )
    
    
    (2,273,580
    )
  For the period fromAugust 1, 2006 to
    
    For the year ended
    
    For the year endedDecember 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    US$(Unaudited)
    
    (Unaudited)
    (Unaudited, Note 3)Net revenues
    
    
    306,282
    
    
    
    472,370
    
    
    
    64,756Operating loss
    
    
    (8,340,733
    )
    
    
    (16,961,741
    )
    
    
    (2,325,246
    )Net loss
    
    
    (8,458,313
    )
    
    
    (17,033,300
    )
    
    
    (2,335,056
    )
  Investment in equity investees
 F-33




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 Loss on equity
investments
 7.2 Investment accounted for under the cost method
  8. AVAILABLE-FOR-SALE INVESTMENT
    F-34




---



##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 9. PROPERTY, EQUIPMENT AND SOFTWARE
  December
    
    December
    
    December31, 2006
    
    31, 2007
    
    31, 2007RMB
    
    RMB
    
    US$(Unaudited, Note 3)Office buildings
    
    
    
    
    
    
    57,563,875
    
    
    
    7,891,300Computer and equipment
    
    
    313,125,239
    
    
    
    504,237,692
    
    
    
    69,124,790Leasehold improvements
    
    
    29,053,716
    
    
    
    5,287,322
    
    
    
    724,827Office furniture and fixtures
    
    
    4,684,950
    
    
    
    6,005,927
    
    
    
    823,339Motor vehicles
    
    
    6,054,354
    
    
    
    8,331,715
    
    
    
    1,142,176Software
    
    
    2,729,911
    
    
    
    10,684,451
    
    
    
    1,464,707Less: accumulated
depreciation and
amortization
    
    
    (128,136,164
    )
    
    
    (247,717,510
    )
    
    
    (33,959,027
    )Net book value
    
    
    227,512,006
    
    
    
    344,393,472
    
    
    
    47,212,112
   10. LAND USE RIGHT
   December
    
    December31, 2007
    
    31, 2007RMB
    
    US$(Unaudited, Note 3)Land use right
    
    
    85,160,349
    
    
    
    11,674,437Less: accumulated amortization
    
    
    (1,440,684
    )
    
    
    (197,500
    )Net book value
    
    
    83,719,665
    
    
    
    11,476,937
  F-35




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 11. INTANGIBLE ASSETS
  December 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    US$(Unaudited, Note 3)Upfront licensing fees
    
    
    91,399,808
    
    
    
    230,962,573
    
    
    
    31,662,130Less: Accumulated amortization
    
    
    (20,854,002
    )
    
    
    (32,015,053
    )
    
    
    (4,388,870
    )Impairment provision
    
    
    (6,582,503
    )
    
    
    (25,286,919
    )
    
    
    (3,466,526
    )63,963,303
    
    
    
    173,660,601
    
    
    
    23,806,734Intangible assets from
business combination relating
to C9I (Note 6)
    
    
    283,701,360
    
    
    
    283,701,360
    
    
    
    38,891,969Less: Accumulated amortization
    
    
    (103,393,384
    )
    
    
    (180,097,825
    )
    
    
    (24,689,198
    )180,307,976
    
    
    
    103,603,535
    
    
    
    14,202,771Net book value
    
    
    244,271,279
    
    
    
    277,264,136
    
    
    
    38,009,505
    RMB
    
    US$(Unaudited, Note 3)2008
    
    
    95,422,430
    
    
    
    13,081,2422009
    
    
    68,782,988
    
    
    
    9,429,3022010
    
    
    38,243,048
    
    
    
    5,242,6522011
    
    
    30,686,110
    
    
    
    4,206,6892012
    
    
    12,144,233
    
    
    
    1,664,825Total
    
    
    245,278,809
    
    
    
    33,624,710
 F-36




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 12. PREPAID ROYALTIES & DEFERRED COSTS
  Hanbitsoft IMC
 Webzen
   13. TAXATION
 Cayman Islands and British Virgin Islands
  Hong Kong
  China
 EIT
 F-37




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 PRC Income Tax Laws
  For the year ended
    
    For the year endedDecember 31, 2005
    
    December 31, 2006RMB
    
    RMBAggregate effect
    
    
    48,947,051
    
    
    
    120,330,643Per share effect  basic
    
    
    2.02
    
    
    
    4.92Per share effect  diluted
    
    
    1.97
    
    
    
    4.90
  For the year ended
    
    For the year endedDecember 31, 2007
    
    December 31, 2007RMB
    
    US$ (Unaudited,Note 3)Aggregate effect
    
    
    52,602,187
    
    
    
    7,211,113Per share effect  basic
    
    
    1.92
    
    
    
    0.26Per share effect  diluted
    
    
    1.90
    
    
    
    0.26
 F-38




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 Composition of income tax (expense) benefit
  For the year ended
    
    For the year ended
    
    For the year ended
    
    For the year endedDecember 31, 2005
    
    December 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    RMB
    
    US$(Unaudited, Note 3)Current income tax expense
    
    
    (606,010
    )
    
    
    (616,896
    )
    
    
    (38,352,387
    )
    
    
    (5,257,641
    )Deferred taxation
    
    
    6,838,895
    
    
    
    12,861,712
    
    
    
    19,288,424
    
    
    
    2,644,206Change in valuation allowance
    
    
    (6,401,140
    )
    
    
    (9,575,053
    )
    
    
    9,795,331
    
    
    
    1,342,819Income tax (expense) benefit
    
    
    (168,255
    )
    
    
    2,669,763
    
    
    
    (9,268,632
    )
    
    
    (1,270,616
    )
 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, 2005
    
    December 31, 2006
    
    December 31, 2007Statutory EIT rate
    
    
    33%
    
    
    
    33%
    
    
    
    33%Effect of tax rates
differential from statutory
rate
    
    
    12%
    
    
    
    1%
    
    
    
    (1%)Change of valuation allowance
    
    
    8%
    
    
    
    3%
    
    
    
    (4%)(Income) not subject to tax
and non-deductible expenses,
net
    
    
    (4%)
    
    
    
    (2%)
    
    
    
    0%Effect of tax holidays
    
    
    (49%)
    
    
    
    (36%)
    
    
    
    (19%)Enacted EIT rate change
    
    
    
    
    
    
    
    
    
    
    (5%)Effective EIT rate
    
    
    0%
    
    
    
    (1%)
    
    
    
    4%
 F-39




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 Significant components of deferred tax assets
 December 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    US$(Unaudited, Note 3)Temporary differences related to revenues
and expenses
    
    
    109,701
    
    
    
    470,335
    
    
    
    64,477Net operating loss carry-forwards *
    
    
    
    
    
    
    4,830,845
    
    
    
    662,249Less: Valuation allowance
    
    
    (109,701
    )
    
    
    (182,835
    )
    
    
    (25,064
    )Net current deferred tax assets
    
    
    
    
    
    
    5,118,345
    
    
    
    701,662Temporary differences related to
depreciation and amortisation
    
    
    6,872,917
    
    
    
    17,250,101
    
    
    
    2,364,777Net operating loss carry-forwards*
    
    
    14,384,698
    
    
    
    18,104,459
    
    
    
    2,481,899Total non-current deferred tax assets
    
    
    21,257,615
    
    
    
    35,354,560
    
    
    
    4,846,676Less: Valuation allowance
    
    
    (15,866,492
    )
    
    
    (5,998,027
    )
    
    
    (822,256
    )Net non-current deferred tax assets
    
    
    5,391,123
    
    
    
    29,356,533
    
    
    
    4,024,420Total deferred tax assets
    
    
    5,391,123
    
    
    
    34,474,878
    
    
    
    4,726,082
 
 *
    
    The net operating loss carry-forwards will expire, if unused, in the years ending December
31, 2010 through 2011. Movement of valuation allowance on deferred tax assets
 For the year ended
    
    For the year ended
    
    For the year endedDecember 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    US$ (Note 3)Balance at January 1
    
    
    6,401,140
    
    
    
    15,976,193
    
    
    
    2,190,140Increase in
valuation allowance
    
    
    9,575,053
    
    
    
    3,193,583
    
    
    
    437,801Reversal of
valuation allowance
    
    
    
    
    
    
    (12,988,914
    )
    
    
    (1,780,620
    )Balance at December 31
    
    
    15,976,193
    
    
    
    6,180,862
    
    
    
    847,321
   F-40




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
    14. OTHER PAYABLES AND ACCRUALS
  December
    
    December
    
    December31, 2006
    
    31, 2007
    
    31, 2007RMB
    
    RMB
    
    US$(Unaudited, Note 3)Staff cost related payables
    
    
    19,794,416
    
    
    
    21,689,586
    
    
    
    2,973,376Professional services
    
    
    7,580,002
    
    
    
    12,633,520
    
    
    
    1,731,900Internet data centers
    
    
    6,932,637
    
    
    
    
    
    
    
    R&D services
    
    
    3,095,366
    
    
    
    2,695,366
    
    
    
    369,502Marketing and promotion
    
    
    2,905,467
    
    
    
    4,306,173
    
    
    
    590,323Others
    
    
    12,159,755
    
    
    
    7,026,575
    
    
    
    963,25752,467,643
    
    
    
    48,351,220
    
    
    
    6,628,358
 F-41




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 15. SHARE REPURCHASE PROGRAM
  16. INVESTMENT BY EA
  17. EMPLOYEE BENEFITS
  18. SHARE-BASED COMPENSATION
   F-42




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
      Weighted-AverageRemainingFor the year ended
    
    
    Weighted-Average
    
    
    Contractual Term
    
    
    Aggregate IntrinsicDecember 31, 2007
    
    
    Exercise Price
    
    
    (years)
    
    
    valueOutstanding at
January 1, 2007
    
    
    672,186
    
    
    
    US$ 17.75Granted
    
    
    1,197,500
    
    
    
    US$ 37.34Exercised
    
    
    (179,436
    )
    
    
    US$ 17.52Forfeited
    
    
    (55,547
    )
    
    
    US$ 29.36Outstanding at
December 31, 2007
    
    
    1,634,703
    
    
    
    US$ 31.73
    
    
    
    3.7
    
    
    US$
    1,668,000Vested and
expected to vest
at December 31,
2007
    
    
    1,600,526
    
    
    
    US$ 31.78
    
    
    
    3.7
    
    
    US$
    1,657,429Exercisable at
December 31, 2007
    
    
    414,779
    
    
    
    US$ 17.51
    
    
    
    1.9
    
    
    US$
    1,579,371
    F-43




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
  Weighted-AverageGrant-Date FairNon-vested Shares
    
    Number of shares
    
    
    ValueNon-vested at January 1, 2007
    
    
    400,570
    
    
    US$
    7.73Granted
    
    
    1,197,500
    
    
    US$
    17.08Vested
    
    
    (324,703
    )
    
    US$
    7.71Forfeited
    
    
    (53,443
    )
    
    US$
    12.04Non-vested at December 31,2007
    
    
    1,219,924
    
    
    US$
    16.73
    19. RELATED PARTY TRANSACTIONS AND BALANCES
  Master Agreements.
 F-44




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
        December 31,
    
    December 31,
    
    December 31,2006
    
    2007
    
    2007RMB
    
    RMB
    
    US$(Unaudited, Note 3)Amounts due to
9Webzen Hong Kong
and 9Webzen
Shanghai
    
    
    332,797
    
    
    
    77,052
    
    
    
    10,563
 F-45




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
  For the year ended
    
    For the year ended
    
    For the year ended
    
    For the year endedDecember 31, 2005
    
    December 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    RMB
    
    US$(Unaudited, Note 3)Loan to GFD
    
    
    12,105,300
    
    
    
    
    
    
    
    
    
    
    
    Share revenue from 9Webzen
    
    
    5,868,266
    
    
    
    1,078,202
    
    
    
    782,340
    
    
    
    107,249Game technical support
fee income from GFD
    
    
    289,825
    
    
    
    1,721,816
    
    
    
    
    
    
    
    Fixed assets purchased
from 9Webzen Shanghai
    
    
    10,333,945
    
    
    
    989,411
    
    
    
    
    
    
    
    Sale of 21% equity
interest in 9Webzen Hong
Kong to Webzen Inc.
    
    
    22,193,050
    
    
    
    
    
    
    
    
    
    
    
    
 20. EARNINGS PER SHARE
  For the year ended
    
    For the year ended
    
    For the year ended
    
    For the year endedDecember 31, 2005
    
    December 31, 2006
    
    December 31, 2007
    
    December 31, 2007RMB
    
    RMB
    
    RMB
    
    US$(Unaudited, Note 3)Numerator:Net income
    
    
    72,471,687
    
    
    
    312,477,048
    
    
    
    240,891,954
    
    
    
    33,023,325Denominator:Denominator for basic earnings per share
 weighted-average shares outstanding
    
    
    24,192,113
    
    
    
    24,456,507
    
    
    
    27,406,263
    
    
    
    27,406,263Dilutive effect of share options
    
    
    612,884
    
    
    
    109,440
    
    
    
    234,363
    
    
    
    234,363Denominator for diluted earnings per share
    
    
    24,804,997
    
    
    
    24,565,947
    
    
    
    27,640,626
    
    
    
    27,640,626Earnings per share- Basic
    
    
    3.00
    
    
    
    12.78
    
    
    
    8.79
    
    
    
    1.20- Diluted
    
    
    2.92
    
    
    
    12.72
    
    
    
    8.72
    
    
    
    1.19
 F-46




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 21. CERTAIN RISKS AND CONCENTRATION
   22. COMMITMENTS AND CONTINGENCIES
 Operating lease commitments
  RMB
    
    US$(Unaudited, Note 3)Less than 1 year
    
    
    43,660,623
    
    
    
    5,985,335Between 1 and 2 years
    
    
    6,043,951
    
    
    
    828,55149,704,574
    
    
    
    6,813,886
  Other contractual obligations
   RMB
    
    US$(Unaudited, Note 3)Less than 1 year
    
    
    37,612,687
    
    
    
    5,156,237
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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 RMB
    
    US$(Unaudited, Note 3)Between 1 and 2 years
    
    
    37,612,687
    
    
    
    5,156,23775,225,374
    
    
    
    10,312,474
   US$License fees
    
    
    10,900,000Minimum royalty fees
    
    
    69,948,134Guaranteed marketing expenses
    
    
    20,000,000100,848,134
     Contingencies
  F-48




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
   23. Recent accounting pronouncements
    F-49




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
      F-50




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##### Table of Contents



THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
 24. SUBSEQUENT EVENTS
 <1>Investment in Ideas Corporation (Ideas)
  <2>Investment in G10 Entertainment Corp.(G10)
  <3>Licensing of Atlantica
  <4>Share Repurchase Programs
  F-51