**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-K**
| **x****ANNUAL REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------|
|                                                                                                          |
| **For the year ended September 30,  2006   **                                                  |
| ** **                                                                                                    |
| **OR**                                                                                                        |
| ** **                                                                                                    |
| **o****TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**   |

 

**Commission File Number: 000-32621**

**INTAC INTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)
| **NEVADA**                                  | ** ** | **98-0336945**                    |
|---------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of             |       | (IRS Employer Identification No.) |
| incorporation or organization)              |       |                              |
|                                        |       |                              |
| **Unit  6-7, 32/F., Laws Commercial Plaza** |       |                              |
| **788  Cheung Sha Wan Road**                | ** ** | ** **                        |
| **Kowloon,  Hong Kong**                     | ** ** | **N/A**                           |
| (Address of  principal executive offices)   |       | (Zip Code)                        |

 

(Registrant’stelephone number, including area code) **011 (852) 2385-8789**

Securitiesregistered pursuant to Section 12(b) of the Exchange Act: **None**

Securitiesregistered under Section 12(g) of the Exchange Act: **Common Stock, par value $.001**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o  Yes   x  No

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of theAct.  o  Yes   x  No

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  x   Yes   o  No

Indicate by check mark ifdisclosure of delinquent filers in response to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K x.

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct (Check one):
|  | Large Accelerated Filer  o | Accelerated Filer  x | Non-Accelerated Filer  o |
|--|---------------------------------|---------------------------|-------------------------------|

 

Indicate by check mark whether the registrant is aShell Company (as defined in Rule 12b-2 of the Exchange Act).   o  Yes   x  No

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant on June 30, 2006 (the last business day of the registrant’smost recently completed third fiscal quarter), was $161,961,533 based on the closing price of the registrant’s commonstock on The Nasdaq SmallCap Market of $7.06 per share.

The number of shares of the registrant’s common stock,$0.001 par value per share, outstanding as of December 13, 2006 was 22,940,727.

 

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**DOCUMENTS INCORPORATED BYREFERENCE**

The informationrequired by Part III of this Report, to the extent not set forth herein,is incorporated by reference from the registrant’s definitive proxy statementfor its 2007 annual meeting to be filed with the Commission.
| PART I                        | 5                                                                                                                               |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                            |   |
|                               | ITEM  1 - BUSINESS                                                                                                              | 5 |
|                               |                                                                                                                            |   |
|                               | ITEM 1A - RISK FACTORS                                                                                                          | 23 |
|                               |                                                                                                                            |   |
|                               | ITEM 1B -  UNRESOLVED STAFF COMMENTS                                                                                            | 39 |
|                               |                                                                                                                            |   |
|                               | ITEM  2 - PROPERTIES                                                                                                            | 39 |
|                               |                                                                                                                            |   |
|                               | ITEM 3 - LEGAL  PROCEEDINGS                                                                                                     | 40 |
|                               |                                                                                                                            |   |
|                               | ITEM 4 -  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                   | 40 |
|                               |                                                                                                                            |   |
| PART II                       | 40                                                                                                                              |
|                               |                                                                                                                            |   |
|                               | ITEM 5 -  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND  ISSUER PURCHASES OF EQUITY SECURITIES | 40 |
|                               |                                                                                                                            |   |
|                               | ITEM 6 – SELECTED  FINANCIAL DATA                                                                                          | 41 |
|                               |                                                                                                                            |   |
|                               | ITEM 7 –  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS                      | 42 |
|                               |                                                                                                                            |   |
|                               | ITEM 7A –  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                      | 52 |
|                               |                                                                                                                            |   |
|                               | ITEM 8 –  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                      | 52 |
|                               |                                                                                                                            |   |
|                               | ITEM 9 –  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE                            | 52 |
|                               |                                                                                                                            |   |
|                               | ITEM 9A –  CONTROLS AND PROCEDURES                                                                                         | 52 |
|                               |                                                                                                                            |   |
|                               | ITEM 9B – OTHER  INFORMATION                                                                                               | 53 |
|                               |                                                                                                                            |   |
| PART III                      | 54                                                                                                                              |
|                               |                                                                                                                            |   |
|                               | ITEM 10 –  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                              | 54 |
|                               |                                                                                                                            |   |
|                               | ITEM 11 -  EXECUTIVE COMPENSATION                                                                                               | 54 |
|                               |                                                                                                                            |   |
|                               | ITEM 12 -  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                       | 54 |
|                               |                                                                                                                            |   |
|                               | ITEM 13 -  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                       | 54 |
|                               |                                                                                                                            |   |
|                               | ITEM 14 -  PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                               | 54 |
|                               |                                                                                                                            |   |
| PART IV                       | 54                                                                                                                              |
|                               |                                                                                                                            |   |
|                               | ITEM 15 –  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                      | 54 |
|                               |                                                                                                                            |   |
| SIGNATURES                         | 56                                                                                                                              |
|                               |                                                                                                                            |   |
| INDEX TO EXHIBITS                  | 57                                                                                                                              |
|                               |                                                                                                                            |
| CONSOLIDATED  FINANCIAL STATEMENTS | 59                                                                                                                              |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKINGSTATEMENTS**

Forward-lookingstatements” have been included throughout this Annual Report onForm 10-K.  These statementsdescribe our attempt to predict future events, such as our plans for futureexpansion, our ability to achieve satisfactory operating performance, theviability of our business model, our expansion into other businesses andpursuit of other business opportunities, and our intent to focus our businessoperations in specific geographic markets. The words “may,” “will,” “expect,” “believe,”“plan,” “intend,” “anticipate,” “estimate,” “continue,” and similarexpressions, as well as discussions of our strategy and pending transactions,are intended to identify forward-looking statements. Although we believe thatthese forward-looking statements are based on reasonable assumptions, we cangive no assurance that our expectations will in fact occur and caution thatactual results may differ materially from those in the forward-lookingstatements. The cautionary language in this report provides examples of risks,uncertainties and events that may cause our actual results to differ materiallyfrom the expectations described in any forward-looking statements. You shouldbe aware that the occurrence of one or more of the events described in anycautionary language in this report could have an adverse effect on ourbusiness, results of operations or financial condition. You also should beaware that the forward-looking statements are subject to a number of risks,assumptions and uncertainties, such as:

·                  ourmerger with HSW International, Inc., announced on April 21, 2006, andanticipated to close in the second quarter of fiscal 2007;

·                  ourability to effectively execute our business plan;

·                  theearly-stage status of our career development and training business segment andits evolving, unproven and unpredictable business model;

·                  ourability to collect our accounts receivable;

·                  ourability to continue to raise additional working capital, the lack of whichwould likely have a significant negative impact on our long-term business planand our ability to take advantage of our strategic alliances and tosuccessfully execute our business plan;

·                  statementsmade concerning the revenues or operating performance expected beyond thefiscal year ended September 30, 2006;

·                  theincreased expense structure assumed by us as a U.S. public company;

·                  ourability to achieve satisfactory operating performance;

·                  theviability of our business model;

·                  ourexpansion into other businesses and pursuit of other business opportunities;

·                  theresults of our intended diversification into other industries and geographicregions;

·                  theimpact of health risks on the economic environment;

·                  thegovernment of the People’s Republic of China, or the PRC, may prevent us fromconducting business in China;

·                  politicaland economic events and conditions in China and other geographic markets inwhich we operate;

·                  theanticipated benefits of our industry contacts and strategic relationships;

·                  ourability to establish and take advantage of contacts and strategicrelationships;

·                  ourability to offset increased operating expenses by increasing revenues andoperating efficiencies;

·                  ourability to react to market opportunities;

·                  theadvent of new technology;

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·                  complexregulations that apply to INTAC or its affiliates as an operating company inChina and elsewhere;

·                  ourability to successfully remediate our internal control weaknesses;

·                  changesin interest rates, foreign currency fluctuations and capital market conditions,particularly those that may affect the availability of credit for our productsand services; and

·                  thepotential sale of the distribution segment of INTAC to Wei Zhou.

You should also be aware that those “forward-looking”statements in regards to our career development and training services businessare subject to a number of further risks, assumptions and uncertainties, suchas:

·                  ourability to capitalize on our career development services joint venture, BeijingIntac Purun Educational Development Ltd.;

·                  ourability to timely complete courseware and facilities for the INTAC MobileTelecommunications Institute;

·                  ourability to attract trainees for the INTAC Mobile Telecommunications Institute;

·                  asignificant delay by the PRC government in issuing 3G telecommunicationlicenses to telecommunication service providers;

·                  ourlack of prior experience with the career development and training services andInternet portal business, and our ability to develop and execute an effectivebusiness plan;

·                  ourability to develop the fee-based services of the career development andtraining services and Internet portal business including assembling anexperienced management team;

·                  anyadverse change in our relationship with the EMIC and MOE which may affect ourability to maintain the use for commercial purposes of the database of studentinformation complied by the MOE in the PRC as well as our other databases andthe continued utilization and adoption of our education software;

·                  thestate of the telecommunications and Internet infrastructure in China may limitour growth;

·                  ournetwork operations that may be vulnerable to hacking, viruses and otherdisruptions, which may make our products and services less attractive andreliable;

·                  PRCInternet laws and regulations that are unclear and will likely change in thenear future;

·                  restrictionson foreign investment in the PRC Internet sector that are imposed by the PRCgovernment; and

·                  regulationand censorship of information distribution in China which may adversely affectour business.

You should also be aware that those “forward-looking”statements in regards to our distribution/telecommunications business aresubject to a number of further risks, assumptions and uncertainties, such as:

·                  thelow-margin nature of our distribution business;

·                  changesin general business conditions or distribution channels in the wireless handsetindustries, and our ability to react to these changes;

·                  theimpact of competition in the wireless handset distribution industry, as well asin industries that we may operate in the future;

·                  ourability to continue to sell products outside of traditional distributionchannels;

·                  ourability to continue to purchase sufficient inventory on terms favorable to us;

·                  oursmall number of current suppliers and customers;

·                  ourlack of supply contracts with our vendors or distribution contracts with ourcustomers;

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·                  theconcentration of a significant portion of our wireless handset distributionbusiness with a few large customers;

·                  thehighly competitive and constantly changing nature of the international wirelessdistribution industry; and

·                  ourability to compete in the prepaid calling card market, in which we have notpreviously participated.

You should notunduly rely on these forward-looking statements, which speak only as of thedate of this filing.  Except as requiredby law, we are not obligated to publicly release any revisions to theseforward-looking statements to reflect events or circumstances occurring afterthe date of this filing or to reflect the occurrence of unanticipatedevents.  All subsequent written and oralforward-looking statements attributable to us, or persons acting on our behalf,are expressly qualified in their entirety by the forward-looking statements setforth in this report.

**PART I**

**ITEM 1 -BUSINESS**

**OVERVIEW**

INTACInternational, Inc., is a United States holding company focused on theexploitation of strategic business opportunities available in China and theAsia-Pacific Rim.  Throughout thisReport, references to “INTAC,” “Company,” “we,” “us,” and “our” refer to INTACInternational, Inc., and its operating subsidiaries, and references to “China”and “PRC” refer to the People’s Republic of China, excluding, for purpose ofthis Annual Report, Hong Kong, Macau and Taiwan.  INTAC currently maintains offices in China(Hong Kong and Beijing), Germany (Frankfurt) and the United States (Dallas,Texas).

We operate in twosegments, our career development and training services segment and our distribution/telecommunicationsSegment.  While our distribution segmenthistorically has been our primary business segment and generated substantiallyall of our operating revenue, we shifted our focus in 2004 to the expansion andmaturation of our career development services segment in China.  Initially, our efforts centered on recruitingand training services to be offered online through our internet portalsphrbank.com and joyba.com.  These effortsdid not achieve the results we anticipated in 2005, due in part to the strengthof established competitors in the market and to the overbroad coverage of ourefforts.  As a result, we determined toestablish a foothold in the marketplace by focusing on a specific segmentmarket from which we can later expand. To this end, recognizing thegrowing opportunities within both the education industry and the mobiletelecommunications/internet industry in China, and in order to better utilizeour strategic resources and enhance our strengths in both industries, wehave further refined our business strategy, as we announcedon November 23, 2005 through a press release.  For details of this press release, please seeour Current Report on Form 8-K, which was filed with the SEC on November 28,2005.  Under our refocused businessstrategy, we have been operating in two business segments – the CareerDevelopment and Training Services Segment and theDistribution/Telecommunications Segment, each as further described below.

On April 20, 2006,we entered into an agreement and plan of merger with HowStuffWorks, Inc., anonline publishing company, to form a new company, HSW International, Inc.,which will focus on the online publishing, training and education markets inChina and providing Chinese consumers with credible content and expert reviews.

In August 2006, inorder to better position us for our merger with HowStuffWorks, Inc., we signeda letter of intent to sell the wireless handset distribution business to ourChairman and CEO, Wei Zhou in exchange for three million shares of our commonstock held by Mr. Zhou.  The consummationof this transaction is anticipated to be concurrent with the closing the mergerwith HowStuffWorks, Inc.  As a result ofthis agreement, the operations of this segment have since been segregated andreported as discontinued operations for all periods presented for the Company’sconsolidated financial statements included elsewhere herein.

**CareerDevelopment and****Training Services Segment**

OnJanuary 15, 2004, we announced that we were shifting the emphasis of ourbusiness from the traditional distribution of premium brand wireless handsetsto various career development services. On November 23, 2005, we announced the further refinement of thisshift in strategy.  Under the refinedstrategy for this business segment, we focus our operations primarily on threebusiness units:

·                  INTAC MobileTelecommunications Institute;

·                  EducationManagement Software Business Unit; and

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·                  DatabaseManagement Business Unit.

***INTAC Mobile Telecommunications Institute***

Through INTACMobile Telecommunications Institute, or IMTI, we seek to become a leadingprovider of mobile telecommunications technology training services inChina.  IMTI will offer training toinformation technology professionals, with a primary focus in the area of third generation digitalmobile systems, or 3G, mobile telecommunications technology.  Newcourses will be developed in the future to reflect advancement in mobiletelecommunications technology.  Thistraining will consist of IMTI’s Mobile Telecommunications Software Engineeringtraining program, which will initially be offered through company-ownedinstitutes and later through franchises, university courses and corporatetraining.  We have started to offer thefirst level courses since April 2006 and the second level courses since October2006.

***Education Management Software Business Unit***

INTAC, through itsindirect wholly-owned subsidiary BeijingHuana Xinlong Information and Technology Development Co., Ltd., or HuanaXinlong, is a leading provider of education management software in China.  Huana Xinlong offers software for theadministration of elementary and middle schools and colleges.  Huana Xinglong’s software hasbeen designated by the Education Management Information Center, or EMIC, as thestandard of the China School Administration System for primary and middleschools.  Additionally,Huana Xinlong enjoys an exclusive contractual relationship with the Ministry ofEducation of The People’s Republic of China, or the MOE for use of certain ofHuana Xinlong’s software products.  HuanaXinglong’s products have been installed in over 10,000 elementary and middleschools and over 50% of colleges throughout China.

***Database Management Business Unit***

We have developed,and continue to develop, databases containing information on individuals.  We intend to utilize these databases to offerone-stop marketing solution to a wide range of businesses with products andservices tailored to the specific needs of the Chinese education market.  Beijing Intac Purun Educational DevelopmentLtd., or Intac Purun, one of our operating entities in China, develops thedatabases utilizing information from several sources.  Intac Purun is exclusively authorized by theMOE to collect resumes and profiles for all graduating college and graduateschool students in China and has recently begun collecting suchinformation.  The EMIC has chosen IntacPurun as its exclusive partner in developing and maintaining the MyJobdatabase, compiled through EMIC’s website www.myjob.edu.cn, which helps graduatesof higher education institutions obtain employment.  Intac Purun has also been granted exclusive accessto the database on university graduates maintained by the EMIC for use by IntacPurun in providing job training and placement services.  Initially, Intac Purunwill collect list rental fees and direct marketing service fees by utilizingthese databases.  Ultimately, Intac Purunplans to provide integrated database marketing solutions and consultingservices.

**Distribution/TelecommunicationsSegment**

Ourdistribution/telecommunications segment includes our wireless handsetdistribution business, which we operate through INTAC Deutschland Gmbh, aGerman corporation wholly owned by INTAC, INTAC International Holdings Limited,or Holdings, a Hong Kong corporation and wholly-owned subsidiary of INTAC andGlobal Creative International Limited and INTAC Telecommunications Limited,both of which are Hong Kong corporations and wholly owned subsidiaries ofHoldings.  Through these subsidiaries, wedistribute wireless handset products to mobile communications equipmentwholesalers, agents, retailers and other distributors mainly in Hong Kong.  These products are then sold primarily tolocal customers in Hong Kong or customers in China.  Additionally, we are working with PrimusTelecommunications Ltd, a global telecommunications services provider (Nasdaq:PRTL), to develop products which involve originating international voice anddata traffic from within China throughout Southeast Asia for termination aroundthe world.  The first product to beoffered under this relationship will be a global prepaid calling card, an Internet Protocol, IP, calling card that provides accessto over fifty countries.  In November2006, we also entered into a contract with China Tietong TelecommunicationsCorporations to distribute its calling cards in China.

In August 2006, inorder to better position us with the anticipated merger with HowStuffWorks,Inc., we entered into a letter of intent with Wei Zhou, our Chairman and CEO,to sell the wireless handset distribution business to Mr. Zhou in exchange forthree million shares of our common stock held by Mr. Zhou.  The consummation of this transaction isanticipated to be concurrent with the closing the merger with HowStuffWorks,Inc.  For more detailed information onthis transaction, please see our Current Report on Form 8-K, filed withthe SEC on August 10, 2006.

***Other Business Opportunities****.* We continually evaluate investment opportunities in other businesssegments within China, the Asia-Pacific Rim and, to a lesser extent,Europe.  Our entry into these newbusiness segments is contingent upon our identifying both favorable investmentopportunities and strategic partners with expertise in such business segmentsas well as

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available capital.  Many of these opportunities will be dependentupon our obtaining additional capital, or their value will be materially lessto us if we do not have the financial resources to fully exploit suchopportunities.

Our common stockcurrently trades in the United States on The Nasdaq SmallCap Market under thesymbol “INTN” and in Europe on the Frankfurt Stock Exchange under the symbol “WKN805768”.

**CORPORATE HISTORY**

INTAC International, Inc., was originallyincorporated under the name Commodore Minerals, Inc., or Commodore, underthe laws of the State of Nevada on September 20, 2000, as a developmentalstage corporation.  On September 28,2001, Mr. Wei Zhou acquired a controlling interest in Commodore in aprivate transaction with one of the organizers of Commodore.  On October 13, 2001, Commodore enteredinto a reorganization agreement with Holdings and the shareholders of Holdings,including Mr. Zhou, pursuant to which (i) Holdings became a wholly ownedsubsidiary of Commodore, (ii) New TechHandels GmbH, previously a subsidiary of Holdings, became an indirectsubsidiary of Commodore and (iii) Commodore changed its name to INTACInternational, Inc.  For moredetailed information on the change of control of Commodore resulting in theestablishment of our corporate structure, please see our Current Report onForm 8-K, filed with the SEC on October 15, 2001.

Mr. Zhou, our Chief Executive Officer, hassignificant experience in supply channel and distribution channel developmentin Asia.  He has successfully developedstrategic alliances in the Asia-Pacific region and has the ability to managemulti-national business relationships and assemble highly efficientdistribution networks that have aided in INTAC’s expansion into the Chinese andAsia-Pacific markets.

In September 2003, Intac (Tianjin) InternationalTrading Company, or Intac Trading, one of our indirect wholly-ownedsubsidiaries operating in China, made loans of $1,233,000 and $123,000 to twoChinese nationals, Ms. Zhang Wanqin and Ms. Li Min, respectively.  These loans were made to finance Ms. Zhang andMs. Li, on behalf of INTAC, for the purpose of establishing Tianjin WeilianInvestment Co., Ltd., or Tianjin Weilian, a company incorporated in the PRC.  Ms. Zhang and Ms. Li are the equity owners ofTianjin Weilian.  Subsequently in October2003, Tianjin Weilian, Tianjin Chengtai International Trading Ltd., or TianjinChengtai, a PRC corporation, Tianjin Yingfeng Technology Development Co., Ltd.,a PRC corporation, and EMIC established Intac Purun, with 45%, 15%, 30% and 10%equity interests, respectively.  Ms.Zhang and Ms. Li pledged as collateral their equity interests in TianjinWeilian against those loans from Intac Trading. Furthermore Ms. Zhang and Ms. Li assigned all operating rights, titleand interest they had in Tianjin Weilian to Intac Trading, including allinterest held, all rights to capital accounts, distributions and/or allocationsof cash, property and income, and all rights to participate in management andto vote with regard to affairs relating to Tianjin Weilian.  In June 2004, Holdings made loans of US$1.5million to tow Chinese nationals, Mr. Zou Jingchen and Ms. Wu Fengzhen.  Mr. Zou is the brother of Mr. Zhou, our ChiefExecutive Officer.  These loans were madeto finance Mr. Zou and Ms. Wu, on behalf of INTAC, for the purpose of acquiring100% equity interest of Tianjin Chengtai. Mr. Zou and Ms. Wu pledged as collateral their equity interest inTianjin Chengtai against this loan from Holdings.  All operating, economic, voting and otherrights with regard to affairs relating to Tianjin Chengtai were assigned toHoldings by Mr. Zou and Ms. Wu.  As aresult of the foregoing, Intac Purun is 60% indirectly owned by us.  We believe these indirect ownershipstructures are common for companies in the PRC Internet sector to comply withthe PRC laws that impose strict restrictions on foreign investment in thisindustry.  However, we cannot be surethat our restructured operations and activities will be viewed by PRCregulatory authorities as in full compliance with applicable PRC laws andregulations.

In June 2004,we began phasing out our business of distributing luxury automobiles fromEurope to purchasers in the Tianjin Port Free Trade Zone, which was operatedthrough our wholly-owned subsidiary FUTAC Group Limited, a British VirginIslands corporation, and our indirectly-owned subsidiary****Intac Trading.  The phase-out was substantially complete asof December 31, 2004, and did not have a material adverse impact on ourresults of operations, and the assets of this business were redeployed to ourother businesses.

InSeptember 2004, INTAC indirectly formed two new companies, Beijing IntacMeidi Advertising Company Limited, or Intac Advertising, and Beijing IntacMeidi Technology Development Company Limited, or Intac Technology, both ofwhich are private PRC corporations established to provide advertising servicesand value added services in support of Intac Purun.

In December 2004, HoldingsacquiredHuana Xinlong, a leading Chinese developer of management software foreducational institution administration. Huana Xinlong is located in Beijing, China.  In August, 2006, we formed Huana XinlongEducation Software Co., Ltd., wholly owned by Holdings, as the main corporateentity carrying out our education management software business in order tobenefit from the tax preferential treatments available to newly establishedforeign invested entities.

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In January 2006,we established Intac International Management Consultancy Beijing Limited,wholly owned by Holdings, to provide management or administrative services toour various corporate entities in China.

**Merger with HowStuffWorksInternational, Inc.**

On April 20, 2006, we entered into anAgreement and Plan of Merger, referred to as the merger agreement, withHowStuffWorks, Inc., HSW International, Inc. and HSW International MergerCorporation.  In this Annual Report, HowStuffWorks, Inc. is referred toas HSW, HSW International, Inc. is referred to as HSW Internationaland HSW International Merger Corporation is referred to as mergersub.  Pursuant to the merger agreement, merger sub will merge with andinto us, with INTAC continuing as the surviving corporation, referred to asthe merger.  As a result of the merger, INTAC will become a whollyowned subsidiary of HSW International.  Pursuant to the terms of themerger agreement, each outstanding share of INTAC common stock, par value$0.001 per share, will be converted into the right to receive one share of HSWInternational common stock, par value $0.001 per share.

In connection with the merger (i) HSW has agreedto contribute certain assets, properties and rights to HSW International inexchange for shares of HSW International common stock, referred to as thecontributed assets, and (ii) certain investors have agreed to purchaseshares of HSW International common stock with an aggregate value ofapproximately $22.5 million, referred to as the equity financing.  Atthe closing of the merger, but prior to the completion of the equity financing,INTAC stockholders will own 50% of the total issued and outstanding shares ofHSW International common stock and HSW will own the remaining 50% of the totalissued and outstanding shares of HSW International common stock.  Themerger, the merger agreement, and the transactions contemplated by the mergeragreement have been approved by our board of directors, and are subject tovarious closing conditions, including approval by our stockholders.  It is currently anticipated that the mergerwill close in the second quarter of fiscal year 2007.

Prior to the closing of the merger, it is contemplatedthat HSW International will use its best efforts to obtain approval for listingof HSW International common stock on either the Nasdaq National Market or theNasdaq Capital Market, and following the closing of the merger, it iscontemplated that we will file with the SEC to terminate registration of ourcommon stock.

For further details on the merger, the mergeragreement and the transactions contemplated by the merger agreement, please seeour Current Report on Form 8-K, filed with the SEC onApril 21, 2006.

**OUR PRODUCTS AND SERVICES**

The following is a brief description of the industriesin which we operate, and the products and services we offer, or plan to offer,under the main categories of career development and training services anddistribution/telecommunications.  Weintend to continue to evaluate opportunities to add new products and services,to provide products and services that can be monetized, and to better integrateour products and services.  Many of ourproducts and services are in the early stage of development, and there can beno assurance that we will successfully implement them on a profitable basis orat all.

**CAREERDEVELOPMENT AND****TRAININGSERVICES SEGMENT**

**General Industry Background**

***The Mobile Telecommunications Market in China***

According to China’s Ministry of Information Industry,or the MII, China is the largest mobile telecommunications market in the worldwith approximately 443 million mobile phone users at the end of October 2006.  In addition, China has experienced asignificant increase in the use of wireless value-added services, the mostpopular form of which is ShortMessaging Services, or SMS.  In2000, China Mobile launched its Monternet wireless value-added servicesplatform, and in 2001 China Unicom launched its UNI-Info wireless value-addedservices platform.  These platformsenabled the development of an additional type of SMS, which allow users toaccess products and services provided by third parties.  China Mobile and China Unicom also began toallow these third-party providers to use their billing and collection systemsto charge fees for products and services that are delivered through theMonternet and UNI-Info platforms.  Thiscreated an opportunity for Internet companies to deliver their Internet portalproducts and services to users in China through their mobile phones and toutilize these billing and collection systems to collect fees for these productsand services.

According to the MII, the total number of shortmessages transmitted in China in 2005 was approximately 304.65 billion.  Point-to-point SMS accounted forapproximately 75% of the total number of SMS messages sent through China Mobile’stelecommunications network, while the remaining approximately 25% was accountedfor by other SMS-based

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wirelessdata services.  In addition, we believethat with the continuous upgrading of mobile telecommunications networks inChina, the wireless value-added services market will further expand by allowingusers to transmit larger amounts of data at higher speeds and to accessadditional products and services through their mobile phones.

***CareerDevelopment and Training in China***

Education in Chinahas been rapidly developing in order to keep pace with the ongoing economicdevelopment.  The PRC government in itsEleventh Five Year Plan stresses the importance of vocational education, withits planned sector spending level at about U.S. $175billion from 2006 to 2010.  We believeChina’s population is becoming more aware of the need for life-long learning ina complex world, and the demand for higher education is rising quickly.  With urban income increasing rapidly, weanticipate an increase in higher education consumption in the next ten yearsand beyond.

According to China’sMinistry of Education there are approximately 2,273 higher educationinstitutions with approximately 23million students in China, of which approximately 3.4 million have enteredthe job market in 2005.  This number of students is expected to growto 25 million****by 2008. According to published statistics, there are also more than 470,000 elementary and middle schoolsin China with a total of nearly200 million students.

**INTAC Mobile TelecommunicationsInstitute**

***INTAC’sApproach***

We have identified mobile telecommunications training for informationtechnology professionals, specifically covering 3G technology, as a growingneed in China.  China is the largestmobile telecommunications market of any country, having over 443 million mobilesubscribers as of October 2006, according to the MII.  Mobile handset shipments in China havesteadily increased and are expected to continue to do so according to the IDC2005 Handsets Report.  Increasingly,these handsets are based on 3G technology, rather than 2G or 2.5G technology.

Third generation systems, or 3G (also known as International MobileTelecommunications 2000 or IMT-2000 systems), are digital mobile systems thatprovide high-speed access to a wide range of telecommunications services supportedby fixed telecommunications networks, and to other services that are specificto mobile users.  The key features of 3Gsystems are:

·                  high degree of commonality of design worldwide;

·                  compatibility of services with fixed networks;

·                  high quality;

·                  small handsets for worldwide use;

·                  worldwide roaming capability; and

·                  capability of multimedia applications including paging, voice telephony,digital data, audio and visual communications.

3G systems are expected to have the capability tosupport circuit and packet data at 144 kilobits per second or higher in highmobility (vehicular) traffic, 384 kilobits per second or higher for pedestriantraffic, and 2 megabits per second or higher for indoor traffic.

The increase in mobile telecommunications users and emergence of 3Gtechnology has lead to an increase in demand for information technologyprofessionals trained in this technology. It is estimated that there is currently a general shortage ofapproximately 500,000 telecommunications industry professionals and existingprofessionals will need additional training to address new technologies, according to areport from CCW, a leading IT industry research company in China.  IMTIseeks to meet the needs of this industry through courses specifically focusingon mobile telecommunications software engineering utilizing 3G technology.

***Courses***

INTAC Mobile Telecommunications Institute includes three levels ofcourses combining written information, lectures and laboratory experience.  IMTI’s courses will be developed based on ourassessment and understanding of market needs in conjunction with industry andacademic experts.  We have assembled apanel currently consisting of 25 full-time course editors, all graduates oftelecommunications universities in China, 15 university professors fromtelecommunications universities in China and 20 industry professionals frommajor telecommunications companies. After developing a course

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outline,the panel of experts review the outline and a detailed course is prepared andcompiled.  A first draft of thecourseware is then prepared and reviewed again by the panel of experts withrefinements being made as necessary. Finally, a trial of the courseware is completed before release.

Graduates of each course will receive a certificate evidencing theircompletion.  We have receivedauthorization from the Ministry of Education, the Ministry of Information andTechnology and Software Development Consortium of the Chinese Government tooffer the “Mobile Telecommunications Software Applications TechnologyCertification” to all of our qualified graduates.  Additionally, we are seeking endorsement of other government agencies, industry manufacturers and serviceproviders and industry associations.

***Delivery ofCourses***

Courses are offered through company owned institutes, franchises andlicenses, and will also be offered through universities and corporatetraining.  IMTI will also offer jobplacement services and career counseling for its graduates.  IMTI’s courses are targeted on ITprofessionals working in or seeking a job with the mobile telecom industry,especially in the fields of software development, testing and projectmanagement.  Therefore, we anticipatethat students will come from the following sources:

·                  Workingprofessionals seeking a career change or laid-off people looking for a new job –they will pay for themselves;

·                  Companies payingfor their employees’ on-job training; and

·                  College students.

Courses are initially offered at company operated institutes.  All IMTI teachers are trained andcertified by IMTI.  We opened our first institute in Beijing and planto open additional institutes in other cities as the market demand for ourcourses grows.  Our S1 level courses wereinitially offered in April 2006 and have been continuing throughout theyear.  Our S2 level courses started inOctober 2006.  There are approximately200 student enrolled in our program as of the date of this report.  We plan to offer S3 level courses by thesecond quarter of fiscal 2007.

Under the law ofthe People’s Republic of China, franchises may not be offered until one yearafter there are two company owned locations. Until we are able to offer franchises and continuing thereafter, we planto license the courseware to interested parties.  Licenses will be offered on standardlicensing agreement terms consisting of a one-time license fee of about U.S. $35,000 to U.S. $60,000 for the initial five years plus 20% of tuition.  In 2006, we have entered into 19 licenseagreements with course operators in 18 cities in China.  Ultimately, we expect franchising to be amajor driver of revenues and profits due to its low variable costs andscalability.

IMTI intends tooffer its courseware to universities as a replacement for or addition toexisting course offerings.  Courses willbe sold to universities viadirect sales efforts and by outside sales agents, instructor trainingwill be provided and the courses will be taught on-campus.  IMTI will alsooffer corporate training for employees of telecommunications firms which willbe designed to meet such firms’particular needs and conducted at locations specified by these firms.

***Sales andMarketing***

IMTI’s courses are targeted to professionals in software development,software testing and project management. Our informal study of information technology professionals revealed ashortage of trained professionals and an interest by current professionals inadditional training.  We anticipate thatthe highest demand for the courses will be in Beijing, followed by Shanghai,Guangzhou and Shenzhen.  We believe that our courses will trainprofessionals to meet the current hiring needs of telecommunications firms andposition graduates to obtain relatively higher paying telecommunicationsindustry positions.

Our marketing strategy is focused on building brand awareness andprestige for IMTI’s courses.  We havelaunched promotion of IMTI courseswares with releases to the press, customerevents, direct advertising and internet advertising.  We currently have one professional in chargeof branding and three marketing professionals, and will continue to strengthenour sales and marketing activities.

***Competition***

Several universities and companies provide software andtelecommunications related training, however to our knowledge, no universityoffers training focused on 3G technology. Courses offered by these universities range in duration from seven daysto seven months and cost between U.S. $220 and U.S. $1,960.  Universities and companies offering softwareand telecommunications courses include the School of Software at PekingUniversity, Beijing Hua Create Co., Ltd.,

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theTraining Center of the School of Software of the Northeastern University, theTraining Center of Shenzhen Telecom, Beijing Jiaotong University-Baige TrainingCenter, Wuhan CVTech Training Center, Shanghai Eutong Information TechnologyCo., Ltd. and the Fudan University Training Center of Embedded Technology.

***Status of 3GTelecoms Licenses in China***

The success of our business strategy to become a leading provider of 3Gmobile telecommunications training services for information technologyprofessionals depends on the issuance by the PRC government of 3Gtelecommunications licenses to telecommunications services providers employingsuch IT professionals.  It is not clearyet when the PRC government will issue its first 3G telecommunicationslicenses, and when it finally does, how many will be issued and what technologystandard(s) will be adopted.

There are factors encouraging the PRC government to make its decisionearlier, among which the strongest might be the ambition of the government tomake 3G communications available before 2008 Beijing Olympics.  However, the government must consider manyother factors as well.  China’s telecomindustry is undergoing a restructuring. In a recent research report entitled “China’s 3G Roadmap Coming intoFocus,” Goldman Sachs suggested that the PRC government may refrain fromissuing 3G licenses until after it has restructured the Chinese telecomindustry.  The maturity and commercialdeployment of 3G technologies is another concern of PRC government.  In addition, the government needs to selectthe technology standard, TD-SCDMA, WCDMA or CDMA 2000, decide which playerswould be awarded with the first 3G licenses and consider the tremendousinvestment for 3G networks.

**Education Management SoftwareBusiness Unit**

***INTAC’sApproach***

According to CCW Research, education spending in China has increasedsubstantially in recent years, going from U.S. $41.6 billion to U.S. $74.8 billion between 1999 and 2003.  Spending on education information technologyhas likewise increased from U.S. $1.7 billion to U.S. $2.8 billion between 1999 and 2003.  We believe that Huana Xinlong is uniquelypositioned to capitalize on this growing market.  Our education management software, whichtargets elementary and middle schools and universities has gained significantacceptance, with installation in over 10,000 elementary and middle schools andover 50% of universities.  Our educationmanagement software has been designated as the standard of the China SchoolAdministration System (for primary and middle schools) by the EMIC.  In addition we enjoy a strong relationshipwith the MOE.  We plan to leverage ourlarge installed base of software and our relationship with the EMIC and the MOEto become the leading provider of integrated education management information systems andservices in China.

***Products***

Our products are divided into three major product lines consisting of theelementary/middle school segment, the college segment and the universalsoftware segment.  We are currentlyfocused on improving these products, strengthening our government and customerrelationships, diversifying our product portfolio and forming strategic partnershipswith industry leaders.  To date, we havereceived a certificate from International Business Machines Corporation, orIBM, acknowledging Huana Xinlong’s status as a “Qualified IBM PartnerworldBusiness Partner,” a relationship which we expect to include support from IBMof our technical development of education software in China.  We have also received a certificate fromIntel Corporation recognizing us as an “Intel Software Partner.”  Moreover, we have entered into a cooperationframework agreement with Microsoft (China) Co., Ltd., an affiliate of MicrosoftCorporation, with respect to our “Green Campus” Surveillance and ManagementSystem product as further described below. As these products mature and are refined, we plan to move towardsproviding integrated management systems and solutions which are specificallydesigned for the education industry to automate, streamline and effectivelymanage every aspect of an education institution, including student/facultymanagement, course set-up, design and offering and the provision of various applications.

Elementary/Middle School Products

***ComprehensiveManagement System for Elementary and Middle Schools (CMSEMS):*** CMSEMS is a school administration databasethat stores schedules, produces data reports to the education bureau, enablescourse set-up, student registration and classification, and manages student andteacher files.  The CMSEMS is incompliance with the standards established by the Ministry of Education, soinformation can be easily shared among various users across different schools.

***Local MOE Office Management System (LMOMS):***  LMOMS is a software package designed per MOEstandards to help build basic databases, fulfill daily management needs andprovide consulting information and generate reports for local MOEs.

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College Products

***ComprehensiveManagement System for Colleges (CMSC):*** CMSC is a university daily administration andschool management software package originally developed by the EMIC.  Huana Xinlong is the current owner of theCMCS.  Over 50% of China’s universitieshave adopted CMSC as their dailyadministration tool.

Universal Products

***SchoolOffice Automatic Administration Management System (SOAAMS): ***This software system,developed independently by Huana Xinlong, is in compliance with the EMICstandards and helps standardize education office procedures for the schools andthe education bureau.  Standardizationincludes personal scheduling, document management, and a daily office workscheduler.

***“Green Campus” Surveillance and Management System (GCSMS):***  GCSMSis a platform designed to effectively monitor and control contents carried on metropolitan area networks and campus networks in orderto provide a clean and safe internet environment for students.  This product is being co-developed withMicrosoft Corporation under a strategic partnership agreement entered into inJune 2005 and utilizes a Microsoft platform.

***Sales andMarketing***

Our sales efforts for our education management software unit arecoordinated in Beijing along with marketing and planning.  We have three local sales offices located inKumming, Xi’An and Xinjiang.  We intendto further utilize our relationship with the MOE to secure governmentcontracts.  We are currently aparticipant in the MOE’s “Demonstrative Zone Construction Project forElementary/Middle School MIS Infrastructure Standardization,” or “Demo Zone”project.  This project is aimed atbuilding a standardized management information system at two to three DemoZones for each province in China.  Wehave contracted with the MOE as the exclusive provider of software andimplementation services for this project.

***Competition***

Our main competitors in the elementary/middle school market are ZhejiangUniversity Networks and TCL Corporation.  Zhejiang University Networks has a closerelationship with local MOEs and a complete product line.  TCL Corporation’s education software business primarily operates in the Guangdong provinceand also has a complete product line.

In the college market, our main competitors are Hangzhou Zhengfang andShanghai Pengda.  Hangzhou Zhengfang isprimarily focused on administrative management software.  Shanghai Pengda primarily focuses ontechnical colleges and professional schools and has a complete product line.

**Database Management Business Unit**

***INTAC’sApproach***

The database marketing industry is in its infancy in China.  Due to government regulations andtechnological roadblocks to the flow of information, large internationalcompanies have been reluctant to enter this market.  Chinese database marketing companiesgenerally either rent or own lists which are compiled from databases of dataregarding individuals for the ultimate purpose of marketing to suchindividuals.  List renters generally rentlists of data which have been compiled from government channels or othercompanies, rather than owning and developing their own lists.  Database marketing service providersgenerally rent lists or obtain lists from their clients for the purpose ofoffering direct marketing solutions.

Through Intac Purun, we intend to offer a one-stop database marketingsolution based on a credible database of students and professionals.  Companies are seeking to acquire newcustomers in a cost-effective way.  Theyare looking for lists of prospects and tailored marketing solutions to reachdistinct customer segments.  However,most domestic list rental service providers lack credible data sources,high-quality data or database marketing services.  Those database marketing solution providersusually are not list owners themselves. Clients usually have to pay higher charge for list rental as well asmarketing services.  There is a need forone-stop database marketing services using high quality lists from reliablesources.

We plan to meet this need by providing high quality lists and customizeddatabase marketing solutions at a reasonable price.  The nature of this product as a joint venturewith MOE guarantees the data quality and decreases data acquisition cost.  Student and professional databases are targetmarkets for many companies in various industries and our professional team willprovide effective database marketing solutions to meet clients’ business needs.

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***Database Products and Services***

 

List rental will initially be the major focus of our database marketingservices due to its ease of execution and relatively quicker return oninvestment.  We have establisheddatabases of information from several sources. Intac Purun is exclusively authorized by the MOE to collectresumes and profiles for all graduating college and graduate school students inChina and has recently begun collecting this information.  The EMIC has chosen Intac Purun as itsexclusive partner in developing and maintaining the MyJob database, compiledthrough EMIC’s website www.myjob.edu.cn, which helps graduates of highereducation institutions obtain employment. Intac Purun has also beengranted exclusive access to the database on university graduates maintained bythe EMIC for use by Intac Purun in providing job training and placementservices.

Our database information can be used to select the target audience whoare most likely to respond to certain products or service offers.  Through advanced data mining technologies, wecan select people by their gender, age, major, school, location and othercriteria.  Furthermore, we can conductmore precise selections such as lifestyle, hobbies, potential profession andincomes.  Our technology platform has thecapacity to conduct electronic database marketing campaigns. Additionally, we have establishedrelationships with mobile service providers who can help to conduct SMS basedmarketing campaign.

The list rental service we will provide does not include sale of thelists or rental to our clients.  Rather,we will offer a platform to enable our clients to reach potential customergroups through our direct marketing platform. Specifically, we will select a list comprised of the target audiencefrom our database based on our client’s needs, and then use our own directmarketing channels to deliver the client’s message to the target audience.  We will also provide clients with campaignmeasurement and necessary records.  Wewill deliver our clients database marketing results, rather than the liststhemselves.

We intend to expandthe service to database marketing consulting. We will provide our clients with integrated database marketing solutionsto convert prospects to sales.  Inaddition to list rental, we will help the client to plan database marketingcampaigns, set marketing objectives, define program timing, choose targetgroups, design offers, manage and fulfill campaigns, organize campaignproduction, manage creative, print and fulfillment suppliers, track theresponse, generate analysis and reports and conduct profiling and data mining.

***Sales andMarketing***

Our potential database products and services clients include insurancecompanies, banks (new accounts and credit cards), career services, apartmentbrokers, moving companies, travel agencies, mobile phone companies and computermanufacturers.  Our database marketing services will bemarketed via three channels: 1) We intend to position ourselves as a potentiallist vendor to those advertising agencies which conduct direct marketingconsulting services.  The potentialclients include OgilvyOne, Wundermann and some local agencies.  2) We plan to market our database servicedirectly to the end users, i.e. the marketing department of those companieswhich need customer data.  The potentialclients include insurance companies, banks (checking/saving accounts and creditcards), career/recruiting services, real estate brokers, travel agencies,education service provider, telecom companies and mobile phonemanufacturers.  3) We plan to placeadvertisements in industry magazines and China’s Direct Marketing Association(DMA) website.

***Competition***

We believe that our ability to provide high quality lists from companyowned databases and customized one-stop database marketing solutions at areasonable price give us a competitive advantage in the marketplace.  We have exclusive access to profiles for all graduatingcollege and graduate school students through our relationship with theMOE.  Our competitors include ChinaLoop(Acxiom China), a firm with international reach, and local competitors such asShendiao Database Marketing Company, zhaopin.com, Chinahr.com and 51job.com.

**OtherProducts and Services**

***Family-SchoolLink Communication System (FSLCS):*** FSLCS is designed tohelp elementary and middle school teachers and parents communicate moreeffectively.  With FSLCS, parents willhave instant access to their children’s’ daily attendance records, exam scoresand event announcements, as well as school news.  We believe that the FSLCS has large potentialdemand from Chinese parents looking to take a more active role in theirchildren’s education process and keep in contact with their children via SMSmessaging.

In addition, INTAC recently launched a new product, the InternetCo-Surfing (ICS) software and services, as a key functional add-on toFSLCS.  As an internet parental controlsoftware, ICS provides parents with immediate notification via SMS when theirchild encounters a web site that has not been proven safe.  The parent can choose to permit the surfingor block the web site utilizing a return SMS. ICS also provides the ability toset time limits on surfing and to trace surfing history.  The software can also be used as an instantcommunication tool between children on their PCs and parents with theirhandsets.

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The service, whichis****offered by IntacPurun in partnership with China Mobile Communications Corporation, or ChinaMobile and China United Communications Corporation, or China Unicom, China’sleading mobile telecom operators, will mainly focus on the elementary andmiddle school markets in China where the communication is most needed.** **Weintend to bundle our FSLCS system with Huana Xinlong’s software for educationalinstitutional administration.

***phrbank.com:***  In 2004, we launched www.phrbank.com, awebsite to integrate recruiting and professional training services in China forlarge companies with increasing demands for new employees.  This website is a platform for PHR Bank(professional human resource bank), an integrated program of placement, search,campus recruiting and professional training services for enterprises.  The service is designed for international andChinese companies that need to hire large numbers of new employees, andprovides employment information to job seekers and employers.  We plan to utilize this website inconjunction with IMTI to assist its graduates in securing employment.

***joyba.com: ***Intac Purun’s websitewww.joyba.com is designed to attract students by providing information relatedto lifestyles and social activities of students and young professionals.  This website also contains limitedinformation on employment opportunities, with a link to our www.phrbank.comwebsite.  We plan to sell advertising onthis website targeting college students and young professionals.

***Other Value-added Mobile TelecommunicationServices.***  Currently, we offer a variety of telecomvalue added services, including Wireless Application Protocol surfing,Interactive Voice Responses and SMS, with China’s major telecommunicationsnetwork operators – China Mobile, China Unicom and China Netcom.  All of the services are targeted at theeducation community.  The servicesoffered include career development services, interactive games, ringtone/screen saver downloads, and FSLCS, as described below.

***CareerService Centers: ***IntacPurun was selected by the EMIC to establish and be the exclusive operator,under the supervision of the EMIC, of the “Career Service Centers” for Chinesestudents.  These Career Service Centerssupport local education authorities in providing career services to localstudents.  They also introduce IntacPurun’s services and products to students and provide Chinese students with afull-range of career development services, which assist these students infinding jobs and managing their careers.

***Affinity Services: ***Apartfrom Educational and Career Services, Intac Purun believes it will derivesubstantial revenue from a variety of affinity services.  These products will reach the same targetgroups and be offered through the same distribution channels as our careerdevelopment services.  Intac Purun’s goalis to position itself to be the one-stop Internet information, education andentertainment portal for Chinese students. These products are currently being developed.

Our careerdevelopment and education services segment involves substantial risk. Ourbusiness model is based on a belief that we will be able to, in part,(i) maintain a close relationship with the MOE and EMIC, an entityaffiliated with the MOE, (ii) our ability to use exclusively the databaseof graduates complied by the MOE and the continuous updating of the database bythe EMIC, (iii) remain as the exclusive operator of these Career ServiceCenters, (iv) retain the designation of Huana Xinlong’s software as thestandard of the China School Administration System by the EMIC, (v) our ability to successfully renegotiate ouragreements with China Mobile and China Unicom on terms acceptable to us,(vi) the ability to attract trainees for our 3G training program, and(vii) the ability to attract customers for our database products andservices.  We cannot provide anyassurance that our model will prove successful or will lead to the achievementof our objectives.  If we are unable toimplement our business model effectively or lose our relationships with the MOEor EMIC, our business, results of operations and financial condition would bematerially adversely affected.

**DISTRIBUTION/TELECOMMUNICATIONSSEGMENT**

**Wireless Handset Distribution**

***IndustryBackground – The Chinese Wireless Telecommunications Industry***

***GeneralInformation***

China hasexperienced rapid growth in mobile telecommunications use in recent years.  According to China’s Ministry of InformationIndustry, China is the largest mobile telecommunications market in the worldwith approximately 383 million mobile phone users as of the end ofOctober 2005.  Although growth inChina has slowed sharply since 2002, we believe the size of the urban marketstill offers room for growth in the coming years.  Prices for both handsets and services offeredby the two State companies controlling the market, China Mobile CommunicationsCorporation and China United Communications Corporation, have been fallingsteadily, as Chinese handset vendors challenge foreign giants such as Nokia andMotorola.

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***Industry Challenges***

 

Numerous factorshave converged in recent years to create new challenges for traditionalwireless equipment distributors.  Thesefactors include the following:

*IncreasingNumber of Equipment Manufacturers and Available Models:* Originally,there were relatively few manufacturers of mobile communicationsequipment.  However, within the lastseveral years, numerous new manufacturers have entered the market and thenumber of available models has increased. We believe that these trends have increased the costs and inventory riskof many traditional distributors who attempt to keep an adequate supply ofhandsets for each manufacturer by model.

*Lack ofBrand Loyalty:* Although four vendors (Nokia, Motorola,Samsung and Siemens) continue to dominate the industry in China, numeroussmaller manufacturers have entered the market. We believe that consumer handset selection is based less on brand nameloyalty and more on features, size, pricing and similar factors.  As a result, distributors having long-termdistribution agreements with vendors and manufacturers or agreements containing“minimum commitments” may find it more difficult to react to changes inconsumer preferences.

*Unaffiliatedand Operator-Affiliated Retailer Base:* Because of the stronggrowth in worldwide users of mobile communications, the number of retaillocations selling wireless handsets is also increasing.  We believe that many of these locations areunaffiliated with a network operator and are generally free to purchase inventoryfrom any entity they desire.  We expectthat this trend has been fueled somewhat by the number of repeat users desiringto purchase new equipment but who do not desire to switch their existingservice provider.  Many of theseretailers, or the distributors that serve them, generally desire to purchase insmaller quantities not readily available from traditional distributors.  In addition, we recognize that the vastmajority of operator-affiliated retailers must rely on secondary sources ofsupply.  In either case, we believe thatthe purchasing agents in these situations are motivated to buy from adistributor on the basis of price and availability and, to a lesser extent, onthe basis of a prior business relationship. Consequently, we expect that thosedistributors that compete on a basis other than price, availability andrelationship will find it increasingly difficult to reach the unaffiliatedretailer and operator-affiliated base.

*PriceVolatility:* Over the last several years, prices for wirelesshandsets have become increasingly volatile. This volatility is due to, among other things, increased supply into thevarious sales channels, a larger number of manufacturers, and a slow-down inthe economy generally.  As a consequenceof this volatility, a “spot market” has developed in which large quantities ofinventory can be purchased and sold at the then-prevailing market price.  Prices for equipment can vary as much as 10%from one day to the next.  Traditionaldistributors often find it difficult to participate or benefit from this spotmarket due to their contractual arrangements with the manufacturers.

***TraditionalResponse to Industry Challenges***

In response to theindustry challenges, many distributors have expanded their focus to provideancillary products (such as accessories) and ancillary services (such aswarehousing, customized packaging, “inventory management,” and other “logisticsservices”) to their customers.  Manytraditional distributors believe that ancillary products and services carry ahigher gross margin than merely the distribution of wireless handsets.  At the same time, many large networkoperators and manufacturers are embracing the move to an outsourced solutionfor their distribution needs because of their ability to shift to thedistributor:

·                  thesignificant initial and continuing costs of maintaining warehouse facilitiesand providing logistics services;

·                  therisks associated with inventory management and storage; and

·                  theother efficiency issues associated with maintaining an infrastructure that mustexpand and contract to meet consumer demand.

Similar to otherdistribution industries that have migrated to a “full service” approach, webelieve that handset distributors are facing increasing costs for personnel, ITinfrastructure, warehouse facilities and general overhead.  We believe that as wireless equipmentmanufacturers continue to migrate toward a mix of products and services,traditional distributors will find it increasingly difficult to efficientlyintegrate and manage these separate operations into a cost-effective solutionfor their customers.  Consequently, weexpect that as revenues for full service distributors increase, their expectedefficiencies of scale may not.

***INTAC’S Approach***

We distribute,through Holdings and its subsidiaries Global Creative and INTAC Telecom,wireless handsets manufactured by major mobile communications equipmentmanufacturers.  For the fiscal year ended September 30, 2006, the

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ninemonths ended September 30, 2005 and the fiscal year ended December 31, 2004,the majority of our total handset sales were products manufactured by Nokia,Motorola, Sony Ericsson, Siemens and Samsung. Our wireless handset products are compatible with most networkoperators, as well as analog and digital standards and other developingtechnologies.

In ourdistribution segment, we pursue an “efficient distribution” strategy that webelieve provides us with a competitive advantage in our market. We believe thatthis market is characterized by multiple distribution levels that add costs tothe ultimate consumer without providing corresponding value added services orproduct distinction.  By reducing thenumber of distribution layers between the manufacturer and the retail distributors,we are able to compete based upon price with other distribution networks.  Within the distribution segment, we also havean established customer base, which at this time has increasing volume demandswhich we believe we are prepared to meet. We have strong and trusted relationships with our customers with areputation for reliability, low cost, experience and trust.  In addition, we seek to take advantage ofwindows of opportunity to acquire other complementary products at discountedprices that may become available from time to time.

We believe thatour ability to take advantage of perceived inefficiencies in the distributionmarkets for the wireless handset industry provides us with the followingcompetitive advantages:

·                  Focuson best selling products. In our distribution business, we have establishedrelationships with industry leaders, including network operators, largeretailers and other worldwide distributors. Through these relationships, we expect to receive up-to-date industryinformation regarding trends in consumer buying patterns.  This information should enable us to buy andsell only those models that we believe are the most popular among end-users,thereby reducing our inventory risk and increasing the number of inventoryturns per month when compared to that of our competitors.

·                  Abilityto quickly modify inventory mix.  Wediffer from other distributors in that we do not stock continuing lines.  Although we attempt to offer a consistentavailability of inventory, we purchase a variety of makes and models to takeadvantage of promotional and other discount opportunities.  As a result, we can offer a higher proportionof low cost inventory than our competitors. We believe that this strategy permits us to be more flexible in ourinventory purchases than we would be if governed by certain manufacturers’distribution agreements.

·                  Reputationas a “best source” provider. In our wireless handset business, we competeprimarily on price and availability.  Weare capable of shipping orders for as few as 100 wireless handset units, althoughour average order is much larger. Accordingly, we believe we are well positioned to serve the growingunaffiliated retailer base.  Further, webelieve that our ability to quickly source mobile telecommunications equipmentat favorable prices provides us with a key competitive advantage as a secondarysupplier to the operator-affiliated retailers.

·                  Exploitationof the Spot Market.  As a participant inthe “spot market” for wireless handsets, there is no set price to us for thepurchase of inventory.  The pricing isusually negotiated for each transaction based on the current market prices forsimilar equipment, the location of the equipment, the number of handsets to bemoved, the cost and effort anticipated in packing and shipping the units, and otherrelevant factors.  Likewise, we determineour selling prices on the basis of current market conditions, the number ofitems we have on hand, target profit margins for various products and otherrelevant factors.  Consequently, unlikeother distributors who buy and sell equipment at predetermined prices orformula, we operate on an opportunity basis, buying and selling inventoryduring periods of market opportunity.

Our system ofefficient distribution involves substantial risk.  Our business model is based on a belief inthe future of the wireless handset industry that is contrary to the generallyheld belief that such industry is shifting away from pure distribution servicesto a mix of distribution services and ancillary services, such as logistics services.  We cannot provide any assurance that ourmodel will prove successful or will lead to the achievement of ourobjectives.  If we are unable toimplement our business model effectively, our business, results of operationsand financial condition would be materially adversely affected.

***Our SupplyChannel***

Wireless handsetsare available to us at low prices for a variety of reasons, including ourability to quickly move large quantities of wireless handsets, the inability ofa vendor to sell sufficient product through regular channels, the cancellationof orders placed by other distributors and the termination of business by amanufacturer or wholesaler.  Currently,our access to sources of equipment is based primarily on relationships whichour management has established over approximately the last eight years.  Other sources of product include otherdistributors, network operators and independent brokers.  We receive information about new sources ofproducts from contacts, online resources, advertising and industrypublications.  Our Chief ExecutiveOfficer currently handles all inventory procurement and has the mostsignificant industry

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contacts.  To date, we have not been able to purchaseinventory directly from a manufacturer. We currently do not have any supply agreements or authorizeddistribution agreements with any manufacturers or other vendors and, therefore,our entire inventory is purchased on the “spot market,” mainly from otherwholesalers.  We plan to purchase alarger portion of our inventory from network operators and manufacturers in thefuture, although there can be no assurances in this regard.  Our experience has indicated that networkoperators and other wholesalers look favorably upon a distribution channel thatenables them to dispose of significant quantities of merchandise quicklywithout affecting their traditional sales channels.  However, this situation could change ifmanufacturers or our suppliers decide to discourage the use of our distributionchannels.

During the fiscalyear ended September 30, 2006, substantially all of our suppliers areother wholesalers, and our single largest supplier, T-Mobile, accounted formore than 10% of our product purchases for the fiscal year endedSeptember 30, 2006.** **At present, we seek to concentratepurchases with selected suppliers to ensure access to high-quality products onadvantageous terms; however, we believe we will need redundant sources ofsupply in the future.  Because productavailability is unpredictable, a strong base of vendor relationships isimportant to our success.  We maintainongoing contact through telephone calls with our vendors to learn when productswill become available, at what prices product is moving and which model numbersare the most sought after by consumers.  Lossof our ability to purchase product from these suppliers, or the failure bythese or other suppliers to supply competitive products on a timely basis andon favorable terms, or at all, would have a material adverse effect on ourbusiness and operations.

We believe thatthe relationships with our suppliers are generally good; however, we have fromtime to time experienced inadequate product supply.  Any future failure or delay by our suppliersin supplying us with products on favorable terms would severely diminish ourability to obtain and deliver products to our customers on a timely andcompetitive basis.

The market forwireless handset products is characterized by rapidly changing technology andfrequent new product introductions, often resulting in product obsolescence orshort product life cycles.  Our successdepends in large part on our ability to anticipate and adapt our business tosuch technological changes.  There can beno assurances that we will be able to identify, obtain and resell productsnecessary to remain competitive or that competitors or manufacturers ofwireless handsets will not market products that have perceived advantages overour products or that render the products sold by us as obsolete or lessmarketable.  We maintain some investmentin product inventory and, therefore, we are subject to the risks of inventoryobsolescence and excessive inventory levels. We attempt to limit these risks by managing inventory turns.  Because of our international operations, ourinventory is also exposed to certain political and economic risks.

***OurDistribution Channel***

Products aregenerally delivered by common carriers to our warehouse facilities in Hong Kongor Frankfurt or designated freight forwarders. After delivery, we inspect, count and prepare the orders for shipment orpick up by our customers, which are mobile communications equipmentwholesalers, agents, retailers and other distributors, mainly in HongKong.  These products are then soldprimarily to local customers in Hong Kong or customers in China.

We do notgenerally maintain inventory for a long period of time.  Instead, we generally seek to have a buyerfor our inventory prior to the time an order is placed with a vendor.  The time between a customer’s purchase orderand the completion of the sale of that item is generally less than 10days.  Although we assume certaininventory and price risk associated with selling these products, we believe ourability to sell our inventory quickly through our distribution channels and oursystem of efficient distribution minimizes the risk.  To date, our expenses resulting fromwrite-downs of excess inventory have not been material.  Most of our new handsets come fully packagedin their original containers and carry the manufacturer’s original warranty.  We have not previously experienced anymaterial amount of warranty-related issues.

We generally sellour products pursuant to a customer purchase order and subject to ourconfirmation containing terms and conditions. Because orders are generally not accepted unless they can be filledwithin a few days of receipt, backlog is generally not material to ourbusiness.

***Sales andMarketing***

Our sales andmarketing efforts for wireless handsets are coordinated in Hong Kong, Frankfurtand Beijing by a manager for each office. These managers, who report directly to our Chief Executive Officer,Mr. Zhou, spend substantially all of their time developing and maintainingrelationships with our customers and suppliers. Inside each office, our sales force (which is, in the aggregate 3 fulltime personnel in this segment) operates on a named account basis rather thanby geography, which allows us to maintain a single point of contact for eachcustomer.  In addition to our insidesales force, we also engage non-employee, commissioned sales agents to sell ourproducts.  Our largest accounts arehandled directly by Mr. Zhou.  Ouroutside sales agents are compensated on a Commission Program that is designedto reward account profitability and promote sales growth into new geographicregions.

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***Seasonality***

 

Handset sales areinfluenced by a number of seasonal factors including customer buying patterns,product promotions, availability of distribution channels, holidays, includingChinese New Year during the first quarter of the year, and product supply andpricing, and as a result, we adjust buying to reflect the anticipated level ofsales activity.  In addition, we alsoexpect that our sales will be influenced by cyclical economic conditions in thedifferent countries in which we operate. An economic downturn in one of our principal markets could materiallyand adversely affect our revenues and profits.

***Competition***

Competition amongwireless handset distributors is intense and is expected to increasesignificantly in the future.  Barriers toentry are relatively insubstantial.  Wecompete primarily on the basis of:

·                  price;

·                  inventoryavailability;

·                  deliverytime; and

·                  ourcustomer relationships.

Many of ourexisting and potential competitors, including traditional distributors, havelonger operating histories, larger customer bases, direct contractualrelationships with manufacturers and other highly desirable vendors, greatername recognition and significantly greater financial, personnel and marketingresources than we do.  These competitorsgenerally can undertake more aggressive pricing policies, move more inventory,and make more attractive offers to customers, distribution partners andsuppliers than we can.  Additionally,substantially all of our existing and prospective customers have establishedlong-standing relationships with one or more of our competitors or potentialcompetitors.  Consequently, we cannot becertain that we will be able to expand our customer list or retain our currentcustomers.  We may not be able to competesuccessfully against our current or future competitors and competition couldmaterially and adversely affect our revenues and profits.

Our competitorsinclude:

***Inthe Asia-Pacific Rim***

·                  Government-owneddistributors that have retail outlets;

·                  FirstMobile;

·                  GlobalTech Holdings; and

·                  Numerousother smaller distributors, resellers and agents.

***InEurope***

·                  Brightpoint;

·                  CellStar;

·                  Wirelesshandset manufacturers that sell directly into our distribution channel; and

·                  Numerousother small distributors, resellers and agents.

***Telecommunications Products***

OnNovember 23, 2005, we announced that we recently began working with PrimusTelecommunications Ltd., a global telecommunications services provider (Nasdaq:PRTL), with a particular strength in Voice-over-IP (VoIP) services andproducts, as well as billing capability across various voice and dataservices.  The first product launchedunder this relationship is the distribution of a global prepaid calling card,an IP calling cardthat provides access to over 50 countries. We are working closely with Primus to explore further opportunities inoffering more diverse telecommunications value-added services to the educationmarket.  In November 2006, we alsoentered a contract with China Tietong Telecommunications Corporations todistribute its calling cards in China.

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***Recent Development***

 

Although wehistorically derived substantially all of our revenue from ourdistribution/telecommunications segment, we intend to focus on the onlinepublishing, training and education markets in China going forward.  As a result of this strategy and ouranticipated merger with HowStuffWorks, Inc., we entered into a letter of intentwith Wei Zhou, our Chairman and CEO, to sell the wireless handset distributionbusiness to Mr. Zhou in exchange for three million shares of our common stockheld by Mr. Zhou.  The consummation ofthis transaction is anticipated to be concurrent with the closing the mergerwith HowStuffWorks, Inc.  For moredetailed information on this transaction, please see our Current Report onForm 8-K, filed with the SEC on August 10, 2006.

**BUSINESSSEGMENT FINANCIAL DATA**

As a result of theanticipated disposal of our distribution/telecommunications business to WeiZhou, the operations of such segment have been segregated and reported asdiscontinued operations for all periods for our consolidated statements ofoperations attached to this report. Information regarding the results of our discontinued operations and theassets and liabilities of such operations is set forth in “Item 6 – SelectedFinancial Data” and in Note 2 of Notes to Consolidated Financial Statements,all of which information is incorporated herein by reference.

**GEOGRAPHIC FOCUS**

In December of 2001, China enteredthe World Trade Organization (“WTO”). Membership in the WTO represents a major milestone of a decade-longshift from a centrally planned economy to a market economy.  With its entry into the WTO, China embarked onan ambitious series of steps to reform its trade and business environment.  For example, China has undertaken majorchanges in import and export rights; however, until the reforms have beencompleted and come into effect, trading rights will remain the subject ofgovernment approval.  We have leveragedour contacts in China to allow us to take advantage of emerging opportunitiesin the wake of these reforms.  We willcontinue to develop strategic contacts in the region as the plan forliberalizing Chinese Internet portal, human resources and distribution servicescontinues to follow the new open-door growth pattern.

China’s WTOmembership has fundamentally redefined China’s relations with other countries,especially with the United States, its most significant export market, as wellas its neighbors throughout Asia.  WTO membershiphas allowed China to defend its trade interests using the WTOdispute-settlement system.  Chineseexporters have benefited from the certainty that their trading partners mustcomply with WTO rules.  For example, WTOmembers can no longer discriminate against Chinese products in their homemarkets.  China’s membership into the WTOhas made it more attractive to foreign investors, and foreign investments haveresulted in more high-paying jobs, more government tax receipts, moretechnology transfers and, ultimately, more consumer spending.  China’s WTO commitments have facilitatedincreased competition in every sector of the economy.  As a result of increased tradingopportunities, Chinese consumers are expected to benefit from the increasedcompetition encouraging a larger range of choices, lower prices, and higherquality in consumer products and services. The combination of reduced trade barriers and the increase in thestandard of living in China has and should continue to significantly increase thedemand for consumer products and services in China, including wirelesshandsets, as well as demand for career development services.

We believe thatthese continuing reforms in China will enable us to participate in variousinvestment opportunities in China.  Ourfirst entry into the Chinese distribution market was accomplished inOctober 2001 through our acquisition of operating subsidiaries thatdistribute premium brand wireless handsets to mobile communications equipmentwholesalers, agents, retailers and other distributors in Hong Kong for sale tomainland China.  On January 15,2004, we announced the shift in emphasis of our business plan from thetraditional distribution of premium brand wireless handsets to its new Internetjoint venture, Intac Purun and our career development services segment.  On November 23, 2005, we announced thefurther refinement of this shift in strategy such that we will operate in twobusiness segments:  the careerdevelopment and training services segment and the distribution/telecommunicationssegment.

Informationregarding financial data by geographic region is contained in our financialstatements beginning on page F-1.

**GOVERNMENT REGULATIONS AND LEGALUNCERTAINTIES**

Certain areasrelated to the Internet, such as telecommunications, Internet informationservices, international connections to computer information networks,information security and censorship are covered in detail by a number ofexisting laws and regulations in China. The PRC Internet industry is regulated by various governmentalauthorities, such as the Ministry of Information Industry, or MII, the StateAdministration of Industry and Commerce, or SAIC, the State Press

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and PublicationsAdministration, or SPPA, and the Ministry of Public Security.

Human resourceservice firms and Internet content providers are subject to substantialregulation by the PRC government.  An “Internetcontent provider” is a commercial operator providing the delivery of Internetcontent.  This section sets forth asummary of the most significant PRC regulations that affect the business andthe industries in which we operate.

***HumanResources***

Human resourceservices firms in China are mainly regulated by the PRC Ministry ofPersonnel.  The principal regulationapplicable to human resource services firms is the Regulations onAdministration of Human Resource Markets (2001), jointly promulgated by the PRCMinistry of Personnel and the PRC State Administration for Industry andCommerce.  Under this regulation, anyentity providing human resource services in China must obtain a human resourceservices license from the local Administration of Personnel.  Each of these Administrations may adoptrules, with some degrees of variation among provinces, to regulate humanresource services operations conducted within the province.

The principalregulation governing ownership in human resource services companies in China isthe Interim Regulations on the Administration of Sino-foreign Equity JointVenture as Human Resource Agencies (2003), jointly promulgated by the PRCMinistry of Personnel, the PRC Ministry of Commerce and the PRC StateAdministration for Industry and Commerce. Under this regulation, the percentage of foreign ownership in the equityinterest of a foreign invested human resource services company cannot be lessthan 25% or more than 49%.  Because Intac Purun provides human resourceservices in China, Intac’s initial indirect ownership interest in Intac Purunwas set at 45% as a result of these regulations.  Subsequently in June 2004, INTACpurchased an additional 15% indirect ownership interest in Intac Purun.  This additional 15% indirect ownershipinterest increases INTAC’s total indirect ownership in Intac Purun to 60%.  Subject to the promulgation of additionalregulations on foreign investment in the PRC human resources services sector,INTAC may be required to undertake other restructuring measures in order tocomply with Chinese regulations.

***Telecommunications***

On October 1, 2000, the Telecommunications Regulations of thePeople’s Republic of China, or the Telecom Regulations, went into effect.  The Telecom Regulations set out the generalframework under which domestic Chinese companies may engage in various types oftelecommunications services in the PRC. The Telecom Regulations reiterate the long-standing principle thattelecommunications service providers need to procure operating licenses as amandatory precondition for the commencement of operations.  A distinction is drawn between “basictelecommunications services” and “value-added telecommunications services.”  “Value-added telecommunications services” aredefined as telecommunications and information services provided through publicnetworks.  A “Catalogue ofTelecommunications Business,” which is attached to the Telecom Regulations andwas updated on June 2001, categorizes various types of telecommunicationsand telecommunications-related activities into basic or value-addedservices.  The Catalogue lists thefollowing services as being of a value-added nature: (a) e-mail,(b) voice mail, (c) online information storage and retrieval,(d) electronic data interchange, (e) online data processing andexchange, (f) value-added fax, (g) Internet access services,(h) Internet information services, (i) Internet data center servicesand Internet virtual private network services, (j) video-conferencing, (k) callcenter and voice mail services, and (l) certain mobile and satellitetelecommunications services.

On December 20, 2001, the PRC StateCouncil promulgated the Regulations for the Administration of Foreign-InvestedTelecommunications Enterprises, or the FITE Regulations, which became effectiveon January 1, 2002.  The FITERegulations stipulate that foreign-invested telecommunications enterprises, orFITEs, must be established as Sino-foreign equity joint ventures.  FITEs can undertake operations in basictelecom services and value-added telecom services.  Under the FITE Regulations and in accordancewith WTO-related documentation, the foreign party to a value-added FITE maycurrently hold up to 49% equity, and value-added FITEs may conduct businessonly within Beijing, Shanghai and Guangzhou and 14 other PRC cities.  The equity limit of foreign investors wasincreased to 50% and the geographical restriction lifted on December 11, 2003.

The Administrative Measures for TelecommunicationsBusiness Operating Licenses, or Telecom License Measures, were promulgated byMII on January 4, 2002, to supplement the FITE Regulations.  The Telecom License Measures confirm thatthere are two types of telecom operating licenses for operators in China(including FITEs), namely: licenses for basic services and licenses forvalue-added services.  With respect tothe latter, a distinction is made as to whether a license is granted forintra-provincial or “trans-regional” (inter-provincial) activities.  An appendix to the license will detail thepermitted activities of the enterprise to which it was granted. An approvedtelecom service operator must conduct its business (whether basic orvalue-added) in accordance with the specifications recorded on its TelecomService Operating License.  TheTelecommunications License Measures also confirm that the MII is the competentindustry authority for foreign-invested telecom enterprises.

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***Internet Information Services***

 

Intac Purun is structured as an Internet contentprovider, or ICP, and has obtained approval from the MII to develop Internetinformation services.  OnSeptember 25, 2000, the State Council approved the Measures for theAdministration of Internet Information Services, or the ICP Measures.  Under the ICP Measures, any entity thatprovides information to online users of the Internet is obligated to obtain anoperating license from the MII or its local branch at the provincial ormunicipal level in accordance with the Telecom Regulations described above.

The ICP Measuresstipulate further that entities providing online information services regardingnews, publishing, education, medicine, health, pharmaceuticals and medicalequipment must procure the consent of the national authorities responsible forsuch areas prior to applying for an operating license from the MII or its localbranch at the provincial or municipal level. Moreover, ICPs must display their operating license numbers in aconspicuous location on their home page. ICPs are obligated to police their websites in order to removecategories of harmful content that are broadly defined.  This obligation reiterates Internet contentrestrictions that have been promulgated by other ministries over the past fewyears.  Most importantly for foreigninvestors, the ICP Measures stipulate that ICPs must obtain the prior consentof the MII prior to establishing an equity or cooperative joint venture with aforeign partner.

OnDecember 28, 2003, the Beijing Telecommunications Administration (themunicipal branch of the MII) issued to Intac Purun a Telecommunications andInformation Services Operating License. We believe we have all necessary licenses to operate the Internetportal.

***Information Security and Censorship***

The principal pieces of PRC legislation concerninginformation security and censorship are:

·                  The Law of thePeople’s Republic of China on the Preservation of State Secrets (1988) and itsImplementing Rules (1990);

·                  The Law of thePeople’s Republic of China Regarding State Security (1993) and its ImplementingRules (1994);

·                  Rules ofthe People’s Republic of China for Protecting the Security of ComputerInformation Systems (1994);

·                  NoticeConcerning Work Relating to the Filing of Computer Information Systems withInternational Connections (1996);

·                  AdministrativeRegulations for the Protection of Secrecy on Computer Information SystemsConnected to International Networks (1999);

·                  Regulations forthe Protection of State Secrets for Computer Information Systems on theInternet (2000);

·                  Notice issued bythe Ministry of Public Security of the People’s Republic of China RegardingIssues Relating to the Implementation of the Administrative Measure for theSecurity Protection of International Connections to Computer InformationNetworks (2000);

·                  The Decision ofthe Standing Committee of the National People’s Congress Regarding theSafeguarding of Internet Security (2000);

·                  Measures for theAdministration of Commercial Web Site Filings for the Record (2002) and theirImplementing Rules (2002);

·                  Regulation forthe Information Dissemination of Watching and Listening through InternetPromulgated by State Bureau of Broadcasting Film & TV (2003);

·                  Notice ofRegulating SMS Service Promulgated by the Ministry of Information Industry(2004); and

·                  Regulation ofManagement of Publication Market Promulgated by Press and PublicationsAdministration (2004).

These pieces of legislation specifically prohibit theuse of Internet infrastructure where it results in a breach of public security,the provision of socially destabilizing content or the divulgence of Statesecrets, as follows:

·                  “A breach ofpublic security” includes breach of national security or disclosure of statesecrets; infringement on state, social or collective interests or the legalrights and interests of citizens; or illegal or criminal activities.

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·                  “Sociallydestabilizing content” includes any action that incites defiance or violationof Chinese laws; incites subversion of state power and the overturning of thesocialist system; fabricates or distorts the truth, spreads rumors or disruptssocial order; advocates cult activities; or spreads feudal superstition,involves obscenities, pornography, gambling, violence, murder, or horrific actsor instigates criminal acts.

·                  “State secrets”are defined as “matters that affect the security and interest of the state.”  The term covers such broad areas as nationaldefense, diplomatic affairs, policy decisions on state affairs, nationaleconomic and social development, political parties and “other State secretsthat the State Secrecy Bureau has determined should be safeguarded.”

According to the aforementioned legislation, it ismandatory for Internet companies in the PRC to complete security filingprocedures with the local public security bureau and for them to updateregularly with the local public security bureau regarding information securityand censorship systems for their websites. In this regard, the *Detailed Implementing Rules for the Measures forthe Administration of Commercial Web Site Filings for the Record*,promulgated in July 2002 by the Beijing Administration for Industry andCommerce, or Beijing AIC, state that websites must comply with the followingrequirements:

·                  they must filewith the Beijing AIC and obtain electronic registration marks;

·                  they must placethe registration marks on their websites’ homepages; and

·                  they mustregister their website names with the Beijing AIC.

We have registered the domain names, www.joyba.com andwww.phrbank.com, and these registrations are renewable annually.

In addition, the State Security Bureau has issuedregulations authorizing the blocking of access to any site it deems to beleaking State secrets or failing to meet the relevant legal legislation regardingthe protection of State secrets in the distribution of information online.  Specifically, Internet companies in Chinawith message boards, chat rooms or similar services, must apply for theapproval of the State Secrets Bureau prior to operating such services.  We may be required to obtain this approval.

***Privacy Concern about Usage of PersonalInformation***

Despite the fact that several PRC laws, regulationsand PRC Supreme Court interpretations refer to privacy, PRC law does notclearly define a “right of privacy.”  PRClaw does protect certain related rights such as personal dignity, right ofreputation, right of name, and privacy of communications where a party canprove it has suffered damage as a result of infringement on such rights.

Although the PRC has several laws and regulationsrelating to the use of the Internet, addressing personal privacy in use of theInternet and the freedom of communications, the PRC Government does notrestrict online service providers in the collection, transmission and commercialuse of personal information or data. Personal data is protected from unlawful use by general statutes and byany contractual arrangement between the user and the service provider.

Since spring 2005, the NPC and the State Council havebegun legislative review of a draft Law for Protection of Personal Informationwhich provides a wider scope of protection than merely protection of thepersonal privacy of a citizen; cellular phone-number, home address, medicalfiles and occupation information will all be protected.  The draft further provides that usage of suchpersonal information by service providers (excluding the national securityauthority, research institutions, and news agency) shall be subject to the priorauthorization of each individual and violations under this law will subject toviolating party of administrative, civil, and even criminal liabilities.

**INTELLECTUALPROPERTY AND PROPRIETARY RIGHTS**

We regard ourcopyrights, service marks, trademarks, trade secrets and other intellectualproperty as critical to our success.  Werely on trademark and copyright law, trade secret protection, non-competitionand confidentiality and/or license agreements with our employees, customers,partners and others to protect our intellectual property rights.  Despite our precautions, it may be possiblefor third parties to obtain and use our intellectual property withoutauthorization.  Furthermore, thevalidity, enforceability and scope of protection of intellectual propertyrights in Internet-related industries are uncertain and still evolving.  The laws of the PRC and certain othercountries do not protect intellectual property to the same extent as do thelaws of the United States.  We haveregistered the domain names www.joyba.com and www.phrbank.com.  These registrations are renewable annually.

Many parties areactively developing chat, homepage, search and related Internettechnologies.  We expect these parties tocontinue to take steps to protect these technologies, including seeking patentprotection.  There may be patents issuedor pending that are held by others and that cover significant parts of ourtechnology, business methods or services. For

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example, we are awarethat a number of patents have been issued in the areas of e-commerce, Web-basedinformation indexing and retrieval and online direct marketing.  Disputes over rights to these technologiesare likely to arise in the future.  Wecannot be certain that our products do not or will not infringe valid patents,copyrights or other intellectual property rights held by third parties.  We may be subject to legal proceedings andclaims from time to time relating to the intellectual property of others in theordinary course of our business.

We may licensetechnology from third parties.  Themarket is evolving and we may need to license technologies to remaincompetitive.  We may not be able tolicense these technologies on commercially reasonable terms or at all.  In addition, we may fail to successfullyintegrate any licensed technology into our services.  Our inability to obtain any of these licensescould delay product and service development until alternative technologies canbe identified, licensed and integrated.

**TECHNOLOGY INFRASTRUCTURE**

We will place ourservers at the facilities of 21ViaNet which provide a reliableenvironment.  21ViaNet is currently thelargest neutral service provider for telecom data center in China.  21Vianet is 4-layer constructed and providesabundant equipment and connection for each level from client equipment tonetwork outlet to provide clients with close to 100% network reliability.  It is also designed for unique DNS Cache toguarantee uninterrupted stable operation. It is also safely constructed to resist over 60% DDoS attacks, which canprotect uninterrupted operation even if with severe network attacks.  The RSA access control system is used, whichblocks most illegal intrusions and provides the system with truly reliable “lock”.  Furthermore 21ViaNet is one of the members ofChina Anti-Junk Mail Organization.

21 Vianet alsoprovides around-the-clock services, such as:

·                  field support ofequipment installation and commissioning;

·                  operations tosolve problems and also save labor and time;

·                  technicalsupport and consulting services for clients; and

·                  service monitoringand in-depth technical services.

**EMPLOYEES**

As ofNovember 30, 2006, we had 177 full-time employees within our careerdevelopment and training services segment, including 57 in sales and marketing,18 in course editors, 6 in customer services, 25 in company owned IMTI, 33 intechnology and 38 in general and administrative functions.

We also had 6full-time employees and 1 part time employee within ourDistribution/Telecommunications Segment, including 2 in sales and marketing, 2in warehouse and distribution services and 2 in general and administrativefunctions.

**WEBSITE ACCESS TO REPORTS**

Our annual reportson Form 10-K, quarterly reports on Form 10-Q and periodic reports onForm 8-K, and any amendments to such reports, are available, withoutcharge, on our website, www.intac.cn, as soon as reasonably practicable afterwe electronically file such reports with the SEC.  We also make available on our website ourCode of Ethics applicable to our Chief Executive Officer and senior financialofficers, our Business Conduct Guidelines applicable to all employees, and thecharter of our Audit Committee. Information on our website does not constitute part of this Report.  Additionally, our filings with the SEC may beread and copied at the SEC Public Reference Room at 450 Fifth Street,N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may beobtained by calling 1-800-SEC-0330. These filings are also available on the SEC’s website at www.sec.govfree of charge as soon as reasonably practicable after the Company has filedthe above referenced reports.

**ITEM 1A -RISK FACTORS**

**Risks Related to ourProposed Merger with HSW International and the Combined Company**

***Thefailure to close, in a timely manner or at all, the merger between us and HSWInternational, or any negative market perception of the merger may adverselyaffect our business and the market price of our common stock.***

On April 20, 2006, we entered intoa merger agreement pursuant to which we will become a wholly owned subsidiaryof HSW International.  If our stockholders do not approve of the mergeragreement, or if there is a delay in the

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close of the merger, or if the merger doesnot close as a result of a failure to satisfy closing conditions or otherwise,the market price of our common stock may decline as a result.  Inaddition, to the extent that the investing public has a negative perception ofthe merger, the public’s perception of our business or the value of our commonstock may be negatively impacted.

***Whetheror not the merger is consummated, the announcement and pendency of the mergercould cause disruptions in our business, which could have an adverse effect onour business and financial results.***

Whether or not the merger is consummated,the announcement and pendency of the merger could cause disruptions in orotherwise negatively impact our business. Specifically:

·                  our mergerwith HSW International, Inc. may disrupt our business relationships withcurrent customers or strategic partners (for example, a customer may delay ordefer decisions about current and future agreements with us because of thepending merger);

·                  our currentand prospective employees may experience uncertainty about their future roleswith the combined company, which might adversely affect our ability to retainkey managers and other employees; and

·                  the attentionof our management may be directed from business operations toward theconsummation of the merger.

These disruptions could be exacerbated by adelay in the consummation of the merger or termination of the merger agreementand could have an adverse effect on our businesses and financial results if themerger is not consummated or of the combined company if the merger isconsummated.

***We willincur significant costs associated with the merger whether or not the merger isconsummated.***

We will incur significant costs related tothe merger, including legal, accounting, advisory, filing and printingfees.  In the event that the merger is consummated, the combined companywill pay for all expenses incurred by us, HSW and HSW International. However, some of these costs will be incurred whether or not the merger isconsummated.  In the event the merger is not consummated, we will pay forour own fees and expenses in connection with the merger and HSW will pay forits and HSW International’s fees and expenses in connection with the merger,except that we will share equally with HSW expenses related to the printing,filing and mailing of registrations statements and proxy statements related tothe merger and the other transactions contemplated by the merger and the feesassociated with the filing of notification and report forms with the AntitrustDivision and the FTC.

***Thecombined company may not realize the intended benefits of the merger if the combinedcompany does not integrate our operations and assets with the contributedassets in a timely and efficient manner.***

Achieving the benefits of the merger willdepend to a large extent on the integration of our assets, operations andbusiness segments with the contributed assets in a timely and efficient mannerand the ability of the combined company to realize the anticipated synergiesfrom this integration.  The integration of the contributed assets to ourexisting business will be critical in determining the success of the combinedcompany in the online publishing, training and education markets inChina.  This integration may be difficult and unpredictable for manyreasons, including, among others, the translation of the contributed assetsinto Chinese and other languages and because HSW’s and our internal systems andprocesses were developed without regard to such integration.  The combinedcompany’s successful integration of the contributed assets with our currentbusiness will also require coordination of different personnel, which may bedifficult and unpredictable because of possible cultural conflicts anddifferences in policies, procedures and operations among us, HSW Internationaland HSW, and the different geographical locations of the companies.  Ifthe combined company cannot successfully integrate the contributed assets withour current business, the combined company may not realize the expectedbenefits of the merger, which could adversely affect the combined company’sbusiness and could adversely affect the value of the combined company’s commonstock after the merger.

In addition, the integration of our businesswith the contributed assets may place a significant burden on management of thecombined company and its internal resources.  The diversion ofmanagement’s attention from ongoing business concerns and any difficultiesencountered in the transition and integration process could harm the combinedcompany’s business and the value of the combined company’s common stock.

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***Thecombined company expects to incur substantial expenses related to theintegration of the contributed assets.***

The combined company expects to incursubstantial expenses in connection with the integration of the contributedassets into our business and operations.  The failure of the combinedcompany to meet the challenges involving this integration, or to do so on atimely basis, could cause substantial additional expenses and serious harm tothe combined company.  For example, pursuant to a services agreement thecombined company has agreed to pay HSW for services for an 18 month periodfollowing the consummation of the merger related to the integration of thecontributed assets, including, among other services, translation, designing anddeveloping the Internet sites through which the contributed assets will bedistributed to customers and providing the technology for establishing andoperating these Internet sites.  While the combined company has assumedthat a certain level of expenses would be incurred, there are a number offactors, some of which are beyond our control, that could affect the totalamount or the timing of all of the expected integration expenses including:

·                  consolidatingand rationalizing information technology and operational infrastructures;

·                  PRCgovernment regulatory control over the telecommunications and Internetinfrastructure in China;

·                  Failure bythe PRC to further develop China’s internet infrastructure, or the combinedcompany’s ability to scale its systems proportionately to match any growth insuch infrastructure;

·                  coordinatingsales and marketing efforts to effectively communicate the capabilities of thecombined company; and

·                  minimizingthe diversion of the combined company management’s attention from ongoingbusiness concerns and successfully returning managers to regular businessresponsibilities from their integration planning activities.

Many of the expenses that will be incurred,by their nature, are impracticable to estimate at the present time.  Theseexpenses could, particularly in the near term, exceed the benefits that thecombined company expects to realize from the inclusion of the contributedassets to the business and operations of the combined company following theconsummation of the merger.  In addition, if the combined company fails tosuccessfully integrate the contributed assets within the term of the servicesagreement with HSW, the combined company may have to complete the integrationitself or engage other parties to complete the integration.  The diversionof employee resources to complete the integration of the contributed assets orany delay in the successful integration of the contributed assets could lead toadditional integration expenses and have an adverse effect on the combinedcompany’s business and operations.

***Thecombined company may not succeed in marketing and selling the contributedassets to potential customers or developing strategic partnerships for thedistribution of its products and services.***

The combined company’s plan to market andsell the contributed assets in the Chinese online publishing, training andeducation markets through the Internet is new and unproven.  Moreover, thecombined company will have limited experience in determining the pricing of theproducts and services that will be developed through the integration of thecontributed assets with our current business.  Because such products andservices have never been marketing or sold in China, the combined company maynot be successful in establishing a customer base or strategic partnerships forthe distribution of its products and services.  If the combined company isnot successful in developing, releasing and marketing these products andservices on a profitable basis, the combined company’s results of operations wouldbe materially and adversely affected.

***Resalesof the combined company’s common stock following the merger and additionalobligations to issue the combined company’s common stock may cause the marketprice of that stock to fall.***

Upon the consummation of the merger, butprior to the equity financing contemplated by the merger agreement, ourstockholders will hold approximately 50% of the outstanding shares of commonstock of the combined company, with HSW holding the remaining approximately 50%if the outstanding shares of common stock of the combined company. Pursuant to the equity financing contemplated by the merger agreement, thecombined company will issue additional shares of its common stock to certaininvestors with an aggregate value of $22.5 million following the consummationof the merger.  Also, HSW will also be granted a warrant to purchase thenumber of shares of the combined company’s common stock equal to the number ofshares eligible for purchase under our stock options that are assumed by thecombined company.  In addition, the combined company has agreed toregister for resale shares of the combined company’s common stock that will beheld by Mr. Zhou, our other affiliates, HSW, and the investors participating inthe equity financing.  The issuance of these new shares and the resale ofadditional shares of the combined company’s common stock could have the effectof depressing the market price for the combined company’s common stock.

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**Risks Related To Our Business**

 

***We needadditional working capital, the lack of which would likely have a significantnegative impact on our long-term business plan and our ability to takeadvantage of our strategic alliances and to successfully execute our expansionplan.***

Our capital requirements are difficult toplan in our rapidly changing industries and geographic region ofoperation.  We currently expect that we will need capital to fundadditions to our career development and training services, Internet portal andcomputer infrastructure, including any acquisitions of complementary assets,technologies or businesses we may pursue, as well as the expansion of our salesand marketing activities.  We believe that we currently have adequatecapital to operate our business as currently anticipated for the next twelvemonths.  However, long-term plans will require us to obtain additionalfinancing through the issuance of debt, equity, other securities or acombination thereof in order to take advantage of our strategic agreements andbusiness alliances.  In addition, we may seek to obtain a workingcapital or other traditional loan facility from a bank or other lending source.

In addition to our current obligations, wecontinue to negotiate other strategic agreements and business alliances, manyof which will be dependent upon our obtaining additional working capital, orthe value of which will be materially less to us if we do not have thefinancial resources to fully exploit such opportunities.

In addition, our wireless handset inventorypurchases generally require the payment in full of the purchase price of theinventory prior to its delivery.  Therefore, our ability to grow ourwireless handset business and acquire additional inventory is dependent uponincreasing our working capital resources.

Also, in some cases we will give creditterms to our wireless handset customers for the balance outstanding, only ifthey have an established and good payment history with us.  Our businessmodel generally requires a deposit by our customers.  To the extent we areunable to increase our working capital assets, we will not be able tosignificantly increase our inventory purchases or fund the increased customerbalances outstanding and accordingly, the growth of our wireless handset salescould be restricted.

We also will give credit terms to ourcredit-worthy career development and training services customers.  We musthave sufficient working capital to carry this receivable until collected. To the extent we are unable to fund increased customer balances outstanding,the growth of our career development and training services revenue could berestricted.

Further, we may expand to other geographicmarkets, and the start-up costs for distribution and other marketing channelsin new geographic markets will require additional capital.

Our forecast of the period of time throughwhich our financial resources will be adequate to support our operations underour current plan of operation is a forward-looking statement.

Our ability to obtain additional financingin the future is subject to a variety of uncertainties, including:

·                  investors’perceptions of and appetite for career development and training services andInternet-related securities, especially in the Chinese market;

·                  investors’perceptions, and the consummation, of the merger with HSW International, Inc;

·                  conditions inthe U.S. and other capital markets in which we may seek to raise financing;

·                  our futureresults of operations, financial condition and cash flows;

·                  the amount ofcapital that other PRC entities may seek to raise in foreign capital markets;

·                  PRCgovernmental regulation of foreign investment in career development andtraining services and Internet companies;

·                  economic,political and other conditions in the PRC;

·                  PRCgovernmental policies relating to foreign currency borrowings; and

·                  any new lawsand regulations that may require various PRC government approvals forsecurities offerings by companies engaged in the Internet sector in the PRC.

Our inability to raise additional funds onfavorable terms, or at all, could force us to scale back our plannedexpenditures, which could adversely affect our growth prospects.  As ofthe date of this prospectus, we do not have any financing arrangements. In connection with the merger between us and HSW International, HSW Internationalhas received commitments to obtain financing by issuing shares of HSWInternational common stock with an aggregate value of $22.5 million to a groupof investors pursuant to stock purchase agreements.  These equityfinancing arrangements are subject to, among other things, the consummation ofthe merger.  For further details on the equity financing arrangementscontemplated in connection with the merger, please see our Current Report onForm 8-K, filed with the SEC on April 21, 2006.

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If we raise capital by issuing equity orconvertible debt securities, the percentage ownership of our stockholders willbe reduced.  Any new securities may have rights, preferences or privilegessenior to those of our common stockholders.  There can be no assurancesthat we will be able to obtain additional financing on terms which areacceptable or at all.

***We are anearly stage company and therefore our business and prospects are difficult toevaluate.***

Our distribution operating companiescommenced operations from 2000 through 2002.  New Tech Handels GmbHcommenced initial operations in 2000 and was sold in 2004, Holdings and FUTACcommenced initial operations in 2001, and Global Creative, Telecommunications,and Auto Mobile Trading commenced initial operations in 2002. Furthermore, our career development and training services segment, Intac Purun,commenced operations in 2003 and Intac Advertising, Intac Technology and INTACDeutschland commenced initial operation in 2004.  Huana Xinlong commencedoperations in 2004 and was purchased by us in December 2004.  We haveonly recently refocused our business model to the career development andtraining services segment and we have very limited experience in thisindustry.  Substantially all of our revenues to date have been in ourdistribution/ telecommunications segment, and we face substantial risks thatour results of operations will be materially and adversely affected by theshift in focus if we are unable to successfully implement our businessplans.  Consequently, we are an early stage company with a limitedoperating history upon which investors and others can evaluate our currentbusiness and our prospects.  Our prospects must be considered in light ofthe many risks, uncertainties, expenses, delays, and difficulties frequentlyencountered by companies in their early stages of development.  Some ofthe risks and difficulties we expect to encounter include our ability to:

·                  continue toraise additional working capital, the lack of which would likely have asignificant negative impact on our long-term business plan and our ability totake advantage of our strategic alliances and to successfully execute ourexpansion plan;

·                  manage theincreased expense structure assumed by us as a U.S. public company including,without limitation, compliance with provisions implemented as a result of theSarbanes-Oxley Act;

·                  manage theanticipated rise in operating expenses;

·                  manage andimplement successfully new business strategies;

·                  adapt andsuccessfully execute our evolving and unpredictable business model, with whichwe have only limited experience;

·                  continue tosell products outside of traditional distribution channels;

·                  establish andtake advantage of contacts and strategic relationships;

·                  adapt to ourintended diversification into other industries and geographic regions;

·                  continue topurchase sufficient inventory on terms favorable to us;

·                  manage ourinventory costs and obsolescence risks;

·                  manage andadapt to rapidly changing and expanding operations;

·                  implement andimprove operational, financial and management systems and processes;

·                  respondeffectively to competitive developments;

·                  attract,retain and motivate qualified personnel; and

·                  manage eachof the other risks set forth in this prospectus.

Because of our lack of operating history andthe early stage of our development, we have limited insight into trends andconditions that may exist or might emerge and affect our business, especiallythe career development and training services and wireless handset market wherewe have very limited history.  We cannot be certain that our businessstrategy will be successful or that we will successfully address theserisks.  Any failure to successfully implement our new business plans wouldhave a material adverse effect on our business, results of operations andfinancial condition.

***Thegrowth we seek is rare.***

Substantial future growth will be requiredin order for us to realize our business objectives.  Growth of thismagnitude is rare.  To the extent we are capable of growing our businessas necessary, we expect that such growth will place a significant strain on ourmanagerial, operational and financial resources.  We must manage ourgrowth, if any, through appropriate systems and controls in each of theseareas.  We must also establish, train and manage a larger workforce.  If we do not manage the growth of our business effectively, ourrevenues and profits could be materially and adversely affected.

***We arecontrolled by Wei Zhou, our Chief Executive Officer.***

Mr. Zhou, our Chief Executive Officer,beneficially owns approximately 52.0% of the outstanding shares of our commonstock and is our largest stockholder.  Accordingly, he may control theoutcome of any corporate transaction or other matter submitted to the stockholdersfor approval, including mergers, consolidations and the sale of all orsubstantially all of

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our assets, election of directors and othersignificant corporate actions.  He can also exercise control in preventingor causing a change in control.

Mr. Zhou’s ownership stake could discourageothers from initiating any potential merger, takeover or change of controltransaction that might be beneficial to our business.  As a result, themarket price of our common stock may be adversely affected.

Mr. Zhou owns a majority of our common stockand we are therefore a “controlled company” within the meaning of therules of Nasdaq Stock Market.  Thus, we are not required to comply withcertain corporate governance rules of the Nasdaq Stock Market that wouldotherwise apply to us as a listed company on the Nasdaq Capital Market.

Specifically, we are not required to have amajority of independent directors on our board of directors and we are notrequired to have nominating, corporate governance and compensation committees composedof independent directors.  Should the interests of Mr. Zhou differ fromthose of other stockholders, the other stockholders may not be afforded theprotections of having a majority of directors on the board who are independentfrom our principal stockholders or our management.

***Wedepend, almost entirely, on the services of Mr. Zhou.***

Our success is substantially dependent onthe efforts of Mr. Zhou.  Mr. Zhou is our key contact with all of our mostsignificant suppliers and customers and the MOE.  Therefore, we are almostentirely dependent on his services.  The loss or interruption of thecontinued full-time service of Mr. Zhou would materially and adversely affectour business.  We do not maintain key man insurance on the life of Mr. Zhou. To support our anticipated growth, we will be required to effectively recruit,develop and retain additional qualified management.  If we are unable toattract and retain such necessary personnel, it could have a materially adverseeffect on our growth.

***We dependon other key personnel and our business may be severely disrupted if we losethe services of our other key executives and employees.***

Our future success is heavily dependent uponthe continued service of our key executives and employees.  If one or moreof our key executives and employees are unable or unwilling to continue intheir present positions, we may not be able to easily replace them and ourbusiness may be severely disrupted.  In addition, if any of these keyexecutives or employees joins a competitor or forms a competing company, we maylose customers and suppliers and incur additional expenses to recruit and trainpersonnel.  We do not maintain key-man life insurance for any of our keyexecutives.

We also rely on a number of key technologystaff for the operation of Intac Purun and Huana Xinlong.  Given thecompetitive nature of the industry, the risk of key technology staff leavingIntac Purun and Huana Xinlong is high and could have a disruptive impact on ouroperations.  We do have employment agreements in place with key managementof Huana Xinlong, but there can be no guarantees that these will be honored.

If we are unable to recruit, develop andretain qualified personnel, our current business and future growth may bematerially and adversely affected.

The success and growth of our businessdepends heavily on our ability to effectively recruit, develop and retainskilled management and other personnel.  Successful expansion of ourcareer development and training services business segment depends on apersonnel with expertise and relationships in China and other geographicmarkets and in industries such as mobile telecommunications, education andmarketing.  Likewise, the success and growth of ourdistribution/telecommunications business segment depends on personnel with thenecessary skills and relationships to expand our business with mobilecommunications distributors such as equipment wholesalers, agents andretailers.  Both of our business segments depend on personnel withexpertise in local and national PRC governmental regulations and entities,especially with regard to education, employment, telecommunications and theInternet.  If we are unable to attract and retain critical skilledmanagement and other personnel, our business segments may be materially andadversely affected.

***Theenacted and proposed changes in securities laws and regulations are likely toincrease our costs.***

The Sarbanes-Oxley Act of 2002 and the SECrules promulgated thereunder have imposed demands upon and required changes inour operational systems and processes, corporate governance, and compliance anddisclosure processes, and the Nasdaq Stock Market has implemented changes inits requirements for companies that are listed on it.  These

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developments have resulted in increases inour expenses for information systems, auditing and consulting fees, legalcompliance and financial reporting costs.  These developments could makeit more difficult for us to attract and retain qualified members of our boardof directors or executive officers.

***Ourinternal control over financial reporting and our disclosure controls andprocedures may not prevent all possible errors that could occur.  Materialweaknesses existed at September 30, 2005******w******ith ourinternal control over financial reporting.  Internal control overfinancial reporting and disclosure controls and procedures, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurancethat the control system’s objective will be met.***

Evaluations are made of our internal controlover financial reporting and our disclosure controls and procedures, whichinclude a review of the objectives, design, implementation and effect of thecontrols and information generated for use in our periodic reports.  In thecourse of our controls evaluation, we seek to identify data errors, controlproblems and to confirm that appropriate corrective action, including processimprovements, are being undertaken.  This type of evaluation is conductedon a quarterly basis so that the conclusions concerning the effectiveness ofour controls can be reported in our periodic reports.

In connection with management’s evaluationof the effectiveness of our internal control over financial reporting as ofSeptember 30, 2005, we determined that material weaknesses existedwith our internal control over financial reporting.  Management has takenvarious actions to improve our internal controls in the identified areas andthese weaknesses have been resolved as of March 31, 2006.

A control system, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurancethat the control system’s objectives will be satisfied.  Internal controlover financial reporting and disclosure controls and procedures are designed togive a reasonable assurance that they are effective to achieve theirobjectives.  We cannot provide absolute assurance that all possible futurecontrol issues within our company have been or will be detected.  Theseinherent limitations include the real world possibility that judgments in ourdecision making can be faulty, and that isolated breakdowns can occur becauseof simple human error or mistake.  The design of our system of controls isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed absolutely inachieving our stated goals under all potential future or unforeseeableconditions.  Because of the inherent limitations in a cost effectivecontrol system, misstatements due to error could occur and not be detected.

**Risks Related to our CareerDevelopment and Training Services**

***Many ofour products and services in the career development and training servicessegment are new and unproven and we may not be able to implement them profitablyor at all.***

Many of our proposed products and servicesin the career development and training services segment are new andunproven.  We have very limited experience in these products and services,and we have limited experience in determining the pricing of these products andservices.  Customers and potential business partners may not determine touse our products and services.  If we are not successful in developing,releasing and marketing these products and services on a profitable basis, ourresults of operations would be materially and adversely affected.

***Becausewe face significant competition, including intense competition in several ofour markets, we may lose market share and our results of operations may bematerially and adversely affected.***

We face significant competition in ourcareer development and training services.  Our INTAC MobileTelecommunications Institute faces competition from universities and privatefirms offering software and telecommunications related training.  OurEducation Management Software Business Unit faces competition from severaldomestic private firms, some of which offer more complete product lines thanus.  Our Database Management Business Unit faces competition from localand national, primarily domestic, firms.  Our online recruitment services,including *www.phrbank.com* and *www.joyba.com*, face competition from otherdedicated job search websites such as 51job.com, ChinaHR.com, Cjol.com andZhaopin.com, as well as increasing levels of competition from national Internetportals in China such as NetEase.com, sina.com, sohu.com and tom.com, each ofwhich provides online recruitment services.  In addition, many executivesearch firms and other competitors currently engaged in print advertising havestarted to internally develop or acquire online capabilities.  Ourexecutive search and other human resource related businesses face significantcompetition from a variety of Chinese and foreign firms in all of our markets,including certain firms that compete with us in the market for onlinerecruitment advertising.

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Many of our competitors or potentialcompetitors have long operating histories, may have greater financial,management, technological development, sales, marketing and other resourcesthan we do, and may be able to adopt our business model.  As a result ofcompetition, we may experience reduced margins, loss of market share or lessuse of our services.  We cannot assure you that existing or futurecompetitors will not develop or offer services and products which providesignificant performance, price, creative or other advantages over ourservices.  If we are unable to compete effectively with current or futurecompetitors as a result of these or other factors, our market share and ourresults of operations may be materially and adversely affected.

***Asignificant delay by the PRC government in issuing 3G telecommunicationslicenses to telecommunications services providers may materially and adverselyaffect the implementation of our business strategy in the mobile telecommunicationstraining area.***

The success of our business strategy tobecome a leading provider of 3G mobile telecommunications training forinformation technology, or IT, professionals depends on the issuance by the PRCgovernment of 3G telecommunications licenses to telecommunications servicesproviders employing such IT professionals.  Despite predictions fromtelecommunications equipment manufacturers, operators and researchers that suchlicenses will be forthcoming by the first half of 2006, it is not clear whenthe PRC government will issue its first 3G telecommunications licenses, howmany will be issued or what technology standards will be adopted. Additionally, adoption of 3G technology will require a large infrastructureinvestment and will require the PRC government to decide whether to adopt theTD SCDMA technology standard developed in China, or WCDMA or CDMA 2000, andwhich telecommunications companies will be awarded the first 3G licenses. Any delay in the adoption of 3G technology or the adoption of competingtechnology may limit the marketability of our training and cause us to fail tomeet our revenue and profitability growth objectives.

***If wefail to effectively identify, establish and operate new institutes, to licenseour courseware, or to gain acceptance of our corporate training in themarketplace, our growth may be slowed and our profitability may be impaired.***

As part of our business strategy, weanticipate opening and operating new institutes at various locations throughoutChina.  Establishing new institutes poses challenges and requires us tomake investments in management and capital expenditures, incur marketing andadvertising expenses and devote other resources.  We cannot be sure thatwe will be able to identify suitable opportunities to launch IMTI successfully,establish new institutes, or to achieve our targeted growth rate. Additionally, we cannot be sure that we will be able to successfully integrateor profitably operate any new institutes.  Any failure by us to effectivelyidentify, establish and manage the operations of newly established institutescould cause us to fail to meet our revenue and profitability growth objectivesand make any newly established institutes more costly to operate than we hadplanned and have a material adverse effect on our results of operations. We further intend to license our courseware and to offer corporatetraining.  There can be no assurance that we will be able to successfullylicense our courseware or to gain customers for our corporate training, each ofwhich could cause us fail to meet our revenue and profitability growthobjectives.

***Ourfinancial performance depends, in part, on our ability to continue to developawareness and acceptance of our programs among high school graduates andworking adults.***

The awareness of our programs among highschool graduates and working adults is important to the success of IMTI. If we were unable to successfully market or advertise our programs, our abilityto attract and enroll prospective students in our programs would be adverselyaffected and, consequently, our ability to increase revenue and profitabilitywould be impaired.  The following are some of the factors that couldprevent us from successfully marketing or advertising our programs:

·                  studentdissatisfaction with our programs and services;

·                  employerdissatisfaction with our programs and services;

·                  diminishedaccess to students and technology professionals;

·                  our failureto maintain or expand our brand or other factors related to our marketing oradvertising practices; and

·                  changes inmobile telecommunications technology.

***We relyon our exclusive relationship with the MOE and the EMIC to ensure the successof the career development and training services segment.***

Huana Xinlong’s software for educationalinstitution administration currently is designated as the standard of the ChinaSchool Administration System for primary and middle schools in China by theEMIC.  Intac Purun currently has an exclusive arrangement with the EMIC touse the database of Chinese students compiled by the MOE.  Our businessplan

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relies on these exclusive arrangements, ourability to commercialize the database of graduates made available to us as aresult of these relationships and continued utilization and adoption of oureducation software by the EMIC.  The loss of our exclusive arrangementswith the MOE or the EMIC would have a material adverse effect on our business,results of operations and financial condition.

**Risks Related to theInternet and Our Technology Infrastructure**

***The stateof the telecommunications and Internet infrastructure in China may limit ourgrowth.***

We rely on the Internet for certain aspectsof our business, including our Internet portals and collection of data for ourDatabase Management Business Unit.  The telecommunications and Internetinfrastructure in China is not well developed and is subject to regulatorycontrol and/or ownership by the Chinese government.  The cost of Internetaccess is high relative to the average income in China.  Failure tofurther develop this infrastructure could limit our ability to grow. Alternatively, as this infrastructure improves and Internet use increases, wemay not be able to scale our systems proportionately.  Our reliance onthis infrastructure makes us vulnerable to disruptions or failures in service,without sufficient access to alternative networks and services.  Suchdisruptions or failures could reduce our user satisfaction.  Should theserisks be realized, our ability to increase revenues and profitability would beimpaired.

***Ouroperations are vulnerable to natural disasters and other events, as we onlyhave limited backup systems and do not maintain any backup servers outside ofChina.***

We have limited backup systems and couldexperience system failures and electrical outages from time to time in thefuture, which could disrupt our operations.  All of our servers androuters are currently hosted in a single location.  We do not maintain anyback up servers outside of Beijing.  We do not have a disaster recoveryplan in the event of damage from fire, floods, typhoons, earthquakes, powerloss, telecommunications failures, break-ins and similar events.  If anyof the foregoing occurs, we may experience a complete system shutdown.  Wedo not carry any business interruption insurance.  To improve theperformance and to prevent disruption of our services, we may have to makesubstantial investments to deploy additional servers or one or more copies ofour websites to mirror our online resources.  Although we carry propertyinsurance with low coverage limits, our coverage may not be adequate tocompensate us for all losses, particularly with respect to loss of business andreputation that may occur.

***Ournetwork operations may be vulnerable to hacking, viruses and other disruptions,which may make our products and services less attractive and reliable.***

Internet usage could decline if anywell-publicized compromise of security occurs.  “Hacking” involves effortsto gain unauthorized access to information or systems or to cause intentionalmalfunctions or loss or corruption of data, software, hardware or othercomputer equipment.  Hackers, if successful, could misappropriateproprietary information or cause disruptions in our service.  We may berequired to expend capital and other resources to protect our website againsthackers.  We cannot assure you that any measures we may take will beeffective.  In addition, the inadvertent transmission of computer virusescould expose us to a material risk of loss or litigation and possibleliability, as well as materially damage our reputation and decrease our usertraffic.

***Unauthorizeduse of our intellectual property by third parties, and the expenses incurred inprotecting our intellectual property rights, may adversely affect our business.***

We regard our copyrights, service marks,trademarks, trade secrets and other intellectual property as critical to oursuccess.  Unauthorized use of our intellectual property by third partiesmay adversely affect our business and reputation.  We rely on trademarkand copyright law, trade secret protection and confidentiality agreements withour employees, customers, business partners and others to protect ourintellectual property rights.  Despite our precautions, it may be possiblefor third parties to obtain and use our intellectual property withoutauthorization.  Furthermore, the validity, enforceability and scope ofprotection of intellectual property in Internet-related industries is uncertainand still evolving.  In particular, the laws of the PRC and certain othercountries are uncertain or do not protect intellectual property rights to thesame extent as do the laws of the United States.  Moreover, litigation maybe necessary in the future to enforce our intellectual property rights, toprotect our trade secrets or to determine the validity and scope of theproprietary rights of others.  Future litigation could result insubstantial costs and diversion of resources.

***We may besubject to intellectual property infringement claims, which may force us toincur substantial legal expenses and, if determined adversely against us,materially disrupt our business.***

We cannot be certain that our products andservices do not or will not infringe valid patents, copyrights or otherintellectual property rights held by third parties.  We may in the futurebe subject to legal proceedings and claims from time

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to time relating to the intellectualproperty of others in the ordinary course of our business.  In particular,if we are found to have violated the intellectual property rights of others, wemay be enjoined from using such intellectual property, and we may incurlicensing fees or be forced to develop alternatives.  We may incursubstantial expenses in defending against these third-party infringementclaims, regardless of their merit.  Successful infringement claims againstus may result in substantial monetary liability or may materially disrupt theconduct of our business.

**Risks Related To theDistribution Industry**

***Our “efficientdistribution” business model may not continue to be successful, which couldresult in the need to quickly change our growth strategy or business plan.***

Our “efficient distribution” business modelis premised upon our ability to acquire inventory in bulk at competitive pricesand quickly resell the products.  Our distribution/telecommunicationssegment is a pure distribution business, and we do not currently offer anyadditional services or product enhancements to accompany the sale of ourinventory.  To the extent that customer preferences dictate thatadditional services or product enhancements are required to successfullycompete in the wireless products industry, we may be forced to quickly changeour distribution business plan, which could have a material adverse effect onour business, financial condition and results of operations.  While weattempt to distinguish ourselves based upon price and our ability to adapt tochanges in market trends, many of our competitors couple their distribution ofwireless communications products with product enhancements and services.

***We are asmall player in a highly competitive environment.***

We compete with numerous well-establishedcompanies, many, if not most, of which are larger and have greater capital andmanagement resources than we do.  In certain markets, we face competitionfrom manufacturers of products that we resell and from our own suppliers. We compete primarily on the basis of price, inventory availability, deliverytime and our customer relationships.  To the extent our competitors marketthe same or similar products and have superior financial resources, thosecompetitors will be better able to withstand substantial price competition andto implement extensive promotional programs.  We expect price competitionto increase in the future.  Because of this intense competition, wholesaledistributors, including INTAC, generally operate with low gross margins. Our ability to remain competitive will be largely dependent on our ability tocontrol costs and protect profit margins, and to anticipate and respond tovarious factors affecting the industry.  These factors include new productintroductions, changes in consumer preferences, demographic trends,international, national, regional and local economic conditions, and discountpricing strategies implemented by competitors.  In addition, our businessplan could be adversely affected if product manufacturers elect to marketwireless products directly to consumers rather than through distributionnetworks.  The trend for direct sales by manufacturers to end-users hasaccelerated in the European Union, therefore reducing the margins and businessopportunities for companies like ours that resell manufacturers’products.  In addition, we face competition from network operators that discountthe price of wireless communications products in connection with promotionalefforts to sell wireless communications services.  No assurance can begiven that we will compete successfully in the wholesale distribution market,particularly if we enter into new international markets.

***We aredependent on a single supplier and do not maintain sufficient redundant sourcesof supply at this time.***

We have historically purchased substantiallyall of the handsets resold by us from only a few wholesalers.  For thefiscal year ended September 30, 2006, we purchased more than 10% ofour wireless handsets from T-Mobile.  Although we intend to seek out andobtain additional sources of supply in the near future, we do not currentlyhave any commitments of supply for any new premium wireless handsets. Accordingly, we are currently dependent on our existing few suppliers, and inparticular T-Mobile, to provide us with adequate inventories.  To theextent that any manufacturers or distributors or existing or future suppliersterminate or modify the terms of their relationships with our suppliers todiscourage resales by us, our suppliers may cease providing products to us atthe favorable pricing that we currently enjoy.  Loss of our ability topurchase product from these suppliers, or the failure by these or othersuppliers to supply competitive products on a timely basis and on favorableterms, or at all, would have a material adverse effect on our business andoperations.  Any determination by T-Mobile not to supply us with handsetsin the future could have a material adverse effect on our business.

***Ourlargest customer represents a majority of our distribution business and oursuccess depends, in significant part, on our ability to retain this customer.***

Our largest customer represents a majorityof our distribution business.  For the fiscal year endedSeptember 30, 2006, our customer, Mr. Lam, represented substantiallyall of our distribution revenues.  We do not maintain

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sales contracts with this or any other ofour customers.  In addition, we have entered into an installment paymentplan agreement with Mr. Lam to pay his current balance due over a period ofnine months.  Monthly payments of $1.7 million are being made inaccordance with this agreement.  As part of this installment payment planagreement, we have agreed that all future sales to Mr. Lam are due and payablewithin 45 days.  If this customer was to reduce or stop purchasingproducts from us prior to the time that we were able to obtain significantadditional customers, our business, operating results and financial conditionwould be materially adversely affected.  We cannot assure you that any ofour principal customers will be customers of ours in future periods.

***We aresubject to risks of customers defaulting on payments due.***

In some cases, we will give credit terms tocustomers for the balance outstanding if they have an established and goodpayment history with us.  As of September 30, 2006, our largestcustomer, Mr. Lam, had a receivable balance of approximately$11.2 million.  We have entered into an installment payment planagreement with Mr. Lam to pay his balance outstanding at September 30, 2006over a period of six months.  Monthly payments of $1.9 million are beingmade in accordance with this agreement.  As part of this installmentpayment plan agreement, we have agreed that all future sales to Mr. Lam are dueand payable within 45 days.  Additionally, our career development servicesreceivables balance totaled $4.9 million at September 30, 2006.  Thisreceivable relates primarily to Huana Xinlong and the sale of educationalsoftware to school districts within China.  These school districts pay fortheir software purchases using funds supplied by the Chinese government. Historically, this funding takes many months, which is typical of the businessprocess in China.  As of September 30, 2006, approximately $963,000 of ourtrade receivable balance relates to sales of educational software completedover 365 days ago.  While believe these career development servicesreceivables to be fully collectible, the timing of the collections cannot beestimated with certainty.  We are susceptible to companies that do not payor delay payment of their outstanding balances due for reasons beyond ourcontrol, including Mr. Lam in particular.  Any failure of, or undue delayby, our customers in making payments us would have a material adverse effect onour business, financial condition and results of operations.

***We do nothave any vendor or customer contracts for new premium wireless handsets, whichrenders our supply and distribution channels particularly unstable.***

We do not have any long-term agreements withour suppliers of new premium handsets, and instead we acquire our inventorypursuant to purchase orders at prices that fluctuate frequently.  Inaddition, we resell our inventory to various retail and wholesale distributorsbased upon purchase orders at varying prices, and we do not have any long-termcontracts with any of our customers.  Accordingly, our suppliers are notcontractually obligated to sell to us in the future, and our customers are notcontractually obligated to buy from us in the future.

***Ourdistribution business operates on a low-margin basis, and our margins may bereduced in the future.***

Our distribution business operates on ahigh-volume, low-margin basis.  Our ability to generate sales is basedupon our having an adequate supply of products.  The gross margins that werealize on sales of wireless handsets could be reduced due to increased competitionor a growing industry emphasis on cost containment.  In addition, weexpect our operating expenses to increase significantly as we expand into newgeographic markets and incur additional personnel, legal, accounting and othercosts associated with operating as a public company.  Therefore, ourfuture profitability will depend on our ability to increase sales to cover ouradditional expenses.  We may not be able to substantially increase salesrates.  Even if our sales rates do increase, the gross margins that wereceive from our sales may not be sufficient to make our future operationsprofitable.

***We aresubject to risks of inventory price declines and obsolescence.***

We purchase inventory at prices thatfluctuate regularly, sometimes daily, based upon market conditions. Although we typically locate a buyer for all or some portion of a supply orderprior to affecting a purchase from our suppliers, we necessarily assumeinventory, price erosion and obsolescence risks for all unsold or unallocated products. These risks are especially significant with wireless telephone products becausethey generally are characterized by rapid technological change and obsolescencewhich affects customer demand.  Our success will depend on our ability topurchase inventory at attractive prices relative to its resale value and ourability to turn our inventory rapidly through sales.  Our initialoperations have focused primarily on wholesale distribution networks, whichgenerally have a shorter inventory cycle than retail sales.  If we pay toomuch or hold inventory too long, we may be forced to sell our inventory at adiscount or at a loss or write down its value.

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***If we experience problems in ourdistribution operations, we could lose customers.***

 

In addition to inventory suppliers, wedepend on several other third parties over whom we have limited control,including, in particular, freight forwarding companies and commoncarriers.  We have no long-term relationships with any of theseparties.  We are, therefore, subject to risks, including risks of employeestrikes and inclement weather, which could result in failures by such partiesto provide services to us in a timely manner, and those relating to priceincreases.  These could damage our reputation and have a material adverseeffect on our financial condition and results of operations.

***Newtechnologies may reduce the demand for our products.***

The technology relating to wireless handsetschanges rapidly, and industry standards are constantly evolving, resulting inrapid product obsolescence and short product life cycles.  If othercompanies develop and commercialize new technologies or products in relatedmarket segments that compete with existing wireless technologies, it couldmaterially change the types of products that we may be required to offer orresult in significant price competition.  Notwithstanding our efficientdistribution strategy, product obsolescence could result in significantlyincreased inventories of our unsold products.  Furthermore, if we elect tostock our inventories in the future with any of these technologies andproducts, we will run the risk that our existing customers and consumers maynot be willing, for financial or other reasons, to purchase new equipmentnecessary to utilize these new technologies.  There is no assurance thatnew technologies will not reduce the demand for our products.

***We maybecome subject to suits alleging medical risks associated with our wirelesshandsets.***

Lawsuits or claims have been filed or madeagainst manufacturers of wireless handsets over the past several years allegingpossible medical risks, including brain cancer, associated with theelectromagnetic fields emitted by wireless communications handsets.  Therehas been only limited relevant research in this area, and this research has notbeen conclusive as to what effects, if any, exposure to electromagnetic fieldsemitted by wireless handsets has on human cells.  Substantially all of ourrevenues are derived, either directly or indirectly, from sales of wirelesshandsets.  Because of our participation in the distribution of wirelesshandsets, we may become subject to lawsuits filed by plaintiffs allegingvarious health risks from our products.  If any future studies findpossible health risks associated with the use of wireless handsets or if anydamages claim against us is successful, it would likely have a material adverseeffect on our business.  Even an unsubstantiated perception that healthrisks exist could adversely affect our ability or the ability of our customersto market wireless handsets.

**Risks Attributable ToInternational Operations**

***Aslowdown or other adverse developments in the PRC economy may materially andadversely affect our customers, demand for our services and our business.***

Substantially all of our operations areconducted in China and substantially all of our growth in revenues will begenerated from providing career development and training services for customersin China, including the government.  Although the PRC economy andgovernment spending on education have grown significantly in recent years, wecannot assure you that such growth will continue.  Career development andtraining services businesses are all relatively new industries in China, and wemay be sensitive to a slowdown in economic growth or other adverse changes inthe PRC economy.  In response to adverse economic developments, employersmight hire fewer permanent employees, engage in hiring freezes, lay offemployees, or reduce spending on marketing and the PRC government might reducespending on education.  As a result, a slowdown in overall economicgrowth, an economic downturn or recession or other adverse economicdevelopments in China may materially reduce the demand for our services andmaterially and adversely affect our business.

***PRC lawsand regulations related to the PRC Internet sector are unclear and will likelychange in the near future.  If we are found to be in violation of currentor future PRC laws or regulations, we could be subject to severe penalties.***

The PRC regulates its Internet sector bymaking pronouncements or enacting regulations regarding the legality of foreigninvestment in the PRC Internet sector and the existence and enforcement ofcontent restrictions on the Internet.  We believe that our current ownershipstructure complies with all existing PRC laws, rules and regulations. There are, however, substantial uncertainties regarding the interpretation ofcurrent PRC Internet laws and regulations.  Accordingly, it is possiblethat the PRC government will ultimately take a view contrary to ours.

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Issues, risks and uncertainties relating toPRC government regulation of the PRC Internet sector include the following:

The PRC enacted regulations applying toInternet-related services and telecom-related activities.  While manyaspects of these regulations remain unclear, they purport to limit and requirelicensing of various aspects of the provision of Internet informationservices.  If these regulations are interpreted to be inconsistent withour ownership structure, our business will be severely impaired.

Under the agreement reached inNovember 1999 between the PRC and the United States concerning the UnitedStates’ support of China’s entry into the World Trade Organization, or the WTO,foreign investment in PRC Internet services will be liberalized to allow for30% foreign ownership in key telecommunication services, including PRC Internetventures, for the first year after China’s entry into the WTO, 49% in thesecond year and 50% thereafter.  China officially entered the WTO onDecember 11, 2001.  However, the implementation of China’s WTOaccession agreements is still subject to various conditions.

The Ministry of Information Industry, or theMII, has also stated that the activities of Internet content providers aresubject to regulation by various PRC government authorities, depending on thespecific activities conducted by the Internet content provider.  Variousgovernment authorities have stated publicly that they are in the process ofpreparing new laws and regulations that will govern these activities.  Theareas of regulation currently include online advertising, online newsreporting, online publishing, online securities trading and the provision ofindustry-specific (e.g., drug-related) information over the Internet. Other aspects of our online operations may be subject to regulation in thefuture.

The interpretation and application ofexisting PRC laws and regulations, the stated positions of the MII and thepossible new laws or regulations have created substantial uncertaintiesregarding the legality of existing and future foreign investments in, and thebusinesses and activities of, PRC Internet companies, including us.

Accordingly, it is possible that therelevant PRC authorities could, at any time, assert that any portion or all ofour existing or future ownership structure and business violate existing orfuture PRC laws, regulations or policies.  It is also possible that thenew laws or regulations governing the PRC Internet sector that have been adoptedor may be adopted in the future will prohibit or restrict foreign investmentin, or other aspects of, any of our proposed businesses and operations. In addition, these new laws and regulations may be retroactively applied to us.

If we are found to be in violation of anyexisting or future PRC laws or regulations, the relevant PRC authorities wouldhave broad discretion in dealing with such violation, including, withoutlimitation, the following:

·                  levyingfines;

·                  confiscatingour income;

·                  revoking our businesslicense;

·                  shutting downour servers and/or blocking our websites;

·                  requiring usto restructure our ownership structure or operations; and

·                  requiring usto discontinue any portion or all of our Internet business.

Any of these actions could have a materialadverse effect on our financial condition and results of operations.

***We haveattempted to comply with restrictions on foreign investment in the PRC Internetsector imposed by the PRC government by entering into agreements with thestockholders of Tianjin Weilian, an investment holding company holding a 45%equity interest of Intac Purun, and the stockholders of Tianjin Chengtai, aninvestment holding company holding a 15% equity interest of Intac Purun. If the PRC government finds that agreements entered into with respect to theownership and operation of Intac Purun do not comply with the relevant foreigninvestment restrictions, our business in the PRC will be adversely affected.***

In order to meet ownership requirementsunder PRC law which impose restrictions on foreign investment in the PRCInternet sector, INTAC entered into agreements with the stockholders of TianjinWeilian, an investment holding company holding a 45% equity interest of IntacPurun, and the stockholders of Tianjin Chengtai International Trading Limited,an investment holding company holding a 15% equity interest of Intac Purun, toexert effective control over Intac Purun.

The legal uncertainties associated with PRCgovernment regulations and the nature of the restructuring through which weexert effective control over Intac Purun may be summarized as follows:

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·                  whether thePRC government may view our structure as being in compliance with its laws andregulations;

·                  whether thePRC government may impose additional regulatory requirements with which we maynot be in compliance; and

·                  whether thePRC government will permit INTAC or Intac Purun to obtain current licenses oracquire future licenses necessary in order to conduct operations in the PRC.

We cannot be sure that our restructuredoperations and activities will be viewed by PRC regulatory authorities as in compliancewith applicable PRC laws and regulations.  Our business will be materiallyadversely affected if our business license is revoked as a result ofnon-compliance.  In addition, we may not be able to obtain all of thelicenses we may need in the future.  Future changes in PRC governmentpolicies affecting the provision of information services, including theprovision of online services and Internet access, may impose additionalregulatory requirements on us or our service providers or otherwise harm ourbusiness.

***Ourinternational operations subject us to other significant risks.***

Our international operations expose us to awide variety of other risks including increased credit risks, customs duties,import quotas and other trade restrictions, potentially greater inflationarypressures, shipping delays, the risk of failure or material interruption ofwireless systems and services, possible wireless product supply interruptionand potentially significant increases in wireless product prices.  Changesmay occur in foreign trade and investment laws in the territories and countrieswhere we operate.  U.S. laws and regulations relating to investment andtrade in foreign countries could also change to our detriment.  Any ofthese factors could materially and adversely affect our revenues andprofits.  We are subject to risk of political instability and tradesanctions within China.

China has traditionally been a closed marketwith strict political controls.  As China shifts to a market economy,growing economic and social freedoms may conflict with the more restrictivepolitical and governmental policies.  In addition, democratic countriesthroughout the world have, from time to time, attempted to use economic andother sanctions to achieve political or social change in other countries. In addition, the Chinese government has insisted that Taiwan is part of Chinaand, from time to time, has threatened military action in the region whenTaiwanese independence has been asserted.  Each of these factors couldresult in economic sanctions, economic instability, the disruption of tradingand war within China and the Asia-Pacific Rim, any of which could result in ourinability to conduct business operations in China.  Because a substantialmajority of our business is currently within China, the disruption ofdistribution channels into China would have material and adverse consequencesto us.

Further risks relating to internationaloperations include, but are not restricted to, unexpected changes in legal andregulatory requirements, changes in tariffs, exchange rates and other barriers,political and economic instability, possible effects of war and acts ofterrorism, difficulties in account receivable collection, difficulties inmanaging distributors or representatives, difficulties in staffing and managinginternational operations, difficulties in protecting INTAC’s intellectualproperty overseas, seasonality of sales and potentially adverse taxconsequences. Any of these factors could materially and adversely affect our revenuesand profits.

**Political, Economic andRegulatory Risks**

***Restrictionson currency exchange may limit our ability to utilize our revenues effectively.***

Some of our revenues and operating expensesare denominated in Renminbi.  Currently, we may purchase foreign exchangefor settlement of “current account transactions” without the approval of theState Administration for Foreign Exchange, or SAFE.  We may also retainforeign exchange in our current account (subject to a ceiling approved by theSAFE) to satisfy foreign exchange liabilities or to pay dividends. However, the relevant PRC governmental authorities may limit or eliminateour ability to purchase and retain foreign currencies in the future.

Since a significant amount of our futurerevenues will be in Renminbi, existing and future restrictions on currencyexchange may limit our ability to use revenue generated in Renminbi to fund ourbusiness activities outside China, if any, or expenditures denominated inforeign currencies.

***We aresubject to risks of currency fluctuations and exchange restrictions.***

Currency fluctuations, devaluations andexchange restrictions may adversely affect our liquidity and results ofoperations.  A substantial portion of our business currently involves thepurchase of wireless telephones in Europe for resale

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in the Asia-Pacific Rim.  We attempt tomanage the risk of foreign currency devaluation by holding wireless telephoneproducts that are not allocated to a particular customer in inventory for ashort time (typically less than 30 days) and by requiring our customers to paycash (in local currency) for the full price of an order upon delivery.  Tothe extent that our inventory cycle increases, the risks of currencyfluctuations decreasing our gross margins on sales of our products willincrease.  In addition, in some countries, local currencies may not bereadily converted into Euros or U.S. dollars (or other “hard currencies”) ormay only be converted at government-controlled rates, and, in some countries,the transfer of hard currencies offshore has been restricted from time totime.  Very limited hedging transactions are available in China to reduceour exposure to exchange rate fluctuations.  To date, we have not enteredinto any hedging transactions in an effort to reduce our exposure to foreigncurrency exchange risk.  While we may decide to enter into hedgingtransactions in the future, the availability and effectiveness of these hedgesmay be limited and we may not be able to successfully hedge our exposure, if atall.  Our revenues as expressed in our U.S. dollar financial statementswill decline in value if Renminbi depreciates relative to the U.S.dollar.  In addition, our currency exchange losses may be magnified by PRCexchange control regulations that restrict our ability to convert Renminbi intoU.S. dollars.

***Regulation andcensorship of information collection and distribution in China may adverselyaffect our business.***

China has enacted regulations governingInternet access and the distribution of news and other information. Furthermore, the Propaganda Department of the Chinese Communist Party has beengiven the responsibility to censor news published in China to ensure, superviseand control a particular political ideology.  In addition, the MII haspublished implementing regulations that subject online information providers topotential liability for content included on their portals and the actions ofsubscribers and others using their systems, including liability for violationof PRC laws prohibiting the distribution of content deemed to be sociallydestabilizing.  Because many PRC laws, regulations and legal requirementswith regard to the Internet are relatively new and untested, theirinterpretation and enforcement may involve significant uncertainty.  In addition,the PRC legal system is a civil law system in which decided legal cases havelimited binding force as legal precedents.  As a result, in many cases itis difficult to determine the type of content that may result in liability fora website operator.

Periodically, the Ministry of PublicSecurity has stopped the distribution over the Internet of information which itbelieves to be socially destabilizing.  The Ministry of Public Securityhas the authority to cause any local Internet service provider to block anywebsite maintained outside China at its sole discretion.  If the PRCgovernment were to take action to limit or eliminate the distribution ofinformation through our portal or to limit or regulate current or futureapplications available to users of our portal, our business would be adverselyaffected.

The State Secrecy Bureau, which is directlyresponsible for the protection of state secrets of all PRC government andChinese Communist Party organizations, is authorized to block any website it deemsto be leaking state secrets or failing to meet the relevant regulationsrelating to the protection of state secrets in the distribution of onlineinformation.  Under the applicable regulations, we may be held liable forany content transmitted on our portal.  Furthermore, where the transmittedcontent clearly violates the laws of the PRC, we will be required to delete it,and where the transmitted content is considered suspicious, we are required toreport such content.  We must also undergo computer security inspections,and if we fail to implement the relevant safeguards against security breaches,our operations in the PRC may be shut down.

Although the PRC has several laws andregulations relating to the use of the Internet, addressing personal privacy inuse of the Internet and the freedom of communications, the PRC government doesnot restrict online service providers in the collection, transmission andcommercial use of personal information or data.  Personal data isprotected from unlawful use by general statutes and by any contractualarrangement between the user and the service provider.

Since spring of 2005, the National People’sCongress and the State Council have begun legislative review of a draft Law forProtection of Personal Information which provides a wider scope of informationprotection than that required to merely protect the personal privacy of acitizen.  Cellular phone number, home address, medical files andoccupational information will all be protected.  The draft further providesthat usage of such personal information by service providers (excluding thenational security authority, research institutions, and news agency) shall besubject to the prior authorization of each individual and violation under thislaw could result in administrative, civil, and be even criminalliabilities.  If regulations are adopted addressing the collection,transmission and commercial use of personal information or data, we could besubject to these penalties, certain aspects of our business plan may no longerbe viable and our business would thus be adversely affected.

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***Political and economic policies ofthe PRC government could affect our business.***

 

A significant portion of our business,assets and operations are located in China and a significant portion of ourfuture revenues are expected to be derived from our operations in China. Accordingly, our business could be adversely affected by changes in political,economic or social conditions in China, adjustments in PRC government policiesor changes in laws and regulations.

The economy of China differs from theeconomies of most countries belonging to the Organization for EconomicCooperation and Development in a number of respects, including:

·                  structure;

·                  level ofgovernment involvement;

·                  level ofdevelopment;

·                  level ofcapital reinvestment;

·                  growth rate;

·                  control offoreign exchange; and

·                  methods ofallocating resources.

Since 1949, China has been primarily aplanned economy subject to a system of macroeconomic management.  Althoughthe Chinese government still owns a significant portion of the productiveassets in China, economic reform policies since the late 1970s have emphasizeddecentralization, autonomous enterprises and the utilization of marketmechanisms.  We cannot predict what affects the economic reform andmacroeconomic measures adopted by the Chinese government may have on ourbusiness or results of operations.

***The PRClegal system embodies uncertainties which could limit the legal protectionsavailable to us.***

The PRC legal system is a civil law systembased on written statutes.  Unlike common law systems, it is a system inwhich decided legal cases have little precedential value.  In 1979, thePRC government began to promulgate a comprehensive system of laws and regulationsgoverning economic matters in general.  We are subject to laws andregulations applicable to foreign investment in mainland China.  However,these laws, regulations and legal requirements are relatively recent, and theirinterpretation and enforcement involve uncertainties.  These uncertaintiescould limit the legal protections available to us and other foreigninvestors.  In addition, we cannot predict the effect of futuredevelopments in the PRC legal system, particularly with regard to the Internet,our ownership structure and currency exchange, including the promulgation ofnew laws, changes to existing laws or the interpretation or enforcementthereof, or the preemption of local regulations by national laws.

***It may bedifficult to enforce any civil judgments against us or our board of directorsor officers, because most of our assets are located outside of the UnitedStates.***

Although we are incorporated in the State ofNevada, substantially all of our assets are located in the PRC.  As aresult, it may be difficult for investors to enforce outside the United Statesany actions brought against us in the United States, including actionspredicated upon the civil liability provisions of the federal securities lawsof the United States or of the securities laws of any state of the UnitedStates.  In addition, certain of our directors and officers and all or asubstantial portion of their assets may be located outside the United States(principally in the PRC).  As a result, it may not be possible for investorsto effect service of process within the United States upon those directors andofficers, or to enforce against them or us judgments obtained in United Statescourts, including judgments predicated upon the civil liability provisions ofthe federal securities laws of the United States or of the securities laws ofany state of the United States.  There is doubt as to the enforceabilityin the PRC, in original actions or in actions for enforcement of judgments ofUnited States courts, of civil liabilities predicated solely upon the federalsecurities laws of the United States or the securities laws of any state of theUnited States.

**Risks Related to the Marketfor Our Common Stock**

***Becauseof factors unique to us and our forecast of anticipated financial performance,the market price of our common stock is likely to be particularlyvolatile.  The market price of our common stock has been and will likelycontinue to be volatile.***

Because of the relatively small number ofshares of our common stock available for resale on The Nasdaq Capital Market,the early stage of our business and numerous other factors, the trading priceof our common stock has been historically volatile, and is likely to continueto be volatile.  In addition, the Nasdaq Stock Market has from time to timeexperienced significant price and volume fluctuations that have affected themarket prices for the securities of technology

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companies, particularly Internetcompanies.  In addition, actual or anticipated variations in our quarterlyoperating results, the introduction of new services, products or technologiesby our suppliers or our competitors, changes in conditions or trends in thewireless telecommunications industry, changes in governmental regulation, orchanges in securities analysts’ estimates of our future performance or that ofour competitors or our industry in general, could all affect future stockperformance.  From time to time, we also may publicly forecast anticipatedperformance goals, and our failure to meet such expectations could adverselyaffect our future stock performance.  Furthermore, investors in our sharesmay experience a decrease in the value of their shares regardless of ouroperating performance or prospects.  Investors should not consideracquiring our common stock unless they are able to absorb a complete loss oftheir investment.

***The saleor availability for sale of substantial amounts of our common stock couldadversely affect its market price.***

There were 22,940,727 shares of our commonstock outstanding as of  December 11, 2006 .  Most of these sharesare either freely tradable without restriction under Rule 144(k) under theSecurities Act of 1933 or are tradable subject to the notice, volume and mannerof sale restrictions of Rule 144 under the Securities Act.

In July 2004, we registered the resaleof an aggregate of 1,800,000 shares of our common stock to two accreditedinvestors who purchased shares of our common stock in private placements. All of these shares are currently freely tradable without restriction.  InMay 2006, we registered the resale of an additional 1,601,272 shares of ourcommon stock.

The sale or availability for sale of theseshares could adversely affect the market price for our shares.

***Anti-takeoverprovisions of Nevada Law, our certificate of incorporation and bylaws coulddelay or deter a change in control.***

Some provisions of our certificate ofincorporation and bylaws, as well as various provisions of Nevada law, may makeit more difficult to acquire our company or effect a change in control of ourcompany, even if an acquisition or change in control would be in the interestof our stockholders or if an acquisition or change in control would provide ourstockholders with a premium for their shares over then current market prices.

***The powerof our board of directors to designate and issue shares of preferred stockcould have an adverse effect on holders of our common stock.***

Our certificate of incorporation authorizes our board of directors todesignate and issue one or more series of preferred stock, having rights andpreferences as the board may determine, and any such designations and issuancescould have an adverse effect on the rights of holders of common stock.

**ITEM1B   Unresolved Staff Comments**

None.

**ITEM 2 -PROPERTIES**

As September 30,2006 we leased approximately 37,793****square feetfor our operations.  Our currentsignificant leased properties are:
| **Location**                                                                     | ** ** | **Size**     | ** ** | **Description**   | ** ** | **Business Segment**        |
|----------------------------------------------------------------------------------|------------|--------------|------------|-------------------|------------|-----------------------------|
|                                                                             |       |         |       |              |       |                        |
| Laws Commercial  Plaza, Kowloon, Hong Kong                                       |       | 2,774 sq ft  |       | Headquarters      |       | Distribution business       |
| Capital Times  Square, 88 Chanan Street, City West District, Beijing, China      |       | 15,823 sq ft |       | Headquarters      |       | Career development services |
| Zhawowei  Industrial Center, Jiuxianqiao Road, Chaoyang District, Beijing, China |       | 17,429 sq ft |       | Direct owned IMTI |       | Career development services |
| Frankfurt,  Germany                                                              |       | 1,500 sq ft  |       | Office            |       | Distribution business       |
| Dallas, Texas                                                                    |       | 270 sq ft    |       | Corporate office  |       | Allocated                   |

 

As September 30,2006 our current total remaining lease obligations are U.S. **$**1,075,660.

In addition to ourleased facilities, some of which are leased on a short-term basis, we alsofrequently utilize the

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storage capabilities ofour vendors and freight-forwarders.  Webelieve that the terms we receive for storage space from those parties iscomparable to, or better than, the terms we could obtain for additional leasedfacilities.

We believe thatour facilities are suitable for our current business and that we could obtainsuitable properties in the relevant areas without a material adverse effect onour business.

**ITEM 3 -LEGAL PROCEEDINGS**

We are not a partyto any pending material legal proceedings, nor is our property subject to suchproceedings, as of the date of this report.

**ITEM 4 -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

No matter wassubmitted to a vote of our security holders during the fourth quarter of thefiscal year ended September 30, 2006.

**PART II**

**ITEM 5 -MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES**

Our common stockis traded on The Nasdaq SmallCap Market under the symbol “INTN” and on theFrankfurt Stock Exchange under the symbol “WKN 805768.” The equity compensationplans information required by Item 201(d) of Regulation S-K in response tothis Item 5 is incorporated by reference from “Item 12 — Security Ownership ofCertain Beneficial Owners and Management,” of this Report, and should beconsidered an a part of this Item 5.

Market for Common Stock

As of December 11,2006, there were 6 holders of record of our common stock.

The following table setsforth the high and low bid prices of our common stock as reported by The NasdaqSmallCap Market or OTCBB for the quarters indicated. Such prices reflectinter-dealer prices, without retail markup, markdown or commission, and may notnecessarily represent actual transactions.
| **QUARTER ENDING**  | ** ** | **LOW** | ** ** | **HIGH** | ** ** |
|--------------------------|------------|---------|------------|----------|------------|
|                     |       |    |       |     |       |
| December 31,  2004  |       | $       | 7.06       |     | $          | 15.97 |   |
|                     |       |    |       |     |       |
| March 31,  2005     |       | $       | 10.74      |     | $          | 17.65 |   |
|                     |       |    |       |     |       |
| June 30,  2005      |       | $       | 5.02       |     | $          | 14.11 |   |
|                     |       |    |       |     |       |
| September 30,  2005 |       | $       | 5.31       |     | $          | 8.90 |   |
|                     |       |    |       |     |       |
| December 31,  2005  |       | $       | 4.99       |     | $          | 6.18 |   |
|                     |       |    |       |     |       |
| March 31,  2006     |       | $       | 3.92       |     | $          | 8.71 |   |
|                     |       |    |       |     |       |
| June 30,  2006      |       | $       | 5.90       |     | $          | 7.42 |   |
|                     |       |    |       |     |       |
| September 30, 2006  |       | $       | 5.90       |     | $          | 7.50 |   |

 

The closing price of ourcommon stock on December 11, 2006 on The Nasdaq SmallCap Market was $7.45.

Dividends

Since inception,we have not paid any cash dividends on our common stock and we do notanticipate declaring dividends in the foreseeable future. We intend to retainfuture earnings for reinvestment in our business.

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**ITEM 6 – SELECTED FINANCIAL DATA**

In August of2005, the Company changed its fiscal year end from December 31st to September 30th. Accordingly, the accompanying financialstatements include the consolidated balance sheets as of September 30,2006 and 2005. The related consolidated statements of operations, consolidatedstatements of stockholders’ equity and comprehensive income (loss) andconsolidated statements of cash flows are presented for the year endedSeptember 30, 2006, the nine months ended September 30, 2005 and the yearended December 31, 2004.

The selectedfinancial data presented for the year ended September 30, 2006, the ninemonths ended September 30, 2005, and the years ended December 31, 2004 and 2003below have been derived from our audited consolidated financial statements. Theselected financial data should be read in conjunction with our auditedconsolidated financial statements and notes thereto, and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included elsewhere in this Report. Operating results for the periods below arenot necessarily indicative of the results that may be expected for futurefiscal years; refer to “Continuing Statement Regarding Forward-LookingStatements” and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” included elsewhere in this Report. Certain prioryear balances have been reclassified to conform to the current yearpresentation.

**Statement of Operations Data:**
| ** **                                                    | ** ** | **Year ended  September 30,  2006** | ** ** | **Nine months  ended  September 30,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  December 31,  2003** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
|                                                          |       |                                          |       |                                                  |       |                                         |       |                                         |       |
| Career  development services revenue                          |       | $                                             | 5,749,932  |                                                  | $          | 4,218,779                                    |       | $                                            | 4,231,076  |   | $ | — |   |
| Career  development services cost of revenue                  |       | 1,508,526                                     |       | 1,039,299                                             |       | 1,233,490                                    |       | —                                       |       |
| Career  development services gross profit                     |       | 4,241,406                                     |       | 3,179,480                                             |       | 2,997,586                                    |       | —                                       |       |
| Operating  expenses (income)                                  |       |                                          |       |                                                  |       |                                         |       |                                         |       |
| Product development                                           |       | 3,422,312                                     |       | 2,660,793                                             |       | 1,819,501                                    |       | —                                       |       |
| Selling, general and administrative expenses                  |       | 2,258,089                                     |       | 1,836,777                                             |       | 504,959                                      |       | 133,516                                      |       |
| Provision for doubtful accounts                               |       | 950,608                                       |       | —                                                |       | —                                       |       | —                                       |       |
| Merger transaction costs                                      |       | 1,340,319                                     |       | —                                                |       | —                                       |       | —                                       |       |
| Gain on sale of assets                                        |       | —                                        |       | (383,933                                              | )          | —                                       |       | —                                       |       |
| Total operating  expenses                                     |       | 7,971,328                                     |       | 4,113,637                                             |       | 2,324,460                                    |       | 133,516                                      |       |
| Total other  income (expense), net                            |       | 2                                             |       | 2,241                                                 |       | 210,133                                      |       | 1,898                                        |       |
| Income (loss)  from continuing operations before income taxes |       | (3,729,920                                    | )          | (931,916                                              | )          | 883,259                                      |       | (131,618                                     | )          |
| Deferred income  taxes                                        |       | 426,447                                       |       | —                                                |       | —                                       |       | —                                       |       |
| Income (loss)  from continuing operations                     |       | (4,156,367                                    | )          | (931,916                                              | )          | 883,259                                      |       | (131,618                                     | )          |
| Income (loss)  from discontinued operations                   |       | (3,985,629                                    | )          | (534,466                                              | )          | 4,933,238                                    |       | (107,578                                     | )          |
| Net income  (loss)                                            |       | $                                             | (8,141,996 | )                                                     | $          | (1,466,382                                   | )          | $                                            | 5,816,497  |   | $ | (239,196 | ) |
| Basic income  (loss) per share                                |       |                                          |       |                                                  |       |                                         |       |                                         |       |
| Income (loss) from continuing operations                      |       | $                                             | (0.18      | )                                                     | $          | (0.04                                        | )          | $                                            | 0.04       |   | $ | (0.01 | ) |
| Income (loss) from discontinued operations                    |       | $                                             | (0.18      | )                                                     | $          | (0.03                                        | )          | $                                            | 0.24       |   | $ | (0.00 | ) |
| Net income (loss)                                             |       | $                                             | (0.36      | )                                                     | $          | (0.07                                        | )          | $                                            | 0.28       |   | $ | (0.01 | ) |
| Diluted income  (loss) per share                              |       |                                          |       |                                                  |       |                                         |       |                                         |       |
| Income (loss) from continuing operations                      |       | $                                             | (0.18      | )                                                     | $          | (0.04                                        | )          | $                                            | 0.04       |   | $ | (0.01 | ) |
| Income (loss) from discontinued operations                    |       | $                                             | (0.18      | )                                                     | $          | (0.03                                        | )          | $                                            | 0.24       |   | $ | (0.00 | ) |
| Net income (loss)                                             |       | $                                             | (0.36      | )                                                     | $          | (0.07                                        | )          | $                                            | 0.28       |   | $ | (0.01 | ) |
| Weighted average  shares outstanding – basic             |       | 22,587,806                                    |       | 22,149,122                                            |       | 20,711,122                                   |       | 19,481,122                                   |       |
| Weighted average shares  outstanding - diluted                |       | 22,587,806                                    |       | 22,149,122                                            |       | 21,007,978                                   |       | 19,481,122                                   |       |

 

41

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**Other Data:**

 
| ** **                                                        | ** ** | **Year ended  September 30,  2006** | ** ** | **Nine months  ended  September 30,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  December 31,  2003** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
|                                                              |       |                                          |       |                                                  |       |                                         |       |                                         |       |
| Net cash  provided by (used in) continuing operating activities   |       | $                                             | 239,650    |                                                  | $          | (2,510,948                                   | )          | $                                            | (904,187   | ) | $ | — |   |
| Net cash provided  by (used in) discontinued operating activities |       | (64,847                                       | )          | 980,322                                               |       | (11,967,262                                  | )          | (1,244,092                                   | )          |
| Net cash  provided by (used in) investing activities              |       | (313,472                                      | )          | 431,863                                               |       | 1,791,499                                    |       | (1,340,829                                   | )          |
| Net cash provided by  financing activities                        |       | 524,682                                       |       | 997                                                   |       | 7,774,384                                    |       | 7,452,371                                    |       |
|                                                                   |            |                                               |            |                                                       |            |                                              |            |                                              |            |  |  |  |  |

 

**Balance Sheet Data:**
| ** **                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                             |       |                   |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                       |       | $                      | 850,131    |                  | $          | 464,118 |   | $ | 1,561,884 |   | $ | 2,067,450 |   |
| Restricted cash                                  |       | —                 |       | —                |       | — |   | 2,800,000 |   |
| Trade accounts  receivable                       |       | 5,242,985              |       | 5,675,683             |       | 3,454,433 |   | — |   |
| Assets held for  sale                            |       | 13,059,001             |       | 21,471,036            |       | 19,311,736 |   | 6,054,848 |   |
| Total current  assets                            |       | 19,197,678             |       | 28,037,266            |       | 24,704,064 |   | 10,809,460 |   |
| Property and  equipment, net                     |       | 1,131,120              |       | 1,345,322             |       | 1,463,340 |   | 635,815 |   |
| Acquired  software, net                          |       | 655,958                |       | 1,409,460             |       | 1,976,322 |   | 304,487 |   |
| Goodwill                                         |       | 16,742,466             |       | 12,799,769            |       | 12,757,188 |   | — |   |
| Total assets                                     |       | 38,578,436             |       | 44,391,959            |       | 41,689,772 |   | 12,521,698 |   |
|                                             |       |                   |       |                  |       |   |   |   |   |
| Trade accounts  payable and accrued expenses     |       | 3,251,308              |       | 2,494,818             |       | 1,639,478 |   | 137,593 |   |
| Short-term note  payable to bank                 |       | —                 |       | —                |       | — |   | 2,728,202 |   |
| Deferred tax  liability                          |       | 426,477                |       | —                |       | — |   | — |   |
| Liabilities held  for sale                       |       | 1,933,512              |       | 5,317,204             |       | 1,219,966 |   | 2,240,357 |   |
| Total current  liabilities                       |       | 5,855,492              |       | 8,156,480             |       | 4,104,592 |   | 5,106,152 |   |
| Total  stockholders’ equity                 |       | 32,722,944             |       | 36,235,479            |       | 37,585,180 |   | 6,720,138 |   |
| Total  liabilities and stockholders’ equity |       | 38,578,436             |       | 44,391,959            |       | 41,689,772 |   | 12,521,698 |   |
| Working capital                                  |       | 13,342,186             |       | 19,880,786            |       | 20,599,472 |   | 5,703,308 |   |
|                                                  |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

**ITEM 7 –MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

This Report, andin particular the following discussion in this Item 7, contains forward-lookingstatements that involve risks and uncertainties. Our actual results coulddiffer materially from those anticipated in forward-looking statements for manyreasons - See “Cautionary Statement Regarding Forward-Looking Statements.” Youshould read the following discussion with our consolidated financial statementsand related notes included in Item 8 of in this Report.

**Overview**

OnJanuary 15, 2004, INTAC announced the shift in focus of its business planfrom the traditional distribution of premium brand wireless handsets to its newInternet joint venture, Intac Purun.  OnNovember 23, 2005, we announced the further refinement of this shift infocus.  Under the refined focus of thisbusiness segment, we will operate primarily in three business units:

·                  INTAC MobileTelecommunications Institute,

·                  EducationManagement Software Business Unit, and

·                  DatabaseManagement Business Unit.

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We have further expanded the capabilities of Intac Purun to encompassvarious integrated educational and career development services.  Intac Purun was formed in October 2003with China Putian Corporation and the EMIC. The newly-founded joint venture was initially owned 45% by INTAC, 15% byChina Putian Corporation, 30% by a private investor group and 10% by theEMIC.  In June 2004, INTACindirectly purchased an additional 15% interest in Intac Purun from ChinaPutian Corporation.  This additional 15%interest brings INTAC’s total ownership in Intac Purun to 60%.  INTAC’s ownership interest in Intac Purun isheld indirectly through PRC nominees.

 

InSeptember 2004, INTAC indirectly formed two new, indirectly ownedcompanies, Intac Advertising and Intac Technology.  Intac Advertising and Intac Technology areprivate Chinese corporations which were established to provide advertisingservices and value added services in support of Intac Purun.

In December 2004, Holdings acquired HuanaXinlong, a leading Chinese developer of management software for educationalinstitution administration.  HuanaXinlong currently has products distributed and installed in more than 10,000 elementary and middleschools.  We will further developenhancements to Huana Xinlong’s software for educational institutionadministration, which has been designated as the standard of the China SchoolAdministration System for primary and middle schools by the EMIC.

In April 2006, theCompany entered into an Agreement and Plan of Merger, referred to as the mergeragreement, with HowStuffWorks Inc. (“HSW”), HSW International, Inc. (“HSWInternational”) and HSW International Merger Corporation (“merger sub”).Pursuant to the merger agreement, merger sub will merge with and into INTAC,with INTAC continuing as the surviving corporation (the “merger”). As a resultof the merger, INTAC will become a wholly owned subsidiary of HSWInternational. Pursuant to the terms of the merger agreement, each outstandingshare of Company common stock, par value $0.001 per share, will be convertedinto the right to receive one share of HSW International common stock, parvalue $0.001 per share.

On August 8, 2006, theCompany entered into a letter of intent with Wei Zhou, its Chairman and CEO, topurchase the Distribution Segment of the business for 3 million shares of theCompany’s common stock.  The consummation of this transaction isanticipated to be concurrent with the closing of the merger transaction withHSW International, Inc. as described in “Recent Events” and is subject to theapproval of the Board of Directors and stockholders of the Company other thanWei Zhou and his affiliates.

Our objective in2007 is to further expand and enhance the business prospects and opportunitiesafforded by our relationship with the EMIC. We are developing an array ofpremium products and services which will be made available directly and throughour Internet portal business.  OurInternet portal is being tailored to meet the growing demand by graduates inChina for career development products and services.

In addition, wecontinually evaluate investment opportunities in other business segments withinChina, the Asia-Pacific Rim and, to a lesser extent, Europe. Our entry intothese new business segments is contingent upon our identifying both favorableinvestment opportunities and strategic partners with expertise in such businesssegments as well as available capital.

INTAC raisedequity financing of $4.5 million in September 2003 in a private placementof common stock to an accredited investor. In May 2004, INTAC raised an additional $12.0 million from the saleof its common stock in a private placement to an accredited investor.  Proceeds from the private placements wereused to expand our Career Development Services Business and for general workingcapital purposes.  INTAC filed aregistration statement that registered the resale of these shares for thepurchasers.

Our revenues fromcontinuing operations for the years ended September 30, 2006, the ninemonths ended September 30, 2005 and the year ended December 31, 2004 werederived primarily from our Integrated Educational and Career DevelopmentServices business and consists primarily of sales of education andadministrative software derived entirely from China.  We expect these revenues to increase in futureyears.

Our cost ofrevenue – career development services is comprised of the service fee paid forthe provision of software training and technological services, and theamortization charge for computer software.

Product development expensesare principally comprised of costs attributable to the development, productionand delivery of our educational and career development services, such assalaries and facility costs.

Our selling,general and administration expenses are comprised of sales expenses, togetherwith commission expense, including commissions payable to sales staff; andgeneral and administrative expenses, which consists primarily of compensationand related expenses for our administrative and accounting staff, occupancycosts and legal, accounting and consulting fees, and costs related to being apublic company.

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We believe thatthe Company will have sufficient capital for the next twelve months if we areable to collect our trade receivables in a timely manner. However, if ourcustomers with large trade receivable balances do not pay timely, this wouldhave a material adverse effect on our liquidity. With timely payment, webelieve that we currently have adequate capital for the next twelve months;however, long-term plans will require that we obtain additional financingthrough the issuance of debt, equity, other securities or a combination thereofin order to take advantage of other strategic agreements and businessalliances.  In addition, we may seek toobtain a working capital or other traditional loan facility from a bank orother lending source.  Unless we are ableto continue to improve our career development services operating performancewith which we have limited experience, additional outside financing required toexecute our long-term business plan would be difficult to obtain on acceptableterms, if at all. As of the date of this Report, we do not have any financingarrangements, nor do we have any commitments to obtain such an arrangement withany bank or other third party. If we raise capital by issuing equity orconvertible debt securities, the percentage ownership of our currentstockholders will be reduced. Any new securities may have rights, preferencesor privileges senior to those of our current common shareholders. There can beno assurances that we will be able to obtain additional financing on termswhich are acceptable to us.

**CRITICALACCOUNTING POLICIES**

INTAC’s discussion andanalysis of its financial condition and results of operations are based uponINTAC’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires INTAC to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities. Onan on-going basis, INTAC evaluates its estimates based on historical experienceand on various other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. The Company believes that of itssignificant accounting policies, the following may involve a higher degree ofjudgment and complexity:

·                  Revenuerecognition;

·                  Inventory;

·                  Concentrationof credit risk, accounts receivable and related provision for doubtfulaccounts;

·                  Impairmentof long lived assets other than goodwill;

·                  Foreigncurrency exchange;

·                  Goodwill;

·                  Productand software development expenses;

·                  Researchand development costs; and

·                  Purchaseprice allocation.

**Revenue Recognition:**

Career DevelopmentServices (included in continuing operations in the consolidated statement ofoperations):

Product revenue from the license of the Company’ssoftware products is recognized in accordance with Staff Accounting Bulletin (“SAB”)No. 104, “Revenue Recognition” when persuasive evidence of an arrangementexists, the product has been delivered, the fee is fixed or determinable, andcollection of the resulting receivable is reasonably assured, and, ifapplicable, upon acceptance when acceptance criteria are specified or uponexpiration of the acceptance period. Maintenance and support revenue forcustomer support is deferred and recognized ratably over the service periodunless it is included in the initial license fee, provided for less than oneyear and is not a significant portion of the total license revenue.  In this case, maintenance support revenue isrecognized when all revenue recognition criteria under SOP 97-2, SOP 98-9 andSAB 104 have been met.  Product upgradesand enhancement revenue is deferred and recognized ratably over the serviceperiod unless it is included in the initial license fee and is notsignificant.  Training and consultingrevenue is recognized as services are performed and billable according to theterms of the service arrangement.

The Company applies the provisions of Statement ofPosition 97-2, *“Software RevenueRecognition,*” (“SOP 97-2”) as amended by Statement ofPosition 98-9 *“Modification of SOP97-2, Software Revenue Recognition, With Respect to Certain*

44

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*Transactions”* toall transactions involving the sale of all its software products.

For arrangements with multiple obligations (e.g.undelivered maintenance and support bundled with term licenses), the Companyallocates revenue to each component of the arrangement using the residual valuemethod based on evidence of the fair value of the undelivered elements, whichis specific to the Company.  The vendorspecific objective evidence of the fair values for the ongoing maintenance andsupport obligations for term licenses are based upon the prices paid for theseparate renewal of these services by the customer or upon substantive renewalrates stated in the contractual arrangements. In this case, maintenance supportrevenue is recognized when all revenue recognition criteria under SOP 97-2, SOP98-9 and SAB 104 have been met. Vendor specific objective evidence of the fairvalue of other services, primarily consulting and training services, is basedupon separate sales of these services.

Franchise fee revenue is derived from the sale tocustomers of the exclusive rights to provide training courses to prospectivestudents.  This arrangement consists ofan up-front, non-refundable license fee, as well as fees for training materialsand contingent payments based on a percentage of the student tuition.  The up-front, non-refundable franchise fee isrecognized as revenue at the time the agreement is entered into, and the feesfor other services are recognized as performed. Contingent payments arerecognized when received.  The Companyhas considered the relevant provisions of FAS 45 “Accounting for Franchise Fee Revenue” in accounting for itsfranchise revenue.

The Company licenses access to its student databaseand education materials under one, two and three-year term licenses. Thesoftware licenses provide for updates to new versions if and when madeavailable.  No express rights of returnare granted.  The Company sells itsproducts and services via a direct sales force and under certain circumstances,sales agents.

Subscription revenue which will be earned primarilythrough our Internet portal business, will be recognized on a straight linebasis over the term of the service contract provided. The Company may alsocontract with third-party mobile operators for the transmission of wirelessshort messages and subscriptions as well as for the billing and collection ofservice fees from customers. Revenues are recorded as the services are providedmonthly or on a per usage basis. The Company will recognize the net amountbilled by the mobile operator as revenue. To date, the Company has generated minimal revenue from subscriptionservices.

Distribution Business (included in discontinuedoperations in the consolidated statement of operations):

The Company’s wireless handset revenues are generallygenerated from a quick turn of product. The Company recognizes revenue upondelivery of product to its customers. Products are sold “as is” and the Companydoes not provide servicing of the wireless handsets, nor does the Companyreceive any usage revenue from the wireless handsets distributed.

Revenue is recognized when customers take delivery ofthe goods, which is taken to be the point in time where the customer hasaccepted the goods and the related risks and rewards of ownership. Certainsales arrangements provide the Company the right to receive a contingentpayment based on sales made by the customers. Contingent payment revenue forthese arrangements is recognized as the cash is received. Receipts of cash inadvance of shipment or delivery are recorded as deposits received.

License fee revenue is derived from the sale tocustomers of the rights to sell products under arrangements in which theCompany is the distributor. These arrangements consist of an up-front,non-refundable license fee, as well as contingent payments based on apercentage of the customer revenue. The services provided by the Company afterthe receipt of the up-front license fee are not significant. The up-front,non-refundable license fee is recognized as revenue at the time the agreementis entered into, and the contingent payments are recognized when received. TheCompany has considered the relevant provisions of SAB 104 and Emerging IssuesTask Force No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables” in accounting for license fee revenue.

**Inventory:**

Inventory in continuingoperations consists primarily of training material and other supplies relatedto our career development services business and is generally immaterial.

Inventory in assets heldfor sale consists primarily of wireless handsets. Generally, we do not maintainany inventory of wireless handsets; however, due to the timing of the inventorybeing received and then being shipped to customers, we may hold inventory for aminimal time period, commonly a few days.  We purchase products only uponthe receipt of an order. Once an order is received, we solicit additionalorders to gain greater discounts from suppliers. Aggregate orders are thendelivered in bulk to be allocated among customers.

Inventories for wirelesshandsets are stated at the lower of cost and net realizable value, calculatedon the first-in, first-out

45

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basis, and are comprisedof finished goods.  Net realizable value is determined on the basis ofanticipated sales proceeds less estimated costs for selling expenses.

**Concentration of Credit Risk,Accounts Receivable and Related Provision for Doubtful Accounts:**

Financial instrumentsthat potentially subject us to concentrations of credit risk consistprincipally of cash and cash equivalents, short-term investments, and tradereceivables.  We are exposed to creditrisks in the event of default by the financial institutions or issuers ofinvestments to the extent of amounts recorded on the balance sheet. We are alsoexposed to credit risks in the event of non-payment by customers to the extentof amounts recorded on the balance sheet. We limit our exposure to credit risk by performing ongoing creditevaluations of our customers’ financial condition and generally require nocollateral.  We are exposed to creditrisks in the event of insolvency by our customers and manage such exposure toaccounting losses by limiting the amount of credit extended whenever deemednecessary.

**Impairmentof Long-Lived Assets and Long-Lived Assets to be Disposed of**

The Companyaccounts for long-lived assets in accordance with the provisions of SFASNo. 144, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of”. This Statement requires that long-livedassets and certain identifiable intangibles be reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future net cashflow expected to be generated by the asset. If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.

**ForeignCurrency Exchange:** We are subject to fluctuations in foreigncurrencies, as distribution business customer orders may involve multi-currencyproduct and delivery transactions before the sale is complete. Additionally, aperiod of up to three months’ time may lapse between when an order is placeduntil revenue and costs are recognized and the supplier is paid. We do notengage in hedging activities nor in the use of financial derivatives.

The functional currenciesof the Company are the People’s Republic of China Renminbi (“RMB”) and the HongKong dollar (“HK$”). The accompanying consolidated financial statements havebeen expressed in United States dollars, the reporting currency of the Company.

Reported assets andliabilities of INTAC’s foreign subsidiaries have been translated at the rate ofexchange at the end of each reporting period. Revenues and expenses have beentranslated at the weighted average rate of exchange in effect during therespective reporting period. Gains and losses resulting from translation areaccumulated in other comprehensive income (loss) in stockholders’ equity.

Realized and unrealizedgains (losses) on currency transactions between foreign entities are includedin other income (expense) in the statements of operations.

**Goodwill:** We assess the carrying value of goodwill annually and when factors are presentthat indicate an impairment may have occurred.  Goodwill is consideredimpaired and a loss is recognized when its carrying value exceeds its impliedfair value. We may use a number of valuation methods including quoted marketprices, discounted cash flows and revenue multiples to determine fair value.The carrying value of goodwill amounted to $16.7 and $12.8 million as ofSeptember 30, 2006 and 2005, respectively. No impairment charge has beenmade.

Factors that we considerimportant which could trigger an impairment review include the following:

·                  significantunderperformance relative to expected historical or projected future operatingresults;

·                  significantchanges in the manner or use of the acquired assets or the strategy for ouroverall business;

·                  significantnegative industry or economic trends;

·                  significantdecline in stock price for a sustained period; and

·                  ourmarket capitalization relative to net book value.

If we determine that thecarrying value of identifiable intangibles and goodwill may not be recoverablebased upon the existence of one or more of the above indicators of impairment,we assess whether the carrying value of the asset is greater than the undiscountedfuture operating cash flow of the acquired operations. Any impairment ismeasured based on a

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projected discounted cashflow method using a discount rate reflecting our average cost of funds.

**Productand Software Development Expenses**

Product andsoftware development expenses primarily include payroll and other employeebenefit costs.  For software to bemarketed or sold, financial accounting standards require the capitalization ofdevelopment costs after technological feasibility is established.  Due to the relatively short period betweentechnological feasibility and the completion of product development, and theinsignificance of the related costs, the Company generally does not capitalizesoftware development costs.  All productand software development costs are expensed when incurred.  Research and development costs to date havenot been significant.

**PurchasePrice Allocations:**  We account for our acquisitionsusing the purchase method of accounting.  This method requires that theacquisition cost be allocated to the assets and liabilities we acquired basedon their fair values.  We make estimates and judgments in determining thefair value of the acquired assets and liabilities.  We base ourdetermination on independent appraisal reports as well as our internaljudgments based on the existing facts and circumstances.  If we were to usedifferent judgments or assumptions, the amounts assigned to the individualassets or liabilities could be materially different.

***RESULTSOF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005 AND FOR THE NINEMONTHS ENDED SEPTEMBER 30, 2005 AND 2004***

In 2005, we changed ourfiscal year-end from December 31 to September 30. As a result of thischange, we have prepared financial statements for the year endedSeptember 30, 2005 and for the nine months ended September 30, 2004.Accordingly, the following discussion of results of operations will compare theaudited balances for the year ended September 30, 2006 to the unauditedbalances for the year ended September 30, 2005 and the previously auditednine months ended September 30, 2005 with the unaudited balances for the ninemonths ended September 30, 2004.

The followingtable summarizes the operating results for the years ended September 30,2006 and 2005 and the nine months ended September 30, 2005 and 2004 and shouldbe read in conjunction with the audited consolidated financial statements andrelated notes contained herein.
| ** **                                             | ** ** | **Year Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                    | ** ** | **2005**                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                                        |       |                                                    |       |   |   |   |   |
| Career development  services revenue                   |       | $                                           | 5,749,932  |                                                    | $          | 8,390,880 |   | $ | 4,218,779 |   | $ | 58,975 |   |
| Career development  services cost of revenue           |       | 1,508,526                                   |       | 2,272,789                                               |       | 1,039,299 |   | — |   |
| Career development  services gross profit              |       | 4,241,406                                   |       | 6,118,091                                               |       | 3,179,480 |   | 58,975 |   |
| Operating expenses  (income)                           |       |                                        |       |                                                    |       |   |   |   |   |
| Product  development                                   |       | 3,422,312                                   |       | 3,359,075                                               |       | 2,660,793 |   | 1,121,219 |   |
| Selling, general  and administrative expenses          |       | 2,258,089                                   |       | 2,018,815                                               |       | 1,836,777 |   | 655,117 |   |
| Provision for  doubtful accounts                       |       | 950,608                                     |       | —                                                  |       | — |   | — |   |
| Merger  transaction costs                              |       | 1,340,319                                   |       | —                                                  |       | — |   | — |   |
| Gain on sale of  assets                                |       | —                                      |       | (383,933                                                | )          | (383,933 | ) | — |   |
| Total operating  expenses                              |       | 7,971,328                                   |       | 4,993,957                                               |       | 4,113,637 |   | 1,776,336 |   |
| Total other income  (expenses) net                     |       | 2                                           |       | (145,870                                                | )          | 2,241 |   | 358,244 |   |
| Income (loss) from  continuing operations before taxes |       | (3,729,920                                  | )          | 978,264                                                 |       | (931,916 | ) | (1,359,117 | ) |
| Deferred income taxes                                  |       | 426,447                                     |       | —                                                  |       | — |   | — |   |
| Income (loss) from  continuing operations              |       | (4,156,367                                  | )          | 978,264                                                 |       | (931,916 | ) | (1,359,117 | ) |
| Income (loss) from  discontinued operations            |       | (3,985,629                                  | )          | 2,397,522                                               |       | (534,466 | ) | 2,333,446 |   |
| Net income (loss)                                      |       | $                                           | (8,141,996 | )                                                       | $          | 3,375,786 |   | $ | (1,466,382 | ) | $ | 974,329 |   |

 

***Results ofOperations for the Year Ended September 30, 2006, Compared to the Year EndedSeptember 30, 2005.***

**Revenue: **Revenue decreased by $2.7 million to $5.7million for the year ended September 30, 2006, from $8.4 million for thesame period in 2005. The decrease in revenue is primarily due to decreasedsales of education and administrative software. This is partly due to a significant amount of sales in the quarter endedDecember 31, 2004 in the prior year caused

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by backlogged orders and from overall slower thananticipated orders in the current year from the Chinese school districts.  We currently expect career development andtraining services revenue to grow during fiscal 2007.

**Gross Profit:** Gross profit decreased by $1.9 millionto $4.2 million for the year ended September 30, 2006, from $6.1 million forthe same period in 2004 and the gross margin increased by .9% to 73.8% for theyear ended September 30, 2006 from 72.9% for the same period in 2004.  Thedecrease in gross profit is mainly due to lower sales volume explainedabove.  We expect margins to remain highdue to the nature of this service business. Unlike the distribution businesswhich has product costs in cost of revenue, our career development services’cost of revenues does not have these types of product costs and thereforeproduces higher margins.

**OperatingExpenses (Income): **Product development expense was $3.4million for the year ended September 30, 2006, as compared to $3.4 millionfor the year ended September 30, 2005.  Product developmentexpense is principally comprised of costs directly attributable to thedevelopment, production and delivery of our career development services, suchas salaries and facility costs.  These costs are generally the type ofcosts that are fixed in nature and do not fluctuate in proportion to revenue.

**Selling, general andadministrative expense** increased by $239,275 to $2.2 millionfor the year ended September 30, 2006, from $2.0 million for the sameperiod in 2005, and increased as a percentage of revenue to 39.3% in 2006 from24.1% in 2005**. **This increaseis primarily comprised of an $88,000 increase in occupancy and insurance costsdue to expansion into a new facility in Beijing, an $80,000 increase inbusiness development costs as well as a $71,000 increase in staff costs relatedto our new Intac International Management Consultancy Beijing Limited Companywhich was established in January 2006.

**Provision for doubtful accounts**includes amounts reserved for trade receivables related to our careerdevelopment services business that are for balances outstanding in excess of 21months.

**Mergertransaction costs** are principally comprised of professionaland investment banking fees related to the announced merger of the Company andHowStuffWorks (“HSW”).  Since HSW hasbeen determined to be the acquiring company, accounting rules require that theacquiree (the Company) record all transaction costs as expense to its statementof operations.  We expect to incur additionalcosts during the next quarter, prior to closing of the transaction.  See “Recent Events”.

**Gain on sale of assets**in 2005 relates to a gain recognized on the sale of software which wasdeveloped for Intac Purun’s internal use but subsequently sold to a thirdparty.

We anticipate that ouroperating expenses will increase in future periods as we increase sales andmarketing operations for our Career Development and Training Services business.

**Deferred income tax expense:**Deferred income tax expense of $426,447 was recorded for the year endedSeptember 30, 2006 as the result of a temporary timing difference between therecognition of Huana Xinlong revenue for financial reporting purposes and theamounts used for income tax purposes.

**Income(loss) from continuing operations:**  Loss from continuingoperations was $4.2 million for the year ended September 30, 2006, ascompared to income from operations of $978,264 for the same period in2005.  The decline in income from continuing operations is primarily dueto lower sales, a gain on sale of assets in the prior year, a provision fordoubtful accounts, merger transaction costs in the current year and deferredincome tax expense, partially offset by improved gross margins.

**Income(loss) from discontinued operations:**  Loss fromdiscontinued operations was $4.0 million for the year ended September 30,2006, as compared to income from discontinued operations of $2.4 million forthe same period in 2005.  The decline in income (loss) from discontinuedoperations is primarily due to lower sales resulting from increased competitionin the wireless handset distribution industry in China.  The decline was also due to a provision fordoubtful accounts of $2.2 million recorded to provide a reserve for uncertaintyregarding the use of certain vendor rebates and due to increased sellinggeneral and administrative costs resulting from increased costs for the auditof our financial statements and overall increased costs associated with being apublic company including Sarbanes Oxley compliance, stock-based compensationand other professional fees.

**Netincome (loss):**  Net loss for the year endedSeptember 30, 2006 was $8.1 million, as compared to a net income of $3.4million for the year ended September 30, 2005. The decline was primarilydue to lower revenues, reserves for vendor rebates, higher selling, general andadministrative costs, a gain on sale of assets in the prior year, new expensesfor merger

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transaction costs in thecurrent year, a provision for doubtful accounts related to career developmentservices in the current year, and deferred income tax expense, partially offsetby improved gross margins.

***Resultsof Operations for the Nine Months Ended September 30, 2005, Compared to theNine Months Ended September 30, 2004***

**Revenue:**Revenueincreased by $4.2 million to $4.2 million for nine months endedSeptember 30, 2005, from $58,975 for the same period in 2004. This newrevenue is due to the redirection of the Company’s business plan from thetraditional distribution business to its career development services, andprimarily consisted of revenues from sales of our education administrationsoftware.

**Gross Profit:**Grossprofit was $3.2 million and $58,975 for the nine months endedSeptember 30, 2005 and 2004. This generated a gross margin of 75.4% and100% for the nine month periods ended September 30, 2005 and 2004.  The improvement in gross margin is due to thechange in focus of the Company’s business plan from the traditionaldistribution business to its career development services, and primarilyconsisted of gross profit from sales of our education administrationsoftware.  We expect margins to remain high due to the nature of thisservice business.

**Operating Expenses:  **Product development expense was $2.7million for the nine months ended September 30, 2005, as compared to $1.1million for the nine months ended September 30, 2004.  Productdevelopment expense is principally comprised of costs directly attributable tothe development, production and delivery of our career development services,such as salaries and facility costs. The increase in product developmentcosts was primarily due to new salaries and other employee costs as the careerdevelopment business expanded. We expect to continue to incur significant productdevelopment costs in future years.

**Selling, general andadministrative expenses** increased by $1.2 million to $1.8million for the nine months ended September 30, 2005, from $655,117 forthe same period in 2004. ** **This increase was primarily due to the acquisition of Huana Xinlong, theincreased business activity related to our career development services and dueto higher selling, general and administrative costs related to being a publiccompany, including Sarbanes-Oxley compliance. Specifically, professional fees increased $545,000 due to costs relatedto public company compliance costs, staff and salary costs increased $335,000,promotion and business development costs increased $220,000 and occupancy andother costs increased $100,000.

**Gain on sale of assets**relates to a gain recognized on the sale of software which was developed forIntac Purun’s internal use but subsequently sold to a third party.

**Income (Loss) from ContinuingOperations:**Loss from continuing operations was $931,916 forthe nine months ended September 30, 2005 compared to a $1.4 million loss forthe same period in 2004. The improvement in loss from operations is primarilydue to the career development services business and the higher sales ofeducation and administrative software and higher gross profit.

**Income (Loss) from DiscontinuedOperations:**Loss from discontinued operations was $534,466for the nine months ended September 30, 2005, as compared to income fromdiscontinued operations of $2.3 million for the nine months ended September 30,2004. The decrease in income from discontinued operations was due to a decreasein distribution revenues resulting from increased competition in the wirelesshandset distribution industry in China. While demand for cell phones increased, the number of distributors andmanufacturers also increased to meet demand. The decrease was also due to a lower gross margin resulting from pricingpressures from increased competition and higher selling, general and administrativecosts related to being a public company, including Sarbanes-Oxley compliance.

**Netincome (loss):** Net loss for the nine months ended September 30, 2005 was $1.5 millioncompared to a net income of $974,329 for the nine months endedSeptember 30, 2004. The decline was primarily due to lower distributionand career development services revenues, lower distribution gross margins,higher product development and selling, general and administrative costsdiscussed above, partially offset by the improved career development servicesgross profits.

***Liquidity and Capital Resources***

As ofSeptember 30, 2006 and 2005, INTAC had retained earnings (deficit)balances of $(5,355,386) and $2,786,610, respectively, primarily due to netlosses for the year ended September 30, 2006 and the nine months endedSeptember 30, 2005. The Company raised equity financing of $4.5 million inSeptember 2003 and $12.0 million in May 2004.  Proceeds of

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the privateplacements are being used to expand Intac Purun’s career development servicesand for working capital purposes.

As ofSeptember 30, 2006 and 2005, INTAC maintained cash related to continuingoperations of $850,131 and $464,118, respectively.  The Company measures liquidity throughworking capital (measured by current assets less current liabilities).  As of September 30, 2006 and 2005, INTACmaintained working capital of $13,342,186 and $19,880,756, respectively.  The decrease in working capital is primarilydue to losses during the current year.

Within ourDistribution Business (included in discontinued operations), a large portion oftrade accounts receivable is attributable to our largest customer –Mr. Lam, from whom we derived substantially all of our distributionrevenue for year ended September 30, 2006. The amount of the receivable balancewith this customer has decreased to $11.2 million at September 30, 2006 from$14.9 million at September 30, 2005; however, we expect this balance to remainhigh for the foreseeable future. We collected approximately $6.1 million of thebalance outstanding at September 30, 2006 in October and November of 2006.

We have enteredinto a new installment payment plan agreement with Mr. Lam to pay his currentbalance over a period of six months. The first payment in accordance with thisagreement was received in November 2006 in the amount of $1.9 million. As partof the installment plan agreement, we have agreed that all future sales to Mr.Lam are due and payable within 45 days. The volume of sales in the Distributionbusiness relies on keeping Mr. Lam as a customer. In order to demonstrate hisbelief that Mr. Lam’s receivable is collectible, Wei Zhou, the Company’sChairman and CEO, entered into a Security and Pledge Agreement with INTACwhereby Mr. Zhou pledged 3 million shares of INTAC common stock to securecollection of this receivable.

In addition, atSeptember 30, 2006, the Company has approximately $2.2 million of supplierrebates receivable from its major mobile handset supplier, T-MobileDeutschland. This amount has been fully reserved based on historical trends anddue to the uncertainty of their use when considering the distribution business’anticipated reduced revenue. Mr. Zhou’s pledge of 3 million shares of INTACcommon stock under the Security and Pledge Agreement also secures thisreceivable.

As of September 30,2006 we have a net trade receivable balance of $5.2 million related to ourCareer Development Services business.  The trade receivable balance relates primarily to Huana Xinlong and thesale of educational software to school districts within China. These schooldistricts pay for their software purchases using funds supplied by the Chinesegovernment. Historically, this funding takes many months, which is typical ofthe business process in China. As of September 30, 2006, approximately $963,000of our trade receivable balance relates to sales of educational softwarecompleted in December 2004******and$950,608 has been reserved in our financial statements. This amount has beenreserved based upon historical collection patterns and due to the passage oftime.  This overall gross balance oftrade receivables from sales completed in December 2004 has decreased$2,037,000 million from the September 30, 2005 balance of $3 million due toaggressive collections during the year.  TheCompany fully intends to pursue collection of these receivables.

We believe thatthe Company will have sufficient capital for the next twelve months if we areable to collect our trade receivables and sell our Career development softwareand training services in according to our business plan.   However, if we are not able to complete salesin a timely manner or if the Chinese government does not fund our schooldistrict customers in a reasonable amount of time, it could have a materialadverse effect on our liquidity. Long-term plans will require that we obtainadditional financing through the issuance of debt, equity, other securities ora combination thereof in order to take advantage of other strategic agreementsand business alliances. In addition, we may seek to obtain a workingcapital or other traditional loan facility from a bank or other lending source.Unless we are able to continue to improve our career development servicesoperating performance with which we have limited experience, additional outsidefinancing required to execute our long-term business plan would be difficult toobtain on acceptable terms, if at all. As of the date of this Report, we do nothave any financing arrangements, nor do we have any commitments to obtain suchan arrangement with any bank or other third party. If we raise capital byissuing equity or convertible debt securities, the percentage ownership of ourcurrent stockholders will be reduced. Any new securities may have rights,preferences or privileges senior to those of our current common stockholders.There can be no assurances that we will be able to obtain additional financingon terms which are acceptable to us.

For the year endedSeptember 30, 2006, cash provided by continuing operating activities(which is comprised of the career development services business) totaled$239,650 compared to cash used in operating activities of $2.5 million for thenine months ended September 30, 2005 and cash used of $904,187 for the yearended December 31, 2004.   Cash providedby continuing operations in the current year was primarily from a decrease intrade and other receivables and an increase in accounts payable and accruedexpenses offset by the net loss.  For thenine months ended September 30, 2005, cash used in continuing operatingactivities consisted primarily of an increase in trade receivables, a decreasein other liabilities and net loss, slightly offset by an increase in tradeaccounts payable and accrued expenses. The year ended December 31, 2004 included a $3.5 million increase intrade receivables offset by net income and an increase in trade and otherpayables.

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For the year endedSeptember 30, 2006, cash used in discontinued operating activities (whichis comprised of the wireless handset distribution business) totaled $64,847compared to cash provided by operating activities of $980,322 for the ninemonths ended September 30, 2005 and cash used of $12.0 million for the yearended December 31, 2004.   Cash used indiscontinued operations in the current year was primarily from a decrease intrade accounts payable, accrued liabilities and income taxes payable, offsetsomewhat by a decrease in trade accounts receivable. For the nine months endedSeptember 30, 2005 cash from discontinued operations primarily included netloss and an increase in trade receivables more than offset by a decrease intrade payables and an increase in cash held for sale.  For the year ended December 31, 2004 cashused in discontinued operations included net income offset by a decrease intrade receivables and cash held for sale and a decrease in accounts payable.

For the year endedSeptember 30, 2006**,**cash used ininvesting activities amounted to $313,472 which included $183,664 in purchasesof property and equipment, $22,341 in sales of property and equipment recordedin assets held for sale and $152,149 of advances to officers and employees ofsubsidiaries***. ***Forthe nine months ended September 30, 2005, cash provided by investingactivities amounted to $431,863 and consisted primarily of the sale of otherassets and collection of a short-term note receivable, partially offset by thepurchase of property and equipment. Cash provided by investing activitiesduring the year ended December 31, 2004 was $1.8 million primarily due to thedeposit of $2.8 million in restricted cash, repayments of advances to officersand employees of subsidiaries, offset by an increase in a short-term notereceivable and purchases of property and equipment and other assets mostlyrelated to the recent acquisition of Huana Xinlong.

For the year endedSeptember 30, 2006, cash provided by financing activities was $524,682 andconsisted solely of proceeds from the exercise of stock options.  Cash provided by financing activities in 2005was immaterial.  Cash provided byfinancing activities during the year ended December 31, 2004 was $7.8million.  This was primarily comprised ofproceeds from the issuance of common stock in a private placement, borrowingsfrom a bank and the investment into Intac Purun by the other joint venturepartners, partially offset by repayments to a shareholder.

**Trade accounts receivable**decreased by $432,698 to $5.2 million at September 30, 2006 compared to $5.7million at September 30, 2005. The decrease relates primarily to collections ofreceivables related to the sale of educational software to school districtswithin China.

**Inventories** increased by $35,902to $45,561 at September 30, 2006 compared to $9,659 at September 30,2005. The balance relates primarily to training materials.

**Property and equipment,** net, andacquired software, decreased by $214,203 to $1.1 million at September 30, 2006compared to $1.3 million at September 30, 2005. This decrease was due to normal depreciation of fixed assets. We do notexpect our purchases of property and equipment to change materially in fiscal2007.

**Commitmentsand Contingencies**

Liabilities forloss contingencies arising from claims, assessments and litigation and othersources are recorded when it is probable that a liability has been incurred andthe amount of the assessment can be reasonably estimated. In the opinion ofmanagement, after consultation with legal counsel, there are no claims,assessments and litigation against the Company.

**ContractualObligations**

The Company’scontractual obligations as of September 30, 2006, are summarized below andrelate to lease commitments under non-cancelable operating leases of theCompany’s office facilities:
| Year ending September 30, | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2007                                     |       | $          | 521,268    |   |
| 2008                                     |       | 191,084    |       |
| 2009                                     |       | 151,260    |       |
| 2010                                     |       | 151,260    |       |
| 2011                                     |       | 12,605     |       |
| Thereafter                               |       | —     |       |
|                                     |       | $          | 1,027,477  |   |

 

**Off –Balance Sheet Arrangements**

The Company has nooff-balance sheet arrangements that have had, or are reasonably likely to have,a current or future effect on the Company’s financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that is material to investors.

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**RECENTACCOUNTING PRONOUNCEMENTS**

Effective October 1, 2005, the Company adoptedStatement of Financial Accounting Standard No. 123 (revised) “Share BasedPayment” (“SFAS 123-R”), using the modified prospective transition method.Under this transition method, compensation cost for all share-based paymentsgranted prior to, but not yet vested as of October 1, 2005, is based on thegrant date fair value estimated in accordance with the original provisions ofSFAS 123 and compensation cost for all share-based payments granted subsequentto October 1, 2005 is based on the grant date fair value estimated inaccordance with the provisions of SFAS 123-R. During the year ended September 30,2006, the Company recognized share-based compensation cost totaling $153,044.

As a result of adopting SFAS 123-R on October 1, 2005,the Company’s loss before income taxes and net loss for year ended September30, 2006 is $153,044 higher than if the Company had continued to account forshare-based compensation under APB Opinion No 25 “Accounting for Stock Issuedto Employees.” Basic loss per share for the year ended September 30, 2006 wouldhave been ($0.28) if the Company had not adopted SFAS 123-R, compared to thereported basic loss per share of ($0.29).

In July 2006, the Financial Accounting StandardsBoard (FASB) issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (FIN 48), which alters the framework for recognizing income taxcontingencies. Previously, under SFAS No. 5, “Accounting forContingencies,” the focus was on the subsequent liability recognition forestimated losses from tax contingencies where such losses were probable and therelated amounts could be reasonably estimated. Under this new interpretation, acontingent tax asset (i.e., an uncertain tax position) may only be recognizedif it is more likely than not that it will ultimately be sustained upon audit.The Company does not believe this standard will have a material impact on itsstatement of financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements” (SFAS 157). SFAS 157 defines fair value as the amountthat would be exchanged to sell an asset or transfer a liability, in an orderlytransaction between market participants, and establishes a fair value hierarchyof quotes and unobservable data that should be used to develop pricingassumptions. In addition, for assets and liabilities that are not actively traded,for example, certain kinds of derivatives, SFAS 157 requires that a fair valuemeasurement include an adjustment for risks inherent in a valuation techniqueand/or inputs, such as those used in pricing models. SFAS 157 is effective forfiscal years beginning after November 15, 2007, however, early adoption ispermitted.  The Company does not believethis standard will have a material impact on its statement of financialposition or results of operations.

**ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

**FOREIGNCURRENCY EXCHANGE RATE RISK**

We may be affectedby fluctuations in the translation of foreign currency. Currently, our primarycurrency risk arises from our purchase of inventory and distribution ofproducts in different geographic regions with constantly changing relativeexchange rates. As the cycle between our purchases and ultimate resale of theinventory lengthens, our risks of foreign currency changes will increase. Mostof our banking accounts are held in Euros and Hong Kong dollars, andsignificant changes in the exchange ratios of these currencies to the marketsin which we purchase and sell inventory could affect our ability to operate inthose markets. We do not use any derivative financial instruments to mitigateany of our currency risks. We do not currently have any credit facilities andtherefore we are not subject to any risks associated with interest ratechanges.

**ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA**

The informationrequired by this Item 8 is set forth in the Company’s Consolidated FinancialStatements and Notes thereto beginning at page F-1 of this Report andincorporated herein by reference.

**ITEM 9 – CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None.

**ITEM 9A – CONTROLS AND PROCEDURES**

**Disclosure Controls and Procedures**

Our Chief Executive Officer and Chief FinancialOfficer, after evaluating the effectiveness of our “disclosure controls andprocedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or15d-15(e)) as of the end of the period

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covered by this report (the “Evaluation Date”), haveconcluded that, as of the Evaluation Date, our disclosure controls andprocedures were ineffective because of the material weaknesses discussed below.Disclosure controls and procedures are controls and other procedures designedto ensure that information required to be disclosed in our reports filed orsubmitted under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and include, without limitation,controls and procedures designed to ensure that information we are required todisclose in such reports is accumulated and communicated to management,including our Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

**Management’s Report on Internal Control Over FinancialReporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined inRules 13a-15(f) or 15d-15(f) under the Securities Exchange Actof 1934. The Company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Internal control overfinancial reporting includes those written policies and procedures that:

·                  pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

·                  providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directors ofthe Company; and

·                  providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the consolidated financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

An internal control material weakness is a significantdeficiency, or aggregation of deficiencies, that results in a more than remotelikelihood that a material misstatement in annual or interim financialstatements will not be prevented or detected on a timely basis by employees inthe normal course of their work. An internal control significant deficiency, oraggregation of deficiencies, is a deficiency that results in a more than remotelikelihood that a misstatement in annual or interim financial statements ismore than inconsequential.

Our management assessed the effectiveness of theCompany’s internal control over financial reporting, as defined in SecuritiesExchange Commission Act Rule 13a-15(f) as of September 30, 2006,and this assessment identified the following material weaknesses in the company’sinternal control over financial reporting:

1.               Deficiencyexisted in our information technology (“IT”) environment due to inadequatephysical security controls around physical access to the accounting server inour Beijing location. Since then, this has been rectified and the server hasbeen moved to a more restricted and secured area. Management did have backup recoverycontrols in place, which were tested and were found effective, which is amitigating control to the lack of physical security around the accountingserver.

2.               Deficiencyexisted in our information technology (“IT”) environment due to backup media notbeing taken offsite even though it is being stored in a fireproof safe at ourBeijing location.  Since then, this hasbeen rectified by taking the backup media off site.

3.               Deficiencyexisted in maintaining adequate controls on certain key spreadsheets used bythe Company in its consolidation process. Since then, we have added controls including password protection andcontrols within the spreadsheet, to remediate these deficiencies.

In making its assessment of internal control overfinancial reporting, management used the criteria issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in InternalControl—Integrated Framework. Because of the material weaknesses described inthe preceding paragraphs, management believes that, as of September 30,2006, the Company’s internal control over financial reporting was not effectivebased on those criteria.

**ITEM 9B – OTHER INFORMATION**

None

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**PART III**

**ITEM 10 – DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

The informationrequired by Items 401, 405 and 406 of Regulation S-K in response to thisItem 10 is set forth in the Company’s definitive proxy statement for its annualmeeting of stockholders and is incorporated herein by reference.

We have adopted aCode of Conduct and Ethics applicable to all employees, including the principalexecutive officer, principal financial officer, principal accounting officerand controller.  Our Code of Ethics isposted on our website, www.intac-international.com.cn.

**ITEM 11 – EXECUTIVE COMPENSATION**

The informationrequired by Item 402 of Regulation S-K in response to this Item 11 is setforth in the Company’s definitive proxy statement for its annual meeting ofstockholders and is incorporated herein by reference.

**ITEM 12 –SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

The following table setsforth information with respect to INTAC’s equity compensation plans, as ofSeptember 30, 2006, under which equity securities of INTAC are authorizedfor issuance.
| Plan Category                                          | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants  and rights** | ** ** | **Weighted-average exercise  price of outstanding  options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future  issuance under equity  compensation plans  (excluding securities  reflected  in the second column)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                                                             |       |                                                                                                        |       |                                                                                                                                                                                                                 |       |
| Equity  compensation plans approved by security holders     |       | 450,000                                                                                                                                          |       | $                                                                                                           | 7.90       |                                                                                                                                                                                                                 | 1,900,000  |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                           |       | —                                                                                                      |       | —                                                                                                                                                                                                               |       |
| Total                                                       |       | 450,000                                                                                                                                          |       | $                                                                                                           | 7.90       |                                                                                                                                                                                                                 | 1,900,000  |   |

 

The informationrequired by Item 403 of Regulation S-K in response to this Item 12 is set forthin the Company’s definitive proxy statement for its annual meeting ofstockholders and is incorporated herein by reference.

**ITEM 13 – CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

The informationrequired by Item 404 of Regulation S-K in response to this Item 13 is setforth in the Company’s definitive proxy statement for its annual meeting ofstockholders and is incorporated herein by reference.

**ITEM 14 – PRINCIPAL ACCOUNTINGFEES AND SERVICES**

The informationrequired by Item 9(e) of Schedule 14A in response to this Item 14 isset forth in the Company’s definitive proxy statement for its annual meeting ofstockholders and is incorporated herein by reference.

**PART IV**

**ITEM 15 – EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

(a)(1) Index to Consolidated Financial Statements

Please see the accompanying Index to ConsolidatedFinancial Statements which appears on page F-1 of this report. The Reportsof Independent Registered Public Accounting Firm, Consolidated FinancialStatements and Notes to Consolidated

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Financial Statements which are listed in the Index toConsolidated Financial Statements and which appear beginning on page F-2of this report are included in Item 8 above.

(a)(2) Financial Statement Schedule

Financial Statement Schedules have been omittedbecause the information required to be set forth therein is not applicable oris included in the Consolidated Financial Statements or notes thereto.

(a)(3) The exhibits to this report are listed onthe Index to Exhibits following the signature pages of this report.

(b)      Exhibits.

See the Exhibit Index following the signaturepages of this report.

(c)     Financial Statement Schedule

See the description under Item 15. (a)(2) above.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.
| Date:  | December 14, 2006 | INTAC INTERNATIONAL, INC.            |
|--------|------------------------|--------------------------------------|
|   |                   |                                 |
|   |                   | By:                                  | /s/ WEI ZHOU |   |
|   |                   | Wei Zhou, President, Chief Executive |
|   |                   | Officer and Director (Principal      |
|   |                   | Executive Officer)                   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has been signedbelow by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

KNOW ALL MEN BYTHESE PRESENTS, that each person whose signature appears below herebyconstitutes and appoints Wei Zhou and J. David Darnell, and each of them, histrue and lawful proxies, attorneys-in-fact and agents, with full power ofsubstitution and resubstitution, for him and in his name, place and stead, inany and all capacities, to (i) act on, sign and title with the SEC any andall amendments to this Annual Report on Form 10-K, together with allexhibits thereto, (ii) act, sign and file such certificates, instruments,agreements and other documents as may be necessary or appropriate in connectiontherewith, and (iii) take any and all actions which may be necessary orappropriate in connection therewith, granting unto such agents, proxies andattorneys-in-fact, and each of them and his and their substitute orsubstitutes, full power and authority to do and perform each and every act andthing necessary or appropriate to be done in connection therewith, as fully forall intents and purposes as he might or could do in person, hereby approving,ratifying and confirming all that such agents, proxies and attorneys-in-fact,any of them or any of his or their substitute or substitutes may lawfully do orcause to be done by virtue hereof.
| Name                      | ** ** | **Title**                              | ** **                                                | **Date** |
|---------------------------|------------|----------------------------------------|-----------------------------------------------------------|----------|
|                      |       |                                   |                                                      |     |
| /s/ WEI ZHOU              |       |                                   | President, Chief Executive Officer and                    |     | December 14, 2006 |
|                      |       | Director (Principal Executive Officer) |                                                      |     |
|                      |       |                                   |                                                      |     |
| Wei Zhou                  |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ J. DAVID DARNELL      |       |                                   | Senior Vice President & Chief Financial  Officer |     | December 14, 2006 |
|                      |       | and Director (Principal Financial and  |                                                      |     |
|                      |       | Accounting Officer)                    |                                                      |     |
|                      |       |                                   |                                                      |     |
| J. David Darnell          |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ Theodore P. Botts     |       |                                   | Director                                                  |     | December 14, 2006 |
|                      |       |                                   |                                                      |     |
| Theodore P. Botts         |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ KEVIN K. JONES        |       |                                   | Director                                                  |     | December 14, 2006 |
|                      |       |                                   |                                                      |     |
| Kevin K. Jones            |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ DR. HEINZ-GERD STEIN  |       |                                   | Director                                                  |     | December 14, 2006 |
|                      |       |                                   |                                                      |     |
| Dr. Heinz-Gerd Stein |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ LARRIE A. WEIL        |       |                                   | Director                                                  |     | December 14, 2006 |
|                      |       |                                   |                                                      |     |
| Larrie A. Weil            |       |                                   |                                                      |     |
|                           |            |                                        |                                                           |          |  |  |  |  |  |  |

 

56

----

**INDEX TOEXHIBITS**

 
| Exhibits | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                              |
|----------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.1      |       | Agreement and Plan of Reorganization, dated  October 13, 2001, by and between Commodore Minerals, Inc., INTAC  Holdco Corp., Wei Zhou and Yip Yin Kwan (filed as Exhibit 2.1 to Current  Report on Form 8-K dated October 13, 2001, filed with the  Commission on October 30, 2001 (the “Reorganization Form 8-K”) and  incorporated herein by reference).      |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.2      |       | Stock Purchase Agreement, dated September 28,  2001, by and between Wei Zhou and Grayson Hand (filed as Exhibit 2.2 to  Reorganization Form 8-K and incorporated herein by reference).                                                                                                                                                                                                        |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.3      |       | Stock for Stock Exchange Agreement, dated  December 31, 2004, by and among INTAC International, Inc. and  Forever Sino International Limited (filed as Exhibit 2.1 to Current  Report on Form 8-K, filed with the Commission on January 5, 2005  and incorporated herein by reference).                                                                                             |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.4      |       | Amendment to Stock for Stock Exchange Agreement,  dated March 22, 2006, by and among INTAC International, Inc. and Forever  Sino International Limited (filed as Exhibit 3.1 to Current Report on  Form 8-K, filed with the Commission on March 23, 2006 and incorporated  herein by reference).                                                                                              |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.5      |       | Agreement and Plan of Merger, dated April20, 2006,  by and among HowStuffWorks, Inc., HSW International, Inc., HSW International  Merger Corporation and Intac International, Inc. (filed as Exhibit 2.1  to Current Report on Form 8-K, filed with the Commission on April 20, 2006  and incorporated herein by reference).                                                                       |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1(i)   |       | Amended and Restated Articles of Incorporation  (filed as Exhibit 3.1 to Current Report on Form 8-K/A dated  October 13, 2001, filed with the Commission on December 26, 2001  and incorporated herein by reference).                                                                                                                                                                    |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2(ii)  |       | Amended and Restated Bylaws (filed as  Exhibit 3.2 to Annual Report on Form 10-K dated September 30, 2005  filed with the Commission on December 19, 2005 and incorporated herein  by reference).                                                                                                                                                                                             |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1     |       | Employment Agreement by and between Commodore  Minerals, Inc. (predecessor to the Registrant) and Wei Zhou dated as of  October 16, 2001 (filed as Exhibit 10.5 to Form 8-K and  incorporated herein by reference).                                                                                                                                                                      |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2     |       | INTAC International, Inc. 2001 Long Term  Incentive Plan (filed as Exhibit 4.1 to Form S 8 dated  April 30, 2004, filed with the Commission on May 4, 2004 and  incorporated herein by reference).                                                                                                                                                                                  |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3     |       | Lease agreement by and between INTAC International  Holdings, Ltd. and Realty Star Development Limited dated March 13, 2002  (filed as Exhibit 10.7 to Form 10-QSB for the quarter ended  March 31, 2003, filed with the Commission on May 20, 2002 and  incorporated herein by reference).                                                                                         |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4     |       | Employment Agreement by and between the Registrant  and J. David Darnell dated as of June 11, 2002 (filed as  Exhibit 10.1 to Form 10-QSB for the quarter June 30, 2002,  filed with the Commission on August 20, 2002 and incorporated herein by  reference).                                                                                                                      |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5     |       | Restricted Stock Agreement between the Registrant  and J. David Darnell dated July 29, 2002 (filed as Exhibit 4.2 to Form S-8  dated April 30, 2004, filed with the Commission on May 4, 2004 and  incorporated herein by reference).                                                                                                                                          |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6     |       | T-Mobile agreement (a translation of which was also  filed) (filed as Exhibit 10.3 to Form 10-KSB for the fiscal year  ended December 31, 2002, filed with the Commission on March 28,  2003 and incorporated herein by reference).                                                                                                                                                      |
|     |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7     |       | Joint Venture Agreement for the establishment of Beijing  INTAC Purun Educational Development Ltd by and among EMIC of the Ministry of  Education P.R.C., China Putian Corporation and INTAC International Inc.  (filed as Exhibit 10.4 to Form 10-QSB for the quarter ended  September 30, 2003, filed with the Commission on November 14, 2003  and incorporated herein by reference). |

 

57

----

 
| 10.8   |   | Subscription and Investment Representation  Agreement, dated as of September 15, 2003, between INTAC  International, Inc. and an accredited investor (filed as  Exhibit 10.4 to Form 10-Q for the quarter ended September 30,  2003, filed with the Commission on November 14, 2003 and incorporated  herein by reference).             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.9   |   | Assignment of Joint Venture Interest and Release of  Debt agreement (filed as Exhibit 10.6 to Form 10-KSB for the fiscal  year ended December 31, 2003, filed with the Commission on  March 30, 2004 and incorporated herein by reference).                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.10  |   | Loan and Interest Pledge Agreement (filed as  Exhibit 10.7 to Form 10-KSB for the fiscal year ended  December 31, 2003, filed with the Commission on March 30, 2004 and  incorporated herein by reference).                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.11  |   | Share Transfer Agreement (filed as Exhibit 10.1  to Form 10-QSB for the quarter ended June 30, 2004, filed with the  Commission on August 16, 2004 and incorporated herein by reference).                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.12  |   | Loan and Interest Pledge Agreement (filed as  Exhibit 10.2 to Form 10-QSB for the quarter ended June 30,  2004, filed with the Commission on August 16, 2004 and incorporated  herein by reference).                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.13  |   | Subscription and Investment Representation  Agreement, dated as of May 13, 2004, between INTAC  International, Inc. and an accredited investor (filed as  Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed  with the Commission on May 26, 2004 and incorporated by reference  herein).                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.14  |   | First Amendment to the Intac International Inc.  Restricted Stock Award Agreement, effective as of July 28, 2005, between  INTAC International, Inc. and J. David Darnell (filed as Exhibit 10.14  to Current Report on Form 10-K dated September 30, 2005 filed with the  Commission on December 19, 2005 and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 21.1   |   | List of Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 23.1   |   | Consent of KBA Group LLP, Independent Registered  Public Accounting Firm (filed herewith)                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 24.1   |   | Power of Attorney (included in signature page herewith).                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1   |   | Certification of Wei Zhou, President and Chief  Executive Officer (filed herewith).                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2   |   | Certification of J. David Darnell, Senior Vice  President and Chief Financial Officer (filed herewith).                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 32.1   |   | Certification of Wei Zhou, President and Chief  Executive Officer (filed herewith).                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                  |
| 32.2   |   | Certification of J. David Darnell, Senior Vice  President and Chief Financial Officer (filed herewith).                                                                                                                                                                                                                                                               |

 

58

----

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

**ANDRELATED FINANCIAL STATEMENT SCHEDULE**
| CONSOLIDATED FINANCIAL  STATEMENTS                                                                                                                                                                                                                                   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                 |   |
| REPORTS  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                                                                                                                                                                            | 60     |
|                                                                                                                                                                                                                                                                 |   |
| CONSOLIDATED  BALANCE SHEETS                                                                                                                                                                                                                                         | 62     |
|                                                                                                                                                                                                                                                                 |   |
| CONSOLIDATED  STATEMENTS OF OPERATIONS                                                                                                                                                                                                                               | 63     |
|                                                                                                                                                                                                                                                                 |   |
| CONSOLIDATED  STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)                                                                                                                                                                                | 64     |
|                                                                                                                                                                                                                                                                 |   |
| CONSOLIDATED  STATEMENTS OF CASH FLOWS                                                                                                                                                                                                                               | 66     |
|                                                                                                                                                                                                                                                                 |   |
| NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                                                                                                          | 67     |
|                                                                                                                                                                                                                                                                 |   |
| FINANCIAL STATEMENT  SCHEDULE                                                                                                                                                                                                                                        |   |
|                                                                                                                                                                                                                                                                 |   |
| SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS                                                                                                                                                                                                              |   |
|                                                                                                                                                                                                                                                                 |   |
| All other schedules are  omitted since the required information is not present, or is not present in  amounts sufficient to require submission of the schedule, or because the  information is included in the consolidated financial statements and notes  thereto. |

 

59

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board ofDirectors and Stockholders

INTACInternational, Inc.:

Wehave audited the accompanying consolidated balance sheets of INTACInternational, Inc. and subsidiaries (the “Company”) as ofSeptember 30, 2006 and 2005, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income (loss), and cashflows for the year ended September 30, 2006, the nine months endedSeptember 30, 2005 and the year ended December 31, 2004. In connectionwith our audit of the consolidated financial statements, we have also auditedthe financial statement schedule for the year ended September 30, 2006,the nine months ended September 30, 2005 and the year endedDecember 31, 2004.  Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedule based on our audits.

Weconducted our audits in accordance with standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of INTACInternational, Inc. and subsidiaries as of September 30, 2006 and2005, and the results of their operations and their cash flows for the yearended September 30, 2006, the nine months ended September 30, 2005 and theyear ended December 31, 2004 in conformity with accounting principlesgenerally accepted in the United States of America.  Also in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of IntacInternational, Inc.’s internal control over financial reporting as ofSeptember 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”), and our report dated December 8, 2006 expressedan unqualified opinion on management’s assessment of, and an adverse opinion onthe effective operation of internal control over financial reporting.
| /s/ KBA Group LLP |   |
|-------------------|--------|
| Dallas, Texas     |   |
| December 8, 2006  |   |
|                   |        |  |

 

60

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

The Board ofDirectors and StockholdersIntac International Inc:

Wewere engaged to audit management’s assessment included in Management’s Reporton Internal Control over Financial Reporting (included in Item 9A of thisForm 10-K) that INTAC International, Inc. and subsidiaries (“the Company”)did not maintain effective internal control over financial reporting as ofSeptember 30, 2006 based on the criteria established in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”) because of the material weaknesses as describedtherein.  Management of the Company isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Amaterial weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.  The followingmaterial weaknesses have been identified and included in management’sassessment.

Deficiencieswhich constituted material weaknesses existed in the Company’s informationtechnology (“IT”) environment at the Company’s Beijing location including bothinadequate physical security controls for accessing the accounting server andinadequate offsite and rotation media backup storage procedures, and inadequatecontrols related to critical spreadsheets.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofINTAC International, Inc. and subsidiaries as of September 30, 2006and 2005, and the related consolidated statements of operations, stockholders’equity and comprehensive income (loss), and cash flows for the year endedSeptember 30, 2006, the nine months ended September 30, 2005 and the yearended December 31, 2004.  The abovematerial weaknesses were considered in determining the nature, timing, andextent of audit tests applied in our audit of the 2006 consolidated financialstatements, and this report does not affect our report dated December 8, 2006,which expressed an unqualified opinion on those consolidated financialstatements.

In ouropinion, management’s assessment that Intac International Inc. did not maintaineffective internal control over financial reporting as of September 30,2006, is fairly stated, in all material respects, based on the COSO controlcriteria.  Also, in our opinion, becauseof the effect of the material weaknesses as described above on the achievementof the objectives of the control criteria, Intac International, Inc. has notmaintained effective internal control over financial reporting as ofSeptember 30, 2006, based on the COSO control criteria.
| /s/ KBA Group LLP |   |
|-------------------|--------|
| Dallas, Texas     |   |
| December 8, 2006  |   |
|                   |        |  |

 

61

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**INTACINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

(Expressed in U.S.dollars)
| ** **                                                                                                                             | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                                                                                                                   |       |                         |       |                         |       |
| Assets                                                                                                                                 |       |                         |       |                         |       |
| Current assets                                                                                                                         |       |                         |       |                         |       |
| Cash and cash  equivalents                                                                                                             |       | $                            | 850,131    |                         | $          | 464,118 |   |
| Trade accounts  receivable (net of allowance for doubtful accounts of $950,608 in 2006 and $0  in 2005)                                |       | 5,242,985                    |       | 5,675,683                    |       |
| Other receivables                                                                                                                      |       | —                       |       | 416,770                      |       |
| Inventories                                                                                                                            |       | 45,561                       |       | 9,659                        |       |
| Assets held for sale                                                                                                                   |       | 13,059,001                   |       | 21,471,036                   |       |
| Total current assets                                                                                                                   |       | 19,197,678                   |       | 28,037,266                   |       |
| Property and equipment,  net                                                                                                           |       | 1,131,120                    |       | 1,345,322                    |       |
| Other assets                                                                                                                           |       | 484,597                      |       | 467,956                      |       |
| Advances to officers of  subsidiaries and employees                                                                                    |       | 179,239                      |       | 27,090                       |       |
| Internet portal  database gateway, net                                                                                                 |       | 187,378                      |       | 305,096                      |       |
| Acquired software, net                                                                                                                 |       | 655,958                      |       | 1,409,460                    |       |
| Goodwill                                                                                                                               |       | 16,742,466                   |       | 12,799,769                   |       |
| Total assets                                                                                                                           |       | $                            | 38,578,436 |                         | $          | 44,391,959 |   |
| Liabilities and  Stockholders’ Equity                                                                                             |       |                         |       |                         |       |
| Current liabilities                                                                                                                    |       |                         |       |                         |       |
| Trade accounts payable                                                                                                                 |       | $                            | 1,253,266  |                         | $          | 1,579,456 |   |
| Accrued expenses                                                                                                                       |       | 1,998,042                    |       | 915,362                      |       |
| Other liabilities                                                                                                                      |       | 244,225                      |       | 311,979                      |       |
| Deferred tax liability                                                                                                                 |       | 426,447                      |       | —                       |       |
| Deferred revenue                                                                                                                       |       | —                       |       | 32,479                       |       |
| Liabilities held for  sale                                                                                                             |       | 1,933,512                    |       | 5,317,204                    |       |
| Total current  liabilities                                                                                                             |       | 5,855,492                    |       | 8,156,480                    |       |
| Commitments and  contingencies                                                                                                         |       |                         |       |                         |       |
| Stockholders’ equity                                                                                                              |       |                         |       |                         |       |
| Preferred stock, $0.001  par value, 10,000,000 shares authorized; none issued and outstanding                                          |       | —                       |       | —                       |       |
| Common stock, $0.001  par value, 100,000,000 shares authorized; 22,940,727 and 22,189,455 shares  issued and outstanding, respectively |       | 22,940                       |       | 22,189                       |       |
| Additional paid-in  capital                                                                                                            |       | 38,019,109                   |       | 33,399,433                   |       |
| Retained earnings  (deficit)                                                                                                           |       | (5,355,386                   | )          | 2,786,610                    |       |
| Accumulated other comprehensive  income                                                                                                |       | 36,281                       |       | 27,247                       |       |
| Total stockholders’  equity                                                                                                       |       | 32,722,944                   |       | 36,235,479                   |       |
| Total liabilities and  stockholders’ equity                                                                                       |       | $                            | 38,578,436 |                         | $          | 44,391,959 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

62

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**INTACINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Expressed in U.S.dollars)
| ** **                                                       | ** ** | **Year Ended,  September 30, 2006** | ** ** | **Nine Months Ended,  September 30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Career development  services revenue                             |       | $                                                  | 5,749,932  |                                                           | $          | 4,218,779                                        |       | $ | 4,231,076 |   |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Career development  services cost of revenue                     |       | 1,508,526                                          |       | 1,039,299                                                      |       | 1,233,490                                        |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Career development  services gross profit                        |       | 4,241,406                                          |       | 3,179,480                                                      |       | 2,997,586                                        |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Operating expenses                                               |       |                                               |       |                                                           |       |                                             |       |
| Product development                                              |       | 3,422,312                                          |       | 2,660,793                                                      |       | 1,819,501                                        |       |
| Selling, general and  administrative expenses                    |       | 2,258,089                                          |       | 1,836,777                                                      |       | 504,959                                          |       |
| Provision for doubtful  accounts                                 |       | 950,608                                            |       | —                                                         |       | —                                           |       |
| Merger transaction  costs                                        |       | 1,340,319                                          |       | —                                                         |       | —                                           |       |
| Gain on sale of assets                                           |       | —                                             |       | (383,933                                                       | )          | —                                           |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Total operating  expenses, net                                   |       | 7,971,328                                          |       | 4,113,637                                                      |       | 2,324,460                                        |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Income (loss) from  operations                                   |       | (3,729,922                                         | )          | (934,157                                                       | )          | 673,126                                          |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Other income (expenses)                                          |       |                                               |       |                                                           |       |                                             |       |
| Foreign currency  exchange gain (loss)                           |       | —                                             |       | —                                                         |       | 4,429                                            |       |
| Interest income  (expense), net                                  |       | —                                             |       | 2,477                                                          |       | (22,927                                          | )          |
| Minority interest in  loss of consolidated joint venture         |       | —                                             |       | —                                                         |       | 366,715                                          |       |
| Other income (expense),  net                                     |       | 2                                                  |       | (236                                                           | )          | (138,084                                         | )          |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Total other income  (expenses), net                              |       | 2                                                  |       | 2,241                                                          |       | 210,133                                          |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Income (loss) before  income taxes                               |       | (3,729,920                                         | )          | (931,916                                                       | )          | 883,259                                          |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Income taxes                                                     |       | (426,447                                           | )          | —                                                         |       | —                                           |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Income (loss) from  continuing operations                        |       | (4,156,367                                         | )          | (931,916                                                       | )          | 883,259                                          |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Income (loss) from  discontinued operations, net of income taxes |       | (3,985,629                                         | )          | (534,466                                                       | )          | 4,933,238                                        |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Net income (loss)                                                |       | $                                                  | (8,141,996 | )                                                              | $          | (1,466,382                                       | )          | $ | 5,816,497 |   |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Basic income (loss) per  share:                                  |       |                                               |       |                                                           |       |                                             |       |
| Income (loss) from  continuing operations                        |       | $                                                  | (0.18      | )                                                              | $          | (0.04                                            | )          | $ | 0.04 |   |
| Income (loss) from  discontinued operations                      |       | (0.18                                              | )          | (0.03                                                          | )          | 0.24                                             |       |
| Net income (loss)                                                |       | $                                                  | (0.36      | )                                                              | $          | (0.07                                            | )          | $ | 0.28 |   |
| Diluted income (loss)  per share:                                |       |                                               |       |                                                           |       |                                             |       |
| Income (loss) from  continuing operations                        |       | $                                                  | (0.18      | )                                                              | $          | (0.04                                            | )          | $ | 0.04 |   |
| Income (loss) from  discontinued operations                      |       | (0.18                                              | )          | (0.03                                                          | )          | 0.24                                             |       |
| Net income (loss)                                                |       | $                                                  | (0.36      | )                                                              | $          | (0.07                                            | )          | $ | 0.28 |   |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Weighted average shares  outstanding - basic                     |       | 22,587,806                                         |       | 22,149,122                                                     |       | 20,711,122                                       |       |
|                                                             |       |                                               |       |                                                           |       |                                             |       |
| Weighted average shares  outstanding - diluted                   |       | 22,587,806                                         |       | 22,149,122                                                     |       | 21,007,978                                       |       |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

63

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**INTACINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)**

(Expressed in U.S.Dollars)
| ** **                                                                                                                | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                                                                | ** ** | **Shares**            | ** ** | **$**                   | ** ** | **Capital** | ** ** |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Balance at December 31,  2003                                                                                             |       | 20,189,455            |       | $                       | 20,189     |   | $ | 8,062,801 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Issuance of common  stock for cash                                                                                        |       | 800,000               |       | 800                     |       | 11,968,387 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Compensation in  connection with restricted stock award                                                                   |       | —                |       | —                  |       | 233,333 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Share issuance in  connection with restricted stock award                                                                 |       | 132,000               |       | 132                     |       | (132 | ) |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Share issuance in  connection with acquisition of Beijing Huana Xinlong Information and  Technology Development Co., Ltd. |       | 1,000,000             |       | 1,000                   |       | 12,999,000 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Comprehensive income                                                                                                      |       |                  |       |                    |       |   |   |
| Net income                                                                                                                |       | —                |       | —                  |       | — |   |
| Foreign currency  translation                                                                                             |       | —                |       | —                  |       | — |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Total comprehensive  income                                                                                               |       |                  |       |                    |       |   |   |
| Balance at  December 31, 2004                                                                                        |       | 22,121,455            |       | 22,121                  |       | 33,263,389 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Compensation in  connection with restricted stock award                                                                   |       | —                |       | —                  |       | 136,112 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Share issuance in  connection with restricted stock award                                                                 |       | 68,000                |       | 68                      |       | (68 | ) |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Comprehensive loss                                                                                                        |       |                  |       |                    |       |   |   |
| Net loss                                                                                                                  |       | —                |       | —                  |       | — |   |
| Foreign currency  translation                                                                                             |       | —                |       | —                  |       | — |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Total comprehensive  loss                                                                                                 |       | —                |       | —                  |       | — |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Balance at  September 30, 2005                                                                                       |       | 22,189,455            |       | 22,189                  |       | 33,399,433 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Stock-based  compensation                                                                                                 |       | —                |       | —                  |       | 153,044 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Exercise of stock  options                                                                                                |       | 150,000               |       | 150                     |       | 524,532 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Incremental shares  issued in connection with acquisition of Huana Xinlong                                                |       | 601,272               |       | 601                     |       | 3,942,100 |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Comprehensive loss                                                                                                        |       |                  |       |                    |       |   |   |
| Net loss                                                                                                                  |       | —                |       | —                  |       | — |   |
| Foreign currency  translation                                                                                             |       | —                |       | —                  |       | — |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Total comprehensive  loss                                                                                                 |       | —                |       | —                  |       | — |   |
|                                                                                                                      |       |                  |       |                    |       |   |   |
| Balance at  September 30, 2006                                                                                       |       | 22,940,727            |       | $                       | 22,940     |   | $ | 38,019,109 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

64

----

 
| ** **                                                                                                                | ** ** | **Retained Earnings  (deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Balance at December 31,  2003                                                                                             |       | $                                     | (1,563,505 | )                                                         | $          | 200,653                               |       | $ | 6,720,138 |   |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Issuance of common  stock for cash                                                                                        |       | —                                |       | —                                                    |       | 11,969,187                            |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Compensation in  connection with restricted stock award                                                                   |       | —                                |       | —                                                    |       | 233,333                               |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Share issuance in  connection with restricted stock award                                                                 |       | —                                |       | —                                                    |       | —                                |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Share issuance in  connection with acquisition of Beijing Huana Xinlong Information and  Technology Development Co., Ltd. |       | —                                |       | —                                                    |       | 13,000,000                            |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Comprehensive income                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Net income                                                                                                                |       | 5,816,497                             |       | —                                                    |       | 5,816,497                             |       |
| Foreign currency  translation                                                                                             |       | —                                |       | (153,975                                                  | )          | (153,975                              | )          |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Total comprehensive  income                                                                                               |       |                                  |       |                                                      |       | 5,662,522                             |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Balance at  December 31, 2004                                                                                        |       | 4,252,992                             |       | 46,678                                                    |       | 37,585,180                            |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Compensation in  connection with restricted stock award                                                                   |       | —                                |       | —                                                    |       | 136,112                               |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Share issuance in  connection with restricted stock award                                                                 |       | —                                |       | —                                                    |       | —                                |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Comprehensive loss                                                                                                        |       |                                  |       |                                                      |       |                                  |       |
| Net loss                                                                                                                  |       | (1,466,382                            | )          | —                                                    |       | (1,466,382                            | )          |
| Foreign currency  translation                                                                                             |       | —                                |       | (19,431                                                   | )          | (19,431                               | )          |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Total comprehensive  loss                                                                                                 |       |                                  |       |                                                      |       | (1,485,813                            | )          |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Balance at  September 30, 2005                                                                                       |       | 2,786,610                             |       | 27,247                                                    |       | 36,235,479                            |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Stock-based  compensation                                                                                                 |       | —                                |       | —                                                    |       | 153,044                               |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Exercise of stock  options                                                                                                |       | —                                |       | —                                                    |       | 524,682                               |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Incremental shares  issued in connection with acquisition of Huana Xinlong                                                |       | —                                |       | —                                                    |       | 3,942,701                             |       |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Comprehensive loss                                                                                                        |       |                                  |       |                                                      |       |                                  |       |
| Net loss                                                                                                                  |       | (8,141,996                            | )          | —                                                    |       | (8,141,996                            | )          |
| Foreign currency  translation                                                                                             |       | —                                |       | 9,034                                                     |       | 9,034                                 |       |
| Total comprehensive  loss                                                                                                 |       |                                  |       |                                                      |       | (8,132,962                            | )          |
|                                                                                                                      |       |                                  |       |                                                      |       |                                  |       |
| Balance at September  30, 2006                                                                                            |       | $                                     | (5,355,386 | )                                                         | $          | 36,281                                |       | $ | 32,722,944 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

65

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**INTACINTERNATIONAL, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(Expressed in U.S.dollars)
| ** **                                                                                                                        | ** ** | **Year ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| CASH FLOW FROM  CONTINUING OPERATING ACTIVITIES:                                                                                  |       |                                              |       |                                                          |       |                                             |       |
| Net income (loss) from  continuing operations                                                                                     |       | $                                                 | (4,156,367 | )                                                             | $          | (931,916                                         | )          | $ | 883,259 |   |
| Adjustments to  reconcile net income (loss) from continuing operations to net cash provided  by (used in) operating activities:   |       |                                              |       |                                                          |       |                                             |       |
| Depreciation of  property and equipment                                                                                           |       | 397,867                                           |       | 272,773                                                       |       | 205,412                                          |       |
| Amortization of  internet portal database gateway and acquired software                                                           |       | 871,224                                           |       | 650,954                                                       |       | 123,883                                          |       |
| Provision for doubtful  accounts                                                                                                  |       | 950,608                                           |       | —                                                        |       | —                                           |       |
| Minority interest in  loss of consolidated joint venture                                                                          |       | —                                            |       | —                                                        |       | (366,715                                         | )          |
| Compensation in  connection with restricted stock award                                                                           |       | —                                            |       | 136,112                                                       |       | 233,333                                          |       |
| Stock-based  compensation expense                                                                                                 |       | 153,044                                           |       | —                                                        |       | —                                           |       |
| Other comprehensive  income (loss)                                                                                                |       | 9,034                                             |       | (19,431                                                       | )          | (153,975                                         | )          |
| Gain on sale of  subsidiary                                                                                                       |       | —                                            |       | —                                                        |       | (15,055                                          | )          |
| Loss on sale of  property and equipment and other assets                                                                          |       | —                                            |       | —                                                        |       | 15,695                                           |       |
| Changes in operating  assets and liabilities from continuing operations, net of effects of  acquisition and disposition in 2004   |       |                                              |       |                                                          |       |                                             |       |
| Trade accounts  receivable                                                                                                        |       | 567,309                                           |       | (2,221,250                                                    | )          | (3,454,433                                       | )          |
| Other receivables                                                                                                                 |       | 416,770                                           |       | (416,770                                                      | )          | —                                           |       |
| Inventories                                                                                                                       |       | (35,902                                           | )          | 982                                                           |       | (10,641                                          | )          |
| Other assets                                                                                                                      |       | (16,641                                           | )          | 101,367                                                       |       | —                                           |       |
| Trade accounts payable  and accrued expenses                                                                                      |       | 756,490                                           |       | 855,340                                                       |       | 1,450,680                                        |       |
| Other liabilities                                                                                                                 |       | (67,754                                           | )          | (669,131                                                      | )          | (118,087                                         | )          |
| Deferred revenue                                                                                                                  |       | 393,968                                           |       | (269,978                                                      | )          | 302,457                                          |       |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Net cash provided by  (used in) continuing operating activities                                                                   |       | 239,650                                           |       | (2,510,948                                                    | )          | (904,187                                         | )          |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| CASH FLOW FROM  DISCONTINUED OPERATING ACTIVITIES:                                                                                |       |                                              |       |                                                          |       |                                             |       |
| Net income (loss) from  discontinued operations                                                                                   |       | (3,985,629                                        | )          | (534,466                                                      | )          | 4,933,238                                        |       |
| Adjustments to  reconcile net income(loss) from discontinued operations to net cash provided  by (used in) operating activities:  |       |                                              |       |                                                          |       |                                             |       |
| Depreciation of  property and equipment                                                                                           |       | 108,245                                           |       | 52,510                                                        |       | 72,970                                           |       |
| Provision for doubtful  supplier rebate receivable                                                                                |       | 2,231,205                                         |       | —                                                        |       | —                                           |       |
| Changes in operating  assets and liabilities from discontinued operations, net of effects of  acquisition and disposition in 2004 |       |                                              |       |                                                          |       |                                             |       |
| Cash held for sale                                                                                                                |       | 1,172,247                                         |       | 1,799,294                                                     |       | (6,027,920                                       | )          |
| Trade accounts  receivable held for sale                                                                                          |       | 2,777,746                                         |       | (1,229,207                                                    | )          | (10,095,186                                      | )          |
| Supplier rebates  receivable held for sale                                                                                        |       | 254,062                                           |       | (2,485,267                                                    | )          | —                                           |       |
| Income tax receivable  held for sale                                                                                              |       | (41,823                                           | )          | —                                                        |       | 335,993                                          |       |
| Inventories held for  sale                                                                                                        |       | 779,259                                           |       | (842,233                                                      | )          | (74,378                                          | )          |
| Deposits paid held for  sale                                                                                                      |       | 26,820                                            |       | 123,450                                                       |       | 99,863                                           |       |
| Other assets held for  sale                                                                                                       |       | (3,287                                            | )          | —                                                        |       | (313,097                                         | )          |
| Trade accounts payable  and accrued expenses held for sale                                                                        |       | (2,734,702                                        | )          | 4,415,176                                                     |       | (1,668,635                                       | )          |
| Income taxes payable  held for sale                                                                                               |       | (604,481                                          | )          | (370,218                                                      | )          | 974,699                                          |       |
| Due to shareholders  held for sale                                                                                                |       | 6,774                                             |       | —                                                        |       | 16,580                                           |       |
| Deposits received held  for sale                                                                                                  |       | (51,283                                           | )          | 51,283                                                        |       | (221,389                                         | )          |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Net cash provided by  (used in) discontinued operating activities                                                                 |       | (64,847                                           | )          | 980,322                                                       |       | (11,967,262                                      | )          |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Net cash provided by  (used in) operating activities                                                                              |       | 174,803                                           |       | (1,530,626                                                    | )          | (12,871,449                                      | )          |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| CASH FLOW FROM  INVESTING ACTIVITIES:                                                                                             |       |                                              |       |                                                          |       |                                             |       |
| Restricted cash deposit                                                                                                           |       | —                                            |       | —                                                        |       | 2,800,000                                        |       |
| Sale (purchase) of  property and equipment                                                                                        |       | (183,664                                          | )          | (154,755                                                      | )          | (913,420                                         | )          |
| Sale (purchase) of  property and equipment held for sale                                                                          |       | 22,341                                            |       | (32,440                                                       | )          | (30,093                                          | )          |
| Sale (purchase) of  other assets                                                                                                  |       | —                                            |       | 328,846                                                       |       | (491,753                                         | )          |
| Repayments from  (advances to) officers of subsidiaries and employees                                                             |       | (152,149                                          | )          | 5,842                                                         |       | 313,158                                          |       |
| Collection of (increase  in) short-term note receivable                                                                           |       | —                                            |       | 365,370                                                       |       | —                                           |       |
| Acquisition costs                                                                                                                 |       | —                                            |       | (81,000                                                       | )          | —                                           |       |
| Cash included in sale  of subsidiary                                                                                              |       | —                                            |       | —                                                        |       | (132,921                                         | )          |
| Cash included in  purchase of subsidiary                                                                                          |       | —                                            |       | —                                                        |       | 246,528                                          |       |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Net cash provided by  (used in) investing activities                                                                              |       | (313,472                                          | )          | 431,863                                                       |       | 1,791,499                                        |       |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| CASH FLOW FROM  FINANCING ACTIVITIES:                                                                                             |       |                                              |       |                                                          |       |                                             |       |
| Proceeds from issuance  of common stock                                                                                           |       | —                                            |       | —                                                        |       | 11,969,187                                       |       |
| Borrowings from  (repayments to) shareholder, net                                                                                 |       | —                                            |       | 997                                                           |       | 33,399                                           |       |
| Borrowings from  (repayments to) bank                                                                                             |       | —                                            |       | —                                                        |       | (2,728,202                                       | )          |
| Incremental purchase of  Intac Purun shares                                                                                       |       | —                                            |       | —                                                        |       | (1,500,000                                       | )          |
| Proceeds from exercise  of stock options                                                                                          |       | 524,682                                           |       | —                                                        |       | —                                           |       |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Net cash provided by  financing activities                                                                                        |       | 524,682                                           |       | 997                                                           |       | 7,774,384                                        |       |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                                                                             |       | 386,013                                           |       | (1,097,766                                                    | )          | (3,305,566                                       | )          |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                                                                 |       | 464,118                                           |       | 1,561,884                                                     |       | 4,867,450                                        |       |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                                                                       |       | $                                                 | 850,131    |                                                          | $          | 464,118                                          |       | $ | 1,561,884 |   |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                                                                                |       |                                              |       |                                                          |       |                                             |       |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Cash paid for interest                                                                                                            |       | $                                                 | 237        |                                                          | $          | 401                                              |       | $ | 38,570 |   |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Cash paid for taxes                                                                                                               |       | $                                                 | 1,033,000  |                                                          | $          | —                                           |       | $ | — |   |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| NON-CASH INVESTING AND  FINANCING ACTIVITIES:                                                                                     |       |                                              |       |                                                          |       |                                             |       |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Sale of property and  equipment for note receivable                                                                               |       | $                                                 | —     |                                                          | $          | 584,615                                          |       | $ | — |   |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Insurance premiums  financed                                                                                                      |       | $                                                 | 233,000    |                                                          | $          | —                                           |       | $ | — |   |
|                                                                                                                              |       |                                              |       |                                                          |       |                                             |       |
| Issuance of Company  stock for the Huana Xinlong acquisition                                                                      |       | $                                                 | 3,942,701  |                                                          | $          | —                                           |       | $ | 13,000,000 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

66

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**INTACINTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Expressed in U.S. dollars)**

**1.  GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

(a)      Description of Business and Basis ofPresentation

INTACInternational, Inc. (“INTAC” or the “Company”) is a United States holdingcompany focused on the exploitation of strategic business opportunitiesavailable in China and the Asia-Pacific Rim. The Company currently maintains offices in China (Hong Kong, Beijing andTianjin), Germany (Frankfurt) and the United States (Dallas, Texas). During theperiods reported, the Company’s revenues from continuing operations werederived primarily from integrated educational and career development serviceswhich includes software license maintenance and support, training, consulting,and franchise revenue delivered to customers in China.

On August 8, 2006, theCompany entered into a letter of intent with Wei Zhou, its Chairman and CEO, tosell the Distribution Segment of the business for 3 million shares of theCompany’s common stock. (See Note 2.)  As a result of this agreement, the operations of this segment have sincebeen segregated and reported as discontinued operations for all periodspresented within the Company’s consolidated statement of operations presentedherein.  Similarly, the Company’s assetsand liabilities of this segment have been classified as “held for sale” withinthe consolidated balance sheets presented herein.

In October 2003, INTAC formed a new Internetjoint venture, Beijing Intac Purun Educational Development Ltd (“Intac Purun”),with China Putian Corporation (“Putian”) and the Ministry of Education in ThePeople’s Republic of China (“PRC”). Intac Purun was established to meet the growing need for expanding theemployment opportunities for graduates of higher level education institutionsin the PRC. The Ministry of Education had already established a database ofgraduates which has been made exclusively available to Intac Purun. Intac Purunprovides mobile telecommunications training services in China offering trainingto information technology professionals with the primary focus in the area ofthird generation digital mobile systems commonly known as “3G”. In addition,the Company continues to develop databases for 1-stop marketing solutions to awide range of businesses with products and services tailored to the specificneeds of Chinese education.  At the timeof formation, the joint venture was owned 45% by INTAC, 15% by Putian, 30% by aprivate investor group and 10% by the Ministry of Education.  In June 2004, INTAC purchased anadditional indirect 15% interest in Intac Purun from Putian.  This additional 15% indirect ownershipinterest increases INTAC’s total indirect ownership in Intac Purun to60%.  INTAC’s ownership in Intac Purun is held indirectly through PRCnominees.

InSeptember 2004, INTAC indirectly formed two new companies, Beijing IntacMeidi Advertising Company Limited (“Intac Advertising”) and Beijing Intac MeidiTechnology Development Company Limited (“Intac Technology”), both Chinesecorporations.  Intac Advertising andIntac Technology were established to provide advertising services and valueadded services in support of Intac Purun.

InSeptember 2004, INTAC sold all of the outstanding shares of New TechHandel GmbH (“New Tech”). The results of operations of New Tech have beenincluded in the consolidated financial statements through the date ofdisposal.  INTAC then formed a newsubsidiary, INTAC Deutschland GmbH (“INTAC Deutschland”), a German corporation,for the continuation of similar operations in Germany.  INTAC Deutschland now acts as the Company’sprimary purchasing agent and distributor of mobile handsets from Europe intothe Asia-Pacific Rim.

InDecember 2004, INTAC acquired Beijing Huana Xinlong Information andTechnology Development Co., Ltd. (“Huana Xinlong”), which INTAC has assigned toINTAC International Holdings Limited (“Holdings”), a Hong Kong corporation anda wholly-owned subsidiary of INTAC. Huana Xinlong, a leading Chinese developer of management software foreducational institution administration, is located in Beijing, China.

InJanuary 2006, INTAC established Intac International Management ConsultancyBeijing Limited to carry out business management and advisory activities.

On April 20, 2006, the Company entered intoan Agreement and Plan of Merger, referred to as the merger agreement, withHowStuffWorks Inc. (“HSW”), HSW International, Inc. (“HSW International”)and HSW International Merger Corporation (“merger sub”). Pursuant to the mergeragreement, merger sub will merge with and into INTAC, with INTAC continuing asthe surviving corporation (the “merger”). As a result of the merger, INTAC willbecome a wholly owned subsidiary of HSW International. Pursuant to the terms ofthe merger agreement, each outstanding share of Company common stock, par value$0.001 per share, will be converted into the right to receive one share of HSWInternational common stock, par value $0.001 per share.

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 In connection with the merger (i) HSW hasagreed to contribute certain assets, properties and rights to HSW Internationalin exchange for shares of HSW International common stock (the “contributedassets”) and (ii) certain investors have entered into agreements topurchase shares of HSW International common stock with an aggregate value ofapproximately $22.5 million (the “equity financing”). At the closing ofthe merger, but prior to the completion of the equity financing, INTACstockholders will own 50% of the total issued and outstanding shares of HSWInternational common stock and HSW will own the remaining 50% of the totalissued and outstanding shares of HSW International common stock. The merger,the merger agreement, and the transactions contemplated by the merger agreementhave been approved by our board of directors, and are subject to variousclosing conditions, including approval by our stockholders.

Prior to the closing of the merger, it is contemplatedthat HSW International will use its best efforts to obtain approval for listingof HSW International common stock on either the Nasdaq National Market or theNasdaq Capital Market, and following the closing of the merger, it iscontemplated that INTAC will file with the SEC to terminate registration of ourcommon stock.

In connection with the merger, INTAC and HSWInternational plan to file a proxy statement/prospectus on Form S-4 withthe SEC which will contain detailed information regarding the merger and thespecial meeting of stockholders at which our stockholders will consider the merger,the merger agreement and the transactions contemplated by the merger agreement.It is currently anticipated that the merger will close in the second quarter offiscal year 2007.

The consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles in the United States of America (“USGAAP”). In theopinion of management, all adjustments necessary for a fair presentation havebeen included.

In August of2005, the Company changed its fiscal year end from December 31st to September 30th. Accordingly, the accompanying financialstatements include the consolidated balance sheets as of September 30,2006 and 2005. The related consolidated statements of operations, consolidatedstatements of stockholders’ equity and comprehensive income (loss) andconsolidated statements of cash flows are presented for the year endedSeptember 30, 2006, the nine months ended September 30, 2005 and the yearended December 31, 2004.

(b)      Principles of Consolidation

The accompanying consolidated financial statementsinclude the financial statements of the Company and its wholly owned continuingoperations subsidiaries, INTAC Holdco Corp., Intac (Tianjin) InternationalTrading Co., Beijing Intac Media Advertising Company Limited, Beijing IntacMeidi Technology Development Company Limited, Intac International ManagementConsultancy Beijing Limited, Huana Xinlong and its 60% owned subsidiary INTACPurun. All intercompany balances and transactions have been eliminated inconsolidation.

The assets and liabilities held for sale and thediscontinued operations include the following companies: Holdings, INTACDeutschland GmbH, FUTAC Group Limited, Global Creative International Limited,INTAC Telecommunications Limited.

In consolidatingthe Company’s 45% indirect ownership interest in Intac Purun during the periodfrom October 2003 (formation) through the period that INTAC acquired theadditional 15% indirect ownership interest in June 2004, the Companyapplied the guidance in Statement of Financial Accounting Standards (“SFAS”)No. 94 “Consolidation of All Majority-Owned Subsidiaries”, and by analogythe guidance in EITF 96-16 “Investor’s Accounting for an Investee When theInvestor Has a Majority of the Voting Interest but the Minority Shareholder orShareholders have Certain Approval or Veto Rights”.  INTAC is designated as the operating partnerfor the joint venture, has effective control of the Board of Directors andappoints the majority of the Board of Directors which hires management andcontrols the day to day activities of Intac Purun making it the primarycontrolling shareholder since the inception of Intac Purun.  Accordingly, management concluded that it wasnecessary to consolidate Intac Purun since the acquisition of its 45% ownershipinterest in order to properly reflect the substance of the Company’s controlposition.

(c)      Reclassification

Certainprior year balances have been reclassified to conform with the current yearpresentation.

(d)      Liquidity

As ofSeptember 30, 2006 and 2005, INTAC had retained earnings (deficit)balances of $(5,355,386) and $2,786,610, respectively, primarily due to netlosses for the year ended September 30, 2006 and the nine months endedSeptember 30,

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2005. The Companyraised equity financing of $4.5 million in September 2003 and $12.0million in May 2004.  Proceeds ofthe private placements are being used to expand Intac Purun’s careerdevelopment services and for working capital purposes.

As ofSeptember 30, 2006 and 2005, INTAC maintained cash related to continuingoperations of $850,131 and $464,118, respectively.  The Company measures liquidity throughworking capital (measured by current assets less current liabilities).  As of September 30, 2006 and 2005, INTACmaintained working capital of $13,342,186 and $19,880,756, respectively.  The decrease in working capital is primarilydue to losses during the current year.

Within ourDistribution Business (included in discontinued operations), a large portion oftrade accounts receivable is attributable to our largest customer –Mr. Lam, from whom we derived substantially all of our distributionrevenue for year ended September 30, 2006. The amount of the receivable balancewith this customer has decreased to $11.2 million at September 30, 2006 from$14.9 million at September 30, 2005; however, we expect this balance to remainhigh for the foreseeable future. We collected approximately $6.1 million of thebalance outstanding at September 30, 2006 in October and November of 2006.

We have enteredinto a new installment payment plan agreement with Mr. Lam to pay his currentbalance over a period of six months. The first payment in accordance with thisagreement was received in November 2006 in the amount of $1.9 million. As partof the installment plan agreement, we have agreed that all future sales to Mr.Lam are due and payable within 45 days. The volume of sales in the Distributionbusiness relies on keeping Mr. Lam as a customer. In order to demonstrate hisbelief that Mr. Lam’s receivable is collectible, Wei Zhou, the Company’sChairman and CEO, entered into a Security and Pledge Agreement with INTACwhereby Mr. Zhou pledged 3 million shares of INTAC common stock to securecollection of this receivable.

In addition, atSeptember 30, 2006, the Company has approximately $2.2 million of supplierrebates receivable from its major mobile handset supplier, T-MobileDeutschland. This amount has been fully reserved based on historical trends anddue to the uncertainty of their use when considering the distribution business’anticipated reduced revenue. Mr. Zhou’s pledge of 3 million shares of INTACcommon stock under the Security and Pledge Agreement also secures thisreceivable.

As of September30, 2006 we have a net trade receivable balance of $5.2 million related to ourCareer Development Services business.  The trade receivable balance relates primarily to Huana Xinlong and thesale of educational software to school districts within China. These schooldistricts pay for their software purchases using funds supplied by the Chinesegovernment. Historically, this funding takes many months, which is typical ofthe business process in China. As of September 30, 2006, approximately $963,000of our gross trade receivable balance relates to sales of educational softwarecompleted in December 2004 and $950,608 has been reserved in our financialstatements. This amount has been reserved based upon historical collectionpatterns and due to the passage of time. This overall gross balance of trade receivables from sales completed inDecember 2004 has decreased $2,037,000 million from the September 30, 2005balance of $3 million due to aggressive collections during the year.  The Company fully intends to pursuecollection of these receivables.

We believe thatthe Company will have sufficient capital for the next twelve months if we areable to collect our trade receivables and sell our Career development softwareand training services in according to our business plan.   However, if we are not able to completesales in a timely manner or if the Chinese government does not fund our schooldistrict customers in a reasonable amount of time, it could have a materialadverse effect on our liquidity. Long-term plans will require that we obtainadditional financing through the issuance of debt, equity, other securities ora combination thereof in order to take advantage of other strategic agreementsand business alliances. In addition, we may seek to obtain a workingcapital or other traditional loan facility from a bank or other lending source.Unless we are able to continue to improve our career development services operatingperformance with which we have limited experience, additional outside financingrequired to execute our long-term business plan would be difficult to obtain onacceptable terms, if at all. As of the date of this Report, we do not have anyfinancing arrangements, nor do we have any commitments to obtain such anarrangement with any bank or other third party. If we raise capital by issuingequity or convertible debt securities, the percentage ownership of our currentstockholders will be reduced. Any new securities may have rights,preferences or privileges senior to those of our current common stockholders.There can be no assurances that we will be able to obtain additional financingon terms which are acceptable to us.

(e)      Cash and Cash Equivalents

For purposes ofthe balance sheets and statement of cash flows, the Company considers allhighly liquid investments with original maturities of three months or less tobe cash equivalents.  The Companymaintains its cash in high quality financial institutions and does not believeany undue risk is associated with its cash balances.  A large portion of the cash balance is

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maintained at onefinancial institution.

(f)       Concentration of Credit Risk and AccountsReceivable

Trade accountsreceivable are stated at the amount the Company expects to collect and are notcollateralized. The Company maintains allowances for doubtful accounts forestimated losses resulting from the inability of its customers to make requiredpayments. The Company does not charge interest on overdue balances. Managementconsiders the following factors when determining the collectibility of specificcustomer accounts: customer credit-worthiness, past transaction history withthe customer, current economic industry trends, and changes in customer paymentterms and the length of time which the receivable remains outstanding. If thefinancial condition of the Company’s customers were to deteriorate, adverselyaffecting their ability to make payments, additional allowances would berequired. Based on management’s assessment, the Company provides for estimateduncollectible amounts through a charge to earnings and a credit to a valuationallowance. Balances that remain outstanding after the Company has usedreasonable collection efforts are written off through a charge to the valuationallowance and a credit to accounts receivable. Based upon the above criteria, as of September 30, 2006 and 2005,the allowance for doubtful accounts receivable was $950,608 and $0,respectively. 

(g)      Inventories

Inventories in ourcareer development services business consist mostly of training material andother supplies. Inventories in our Distribution business are shown on theconsolidated balance sheets as assets held for sale. This consists mostly ofwireless handsets which are stated at the lower of cost and net realizablevalue, calculated on the first-in, first-out basis, and are comprised offinished goods. Net realizable value is determined on the basis of anticipatedsales proceeds less estimated costs for selling expenses.

(h)      Deposits Paid

Deposits paid arepayments made to suppliers for down payments for wireless handsets and includedin assets held for sale on the consolidated balance sheet.

(i)       Property and Equipment

Property andequipment is stated at cost less accumulated depreciation and amortization andany provisions for impairment losses required to reflect recoverableamounts.  Cost represents the purchaseprice and any directly attributable costs of bringing the asset to workingcondition for its intended use.  Repairsand maintenance are expensed as incurred. Betterments and capital improvements are capitalized and depreciatedover the remaining useful life of the related asset.

Depreciation andamortization is calculated to write off the cost of the fixed asset over theshorter of the useful life or, if applicable, the remaining lease term, on astraight line basis, at the following annual rates:
| Furniture and fixtures  |   | 20 | % |
|-------------------------|--------|----|---|
| Leasehold  improvements |   | 20 | % |
| Motor vehicles          |   | 20 | % |

 

(j)       Intangible Assets

In accordance with the accounting rules containedin SFAS No. 142 “Goodwill and Intangible Assets” (“SFAS 142”), the Companyreviews each indefinitely lived intangible asset for impairment annually andwhen events or circumstances indicate that the asset might be impaired.  Impairment is measured as the amount by whichthe Company’s carrying value exceeds the fair value.  Should impairment be indicated, the impairedamount will be charged to expense.  As ofSeptember 30, 2006 and 2005, the Company performed its annual impairmenttests and found none of its goodwill to be impaired.

Non-amortizable intangible assets include thefollowing:

·                  Recordedgoodwill of $59,021 attributable to the wireless handset distribution business(included in assets held for sale on the consolidated balance sheets).

·                  Recordedgoodwill of $1,064,113 relating to the acquisition of an additional 15%indirect ownership interest in Intac Purun from Putian for $1.5 millionattributable to the career development services business.

·                  Recordedgoodwill of $15,678,353 relating to the acquisition of Huana Xinlongattributable to the career

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developmentservices business. The acquisition consideration issued by the Company in thetransaction consisted of up to 2,000,000 shares of Company common stock,including 1,000,000 shares issued on closing and up to an additional 1,000,000shares contingent on achieving net income of $13 million during the thirteen monthperiod ending December 31, 2005 of which an additional 601,272 shares wereissued.  The Company issued a total of1,601,272 shares as consideration for this transaction.

Goodwill represents the excess of the purchase priceover the fair value of identifiable assets and liabilities acquired as a resultof the Company’s acquisitions of interests in its subsidiaries.

Amortizable intangible assets include the following:

·                  The legal rightfor exclusive access to a student database which is owned by the PRC Ministryof Education.  The Company acquired theaccess right in October 2003 in connection with the formation of IntacPurun.  The access right to this studentdatabase has been recorded based on a valuation completed inDecember 2004.  Management hasdetermined that this intangible asset has a finite life as contemplated by SFASNo. 142 and accordingly, this asset is being amortized over a five yearlife on a straight line basis in accordance with the terms of the internetcontent provider license agreement.
| ** **                        | ** ** | **Weighted Average**                            | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **Remaining Amortization  Period (Years)** | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization**    | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                              |       |                                                 |       |                             |       |                             |       |   |   |   |   |
| Internet portal  database gateway |       | 2.0                                                  |       | $                                | 411,666    |                             | $          | 224,288 |   | $ | 411,666 |   | $ | 106,570 |   |
|                                   |            |                                                      |            |                                  |            |                                  |            |  |  |  |  |  |  |  |  |

 

Amortization expense was $117,718 and $45,673 for theyear ended September 30, 2006 and the nine months ended September 30,2005. Estimated aggregate amortization expense for each of the next three yearsis as follows:
| 2007  |   | $      | 83,279  |   |
|-------|--------|--------|---------|--------|
| 2008  |   | 83,279 |    |
| 2009  |   | 20,820 |    |
| Total |   | $      | 187,378 |   |

 

(k)      Acquired Software

Software wasacquired in connection with the acquisition of Huana Xinlong.  This software has been recorded using valuesestablished in December 2004. Amortization is recorded based on the estimated useful life ofapproximately three years on a straight line basis.  At September 30, 2006, acquired softwarerecorded value totaled $2,039,307 with accumulated amortization totaling$1,383,349.

(l)       Deposits Received

Deposits receivedare payments received from customers for down payments for wireless handsetsand are included in liabilities held for sale in the consolidated balancesheet.

(m)     Revenue Recognition

The Company’s revenue is derived from primarily twosources (i) career development services which includes software licensemaintenance and support, training, consulting, and franchise revenue forcustomers in China (included in continuing operations on the consolidatedstatement of operations) and (ii) distribution revenue, which includeswireless handsets distribution mainly into China – (included in discontinuedoperations on the consolidated statements of operations).

Career DevelopmentServices:

Product revenue from the license of the Company’ssoftware products is recognized in accordance with Staff Accounting Bulletin (“SAB”)No. 104, “Revenue Recognition” when persuasive evidence of an arrangementexists, the product has been delivered, the fee is fixed or determinable, andcollection of the resulting receivable is reasonably assured, and, ifapplicable, upon acceptance when acceptance criteria are specified or uponexpiration of the acceptance period. Maintenance and support revenue forcustomer support is deferred and recognized ratably over the service periodunless it is included in the initial license fee, provided for less than oneyear and is not a significant portion of the total license revenue.  In this case,

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maintenance support revenue is recognized when allrevenue recognition criteria under SOP 97-2, SOP 98-9 and SAB 104 have beenmet.  Product upgrades and enhancementrevenue is deferred and recognized ratably over the service period unless it isincluded in the initial license fee and is not significant.  Training and consulting revenue is recognizedas services are performed and billable according to the terms of the servicearrangement.

The Company applies the provisions of Statement ofPosition 97-2, *“Software RevenueRecognition,*” (“SOP 97-2”) as amended by Statement ofPosition 98-9 *“Modification of SOP97-2, Software Revenue Recognition, With Respect to Certain Transactions”*to all transactions involving the sale of all its software products.

For arrangements with multiple obligations (e.g.undelivered maintenance and support bundled with term licenses), the Companyallocates revenue to each component of the arrangement using the residual valuemethod based on evidence of the fair value of the undelivered elements, whichis specific to the Company.  The vendorspecific objective evidence of the fair values for the ongoing maintenance andsupport obligations for term licenses are based upon the prices paid for theseparate renewal of these services by the customer or upon substantive renewalrates stated in the contractual arrangements. In this case, maintenance supportrevenue is recognized when all revenue recognition criteria under SOP 97-2, SOP98-9 and SAB 104 have been met. Vendor specific objective evidence of the fairvalue of other services, primarily consulting and training services, is basedupon separate sales of these services.

Franchise fee revenue is derived from the sale tocustomers of the exclusive rights to provide training courses to prospectivestudents.  This arrangement consists ofan up-front, non-refundable license fee, as well as fees for training materialsand contingent payments based on a percentage of the student tuition.  The up-front, non-refundable franchise fee isrecognized as revenue at the time the agreement is entered into, and the feesfor other services are recognized as performed. Contingent payments arerecognized when received.  The Companyhas considered the relevant provisions of FAS 45 “Accounting for Franchise FeeRevenue” in accounting for its franchise revenue.

The Company licenses access to its student databaseand education materials under one, two and three-year term licenses. Thesoftware licenses provide for updates to new versions if and when madeavailable.  No express rights of returnare granted.  The Company sells itsproducts and services via a direct sales force and under certain circumstances,sales agents.

Subscription revenue which will be earned primarilythrough our Internet portal business, will be recognized on a straight linebasis over the term of the service contract provided. The Company may alsocontract with third-party mobile operators for the transmission of wirelessshort messages and subscriptions as well as for the billing and collection ofservice fees from customers. Revenues are recorded as the services are providedmonthly or on a per usage basis. The Company will recognize the net amountbilled by the mobile operator as revenue. To date, the Company has generated minimal revenue from subscriptionservices.

Distribution Business:

The Company’s wireless handset revenue is generallygenerated from a quick turn of product. The Company recognizes revenue upondelivery of product to its customers. Products are sold “as is” and the Companydoes not provide servicing of the wireless handsets, nor does the Companyreceive any usage revenue from the wireless handsets distributed.

Revenue is recognized when customers take delivery ofthe goods, which is taken to be the point in time where the customer hasaccepted the goods and the related risks and rewards of ownership. Certainsales arrangements provide the Company the right to receive a contingentpayment based on sales made by the customers. Contingent payment revenue forthese arrangements is recognized as the cash is received. Receipts of cash inadvance of shipment or delivery are recorded as deposits received.

License fee revenue is derived from the sale tocustomers of the rights to sell products under arrangements in which theCompany is the distributor. These arrangements consist of an up-front,non-refundable license fee, as well contingent payments based on a percentageof the customer revenue. The services provided by the Company after the receiptof the up-front license fee are not significant. The up-front, non-refundablelicense fee is recognized as revenue at the time the agreement is entered into,and the contingent payments are recognized when received. The Company has consideredthe relevant provisions of SAB 104 and Emerging Issues Task Force No. 00-21, “Accountingfor Revenue Arrangements with Multiple Deliverables” in accounting for licensefee revenue.

(n)      Cost of Revenues

Career Development Services (included in continuingoperations):

The Company’s career development services cost ofrevenue is primarily comprised of the service fees paid for the provision

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of software training and technological services, andthe amortization charge for acquired software.

Distribution Business (included in discontinuedoperations):

The Company’s distributionbusiness cost of revenues is comprised of the cost of the wireless handsetproducts distributed.

(o)      Vendor Programs

Incentive arrangements suchas volume incentive rebates or other vendor programs are accounted for inaccordance with the Emerging Issues Task Force Issue No. 02-16, “Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor” and Emerging Issues Task Force No. 03-10, “Application of IssueNo. 02-16 by Resellers to Sales Incentives Offered to Customers byManufacturer”.  To the extent that theCompany receives excess funds from suppliers for reimbursement of its costs,the Company recognizes the excess as a liability due to the supplier, which isapplied to future costs incurred on behalf of the supplier.  Volume incentive rebates are considerationreceived from the suppliers when purchases or sell-through targets are attainedor exceeded within a specific time period. The amount of rebate earned in any financial reporting period is accruedas a vendor receivable. This same amount is either a reduction on inventorycost or is a reduction of cost of sales for those items already sold.  Volume rebates to date have been determinedbased on actual negotiated volume discounts. When there is uncertaintyregarding the use of these rebates, the amounts are reserved accordingly.

(q)      Income Taxes

Income taxes areaccounted for under the asset and liability method. Deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities, and their respective tax bases and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the period in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.

(r)       Foreign Currency Translation

The Company’soperations in China and Hong Kong use the local currencies as their functionalcurrencies.  German operations use theHong Kong dollar as its functional currency. The accompanying consolidatedfinancial statements have been expressed in United States dollars, thereporting currency of the Company.

Reported assetsand liabilities of INTAC’s foreign subsidiaries have been translated at therate of exchange at the end of each period. Revenues and expenses have beentranslated at the weighted average rate of exchange in effect during therespective period. Gains and losses resulting from translation are accumulatedin other comprehensive income (loss) in stockholders’ equity.

Realized andunrealized gains (losses) on currency transactions between foreign entities isincluded in other income (expense) in the accompanying statements ofoperations.

(s)      Net Income (Loss) Per Share – Basic andDiluted

Basic income(loss) per share is calculated by dividing net income (loss) by theweighted-average number of common shares outstanding during the period. Dilutedincome (loss) per share is calculated by dividing net income (loss) by theweighted-average number of common shares and dilutive potential common shares,if any, outstanding during the period. Computation of diluted income per share for the year endedDecember 31, 2004 includes dilutive stock options and restricted stockawards granted under the terms of the Company’s 2001 Long Term IncentivePlan.  Stock options and the restrictedstock award (to the extent not vested) were not included in the computation ofdiluted loss per share for the year ended September 30, 2006 and the nine monthsended September 30, 2005 because their effects are anti-dilutive.  Total diluted shares excluded from thediluted income (loss) per share computation totaled 450,000 and 600,000 atSeptember 30, 2006 and 2005, respectively.

(t)       Segment Reporting

SFAS No. 131 “Disclosuresabout Segments of an Enterprise and Related Information”, established standardsfor reporting information about operating segments in financial statements.Operating segments are defined as components of an enterprise about whichseparate financial information is available that is evaluated regularly by thechief operating decision maker, or decision making group, in deciding how toallocate resources and assessing performance.

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Historically, the Company’s results of operations havebeen considered to be comprised of two reportable segments:  (i) career development services and(ii) distribution of wireless handsets. The statement of operations included herein reflects operations of thecareer development services segment as continuing operations and thedistribution segment as discontinued operations due to the transactiondescribed in Note 2 below.  Accordingly,there is only one reportable segment and disclosure as required under SFAS No.131 is not required.

(u)      Impairment of Long-Lived Assets andLong-Lived Assets to be Disposed of

The Companyaccounts for long-lived assets in accordance with the provisions of SFASNo. 144, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of”. This Statement requires that long-livedassets and certain identifiable intangibles be reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future net cashflow expected to be generated by the asset. If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.

 (v)     Useof Estimates

Management of theCompany has made a number of estimates and assumptions relating to thereporting of assets and liabilities and the disclosure of contingent assets andliabilities to prepare these consolidated financial statements in conformitywith accounting principles generally accepted in the United States of America. Themost significant estimates and related assumptions include the assessment ofthe provision for doubtful accounts, the assessment of the impairment oftangible and intangible long-lived assets, the assessment of the valuationallowance on deferred tax assets, the purchase price allocation on acquisitionsand the assessment of criteria related to revenue recognition. Actual resultscould differ from those estimates.

(w)     Product and Software Development Expenses

Product andsoftware development expenses primarily include payroll and other employeebenefit costs.  For software to bemarketed or sold, financial accounting standards require the capitalization ofdevelopment costs after technological feasibility is established.  Due to the relatively short period betweentechnological feasibility and the completion of product development, and theinsignificance of the related costs, the Company generally does not capitalizesoftware development costs.  All productand software development costs are expensed when incurred.  Research and development costs to date havenot been significant.

(x)       Employee Benefit Plans

The Company’ssubsidiaries in China participate in a government-mandated multi-employerdefined contribution plan pursuant to which certain retirement, medical andother welfare benefits are provided to employees.  Chinese labor regulations require the Company’ssubsidiaries to pay to the local labor bureau monthly contributions at a statedcontribution rate based on the monthly basic compensation of qualifiedemployees.  The relevant local laborbureau is responsible for meeting all retirement benefit obligations; theCompany has no further commitments beyond its monthly contributions.  Employee benefit plan costs to date have notbeen significant.

(y)                 Stock OptionPlans and Stock-Based Compensation

Effective October 1,2005, the Company adopted Statement of Financial Accounting Standard No. 123(revised) “Share Based Payment” (“SFAS 123-R”), using the modified prospectivetransition method. Under this transition method, compensation cost for allshare-based payments granted prior to, but not yet vested as of October 1,2005, is based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS 123 and compensation cost for all share-basedpayments granted subsequent to October 1, 2005 is based on the grant date fairvalue estimated in accordance with the provisions of SFAS 123-R. During theyear ended September 30, 2006, the Company recognized share-based compensationcost totaling $153,044.

As a result of adoptingSFAS 123-R on October 1, 2005, the Company’s loss before income taxes and netloss for year ended September 30, 2006 is $153,044 and $153,044 higher,respectively, than if the Company had continued to account for share-basedcompensation under APB Opinion No 25 “Accounting for Stock Issued to Employees.”Basic and diluted loss per share for the year ended September 30, 2006 wouldhave been ($0.35), if the Company had not adopted SFAS 123-R, compared to thereported basic and diluted loss per share of ($0.36).

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The followingtable illustrates the effect on net income (loss) and earnings (loss) per shareif the Company had applied the fair value recognition provisions of SFAS 123 tooptions granted under the Company’s stock option plan in all periods presented.For purposes of this pro forma disclosure, the value of the options isestimated using a Black-Scholes option pricing model and amortized over theoptions’ vesting periods.
|                                                                                                          | ** **          | **Nine Months  Ended  September 30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------|---------------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                                                                     |                |                                                      |       |                                             |       |
| Net income  (loss), as reported                                                                          |                | $                                                         | (1,466,382 | )                                                | $          | 5,816,497 |   |
| Add:  Total  stock-based employee compensation expense included in reported net income  (loss)      |                | 136,112                                                   |       | 233,333                                          |       |
| Deduct:   Total stock-based employee compensation expense determined under fair value  based method |                | (1,117,425                                                | )          | (843,407                                         | )          |
| Pro forma net  income (loss)                                                                             |                | $                                                         | (2,447,695 | )                                                | $          | 5,206,423 |   |
|                                                                                                     |                |                                                      |       |                                             |       |
| Net income  (loss) per share – Basic - as reported                                                  |                | $                                                         | (0.07      | )                                                | $          | 0.28 |   |
|                                                                                                     |                |                                                      |       |                                             |       |
|                                                                                                     | Basic - Pro forma   |                                                      | $          | (0.11                                            | )          | $ | 0.25 |   |
|                                                                                                     |                |                                                      |       |                                             |       |
| Net income  (loss) per share – Diluted - as reported                                                |                | $                                                         | (0.07      | )                                                | $          | 0.28 |   |
|                                                                                                     |                |                                                      |       |                                             |       |
|                                                                                                     | Diluted - Pro forma |                                                      | $          | (0.11                                            | )          | $ | 0.25 |   |

 

On August 28, 2005, the Board of Directors ofINTAC approved the acceleration of vesting of all unvested options to acquireshares of the Company’s common stock. These options were previously awarded in2003 and 2004 under the Company’s 2001 Long Term Incentive Plan and were tovest in three equal annual installments after the date of grant. Options topurchase 200,000 shares of common stock at exercise prices between $9.50 and$15.75, prices that were above the current market price of the Company’s commonstock, are subject to this acceleration. The acceleration of the vesting ofthese options was undertaken primarily to eliminate the related futurestock-based compensation expense resulting from the adoption of SFAS 123R.

(z)       Commitments and Contingencies

Liabilities forloss contingencies arising from claims, assessments and litigation and othersources are recorded when it is probable that a liability has been incurred andthe amount of the assessment can be reasonably estimated. In the opinion ofmanagement, after consultation with legal counsel, there are no claims,assessments and litigation against the Company.

(aa)    Fair Value of Financial Instruments

The carryingamounts of all current assets and current liabilities at September 30,2006 and 2005 approximate their fair values because of the short maturity ofthese instruments.

(bb)    ComprehensiveIncome (Loss)

Comprehensive income (loss) is defined as the change in equity of acompany during a period from transactions and other events and circumstancesexcluding transactions resulting from investments from owners and distributionsto owners.  For the Company,comprehensive income (loss) for the periods presented includes net income(loss) and foreign currency translation adjustments.

(cc)                    Impact of NewAccounting Standards

Effective October 1, 2005, the Company adoptedStatement of Financial Accounting Standard No. 123 (revised) “Share BasedPayment” (“SFAS 123-R”), using the modified prospective transition method.Under this transition method, compensation cost for all share-based paymentsgranted prior to, but not yet vested as of October 1, 2005, is based on thegrant date fair value estimated in accordance with the original provisions ofSFAS 123 and compensation cost for all share-based payments granted subsequentto October 1, 2005 is based on the grant date fair value estimated inaccordance with the provisions of SFAS 123-R. During the year ended September30, 2006, the Company recognized share-based compensation cost totaling$153,044.

75

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As a result of adopting SFAS 123-R on October 1, 2005,the Company’s loss before income taxes and net loss for year ended September30, 2006 is $153,044 higher than if the Company had continued to account forshare-based compensation under APB Opinion No 25 “Accounting for Stock Issuedto Employees.” Basic and diluted loss per share for the year ended September30, 2006 would have been ($0.33) if the Company had not adopted SFAS 123-R,compared to the reported basic and diluted loss per share of ($0.34).

In July 2006, the Financial Accounting StandardsBoard (FASB) issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (FIN 48), which alters the framework for recognizing income taxcontingencies. Previously, under SFAS No. 5, “Accounting forContingencies,” the focus was on the subsequent liability recognition forestimated losses from tax contingencies where such losses were probable and therelated amounts could be reasonably estimated. Under this new interpretation, acontingent tax asset (i.e., an uncertain tax position) may only be recognizedif it is more likely than not that it will ultimately be sustained upon audit.The Company does not believe this standard will have a material impact on itsstatement of financial position or results of operations.

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157defines fair value as the amount that would be exchanged to sell an asset ortransfer a liability, in an orderly transaction between market participants,and establishes a fair value hierarchy of quotes and unobservable data thatshould be used to develop pricing assumptions. In addition, for assets andliabilities that are not actively traded, for example, certain kinds ofderivatives, SFAS 157 requires that a fair value measurement include anadjustment for risks inherent in a valuation technique and/or inputs, such asthose used in pricing models. SFAS 157 is effective for fiscal years beginningafter November 15, 2007, however, early adoption is permitted.  The Company does not believe this standardwill have a material impact on its statement of financial position or resultsof operations.

(dd)           Merger Transaction Costs

Merger transaction costs of $1,340,319 are principallycomprised of professional and investment banking fees related to thecontemplated merger of the Company and HSW described in “Recent Events”. Since HSW has been determined to be the accounting acquirer, accounting rulesrequire that the acquiree (the Company) record all transaction costs as expensein its consolidated statement of operations.

**2.  DISCONTINUED OPERATIONS**

On August 8, 2006, theCompany entered into a letter of intent with Wei Zhou, its Chairman and CEO, topurchase the Company’s Distribution Business of the business for 3 millionshares of the Company’s common stock.  The consummation of thistransaction is anticipated to be concurrent with the closing of the mergertransaction with HSW International, Inc. as described in “Recent Events” and issubject to the approval of the Board of Directors and stockholders of theCompany other than Wei Zhou and his affiliates. It is expected that thisagreement will close in the second fiscal quarter of 2007.  The Board of Directors approved the sale ofthe distribution business irrespective of whether the HSW International mergertransaction is completed or not completed.

As a result ofthis agreement, the operations of this business have been segregated andreported as discontinued operations for all periods presented for the Company’sconsolidated statements of operations presented herein. The loss fromdiscontinued operations includes a $2.2 million provision for doubtful supplierrebates receivable.  The results ofdiscontinued operations are as follows:
|                                                                        | ** ** | **Year ended  September 30,  2006** | ** ** | **Nine months  ended  September 30,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------|------------|
|                                                                   |       |                                          |       |                                                  |       |                                         |       |
| Revenues                                                               |       | $                                             | 62,630,285 |                                                  | $          | 57,019,701                                   |       | $ | 111,025,925 |   |
| Income (loss)  from discontinued operations (before income taxes) |       | (3,674,041                                    | )          | 667,378                                               |       | 5,865,085                                    |       |
| Income taxes                                                           |       | 311,588                                       |       | (132,912                                              | )          | (931,847                                     | )          |
| Income (loss) from  discontinued operations                            |       | (3,985,629                                    | )          | 534,466                                               |       | 4,933,238                                    |       |
|                                                                        |            |                                               |            |                                                       |            |                                              |            |  |  |  |

 

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The Company’s assets and liabilities of this segmenthave been classified as “held for sale” for the consolidated balance sheetspresented herein.  The assets andliabilities held for sale as of September 30, 2006 and 2005 are as follows:
| ** **                                                       | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                       | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Assets:                                                          |       |                   |       |   |   |
| Cash and cash equivalents                                        |       | $                      | 999,503    |   | $ | 2,171,750 |   |
| Trade accounts receivable                                        |       | 11,461,713             |       | 15,324,679 |   |
| Supplier rebate receivable, net of $2,231,205  allowance in 2006 |       | —                 |       | 2,485,267 |   |
| Income tax receivable                                            |       | 41,823                 |       | — |   |
| Inventories                                                      |       | 369,723                |       | 1,148,982 |   |
| Deposits paid                                                    |       | —                 |       | 26,820 |   |
| Property and equipment, net                                      |       | 71,955                 |       | 202,541 |   |
| Other assets                                                     |       | 55,263                 |       | 51,976 |   |
| Goodwill                                                         |       | 59,021                 |       | 59,021 |   |
| Total assets                                                     |       | $                      | 13,059,001 |   | $ | 21,471,036 |   |
|                                                             |       |                   |       |   |   |
| Liabilities :                                                    |       |                   |       |   |   |
| Trade accounts payable                                           |       | $                      | 1,764,322  |   | $ | 4,369,996 |   |
| Accrued expenses                                                 |       | 45,755                 |       | 174,783 |   |
| Income taxes payable                                             |       | —                 |       | 604,481 |   |
| Due to shareholder                                               |       | 123,435                |       | 116,661 |   |
| Deposits received                                                |       | —                 |       | 51,283 |   |
| Total liabilities                                                |       | $                      | 1,933,512  |   | $ | 5,317,204 |   |

 

**3.  INVESTMENT IN INTAC PURUN**

OnJanuary 15, 2004, INTAC announced the shift in focus of its business planfrom the traditional distribution of premium brand wireless handsets to its newcareer development services and Internet joint venture, Intac Purun.  Intac Purun was formed in October 2003with China Putian Corporation (“Putian”) and the Ministry of Education in ThePeople’s Republic of China (“PRC”).  TheCompany indirectly invested a total of $2.3 million in cash in the newlyfounded Internet joint venture in September 2003 and October 2003,owned 45% indirectly by INTAC, 15% by Putian, 30% by a private investor groupand 10% by the Ministry of Education.

In order to meetownership requirements under PRC law which restrict or prohibit INTAC from operatingin certain industries such as Internet content providers, INTAC made loans of$1,233,000 and $123,000 to two China nationals, Miss Zhang Wanqin andMiss Li Min, respectively. Miss Zhang and Miss Li are the equityowners of Tianjin Weilian, a company incorporated in the PRC. These loans weremade to finance Miss Zhang and Miss Li, on behalf of INTAC, for thepurpose of establishing Tianjin Weilian to hold the 45% interest in Purun.Subsequently in October 2003, Tianjin Weilian, Tianjin Chengtai InternationalTrading Ltd., or Tianjin Chengtai, a PRC corporation, Tianjin YingfengTechnology Development Co., Ltd., a PRC corporation, and EMIC established IntacPurun, with 45%, 15%, 30% and 10% equity interests, respectively. TianjinWeilian pledged as collateral the 45% ownership of Intac Purun against theseloans from INTAC. Furthermore Tianjin Weilian assigned all operating rights,title and interest they had in Intac Purun to INTAC, including all interestheld, all rights to capital accounts, distributions and/or allocations of cash,property and income, and all rights to participate in management and to votewith regard to affairs relating to Intac Purun. When permitted under applicablelaws, Tianjin Weilan will transfer ownership of Intac Purun directly intoINTAC.

In June 2004, INTACpurchased an additional 15% interest in Intac Purun from Putian for $1.5million. The incremental acquired ownership was accounted for using thepurchase method of accounting. INTAC made loans of $1.5 million to two Chinanationals, Mr. Zou Jingchen and Ms. Tian Jinmei. Mr. Zou is thebrother of Mr. Zhou, our Chief Executive Officer. Mr. Jingchen andMs. Jinmei are the equity investors of Tianjin Chengtai InternationalTrading Limited (“Chengtai”), a company incorporated in the PRC. These loanswere made to finance Mr. Jingchen and Ms. Jinmei, on behalf of INTAC,for the purpose of establishing Chengtai which purchased the 15% interest inIntac Purun in June 2004 from Putian. A total of 15% of the outstandingsecurities of Intac Purun, representing the 15% ownership, were pledged ascollateral for these loans from INTAC and all operating, economic, voting andother rights were assigned to INTAC by Chengtai. This additional 15% interestincreases INTAC’s total indirect ownership in Intac Purun to 60%, for which theCompany has paid or invested $3.8 million. Intac Purun is incorporated anddomiciled in PRC.

77

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The following table summarizes the estimated fairvalue of the assets acquired and liabilities assumed as of the date ofacquisition of the indirect 15% incremental ownership in Intac Purun.
| Current assets               |   | $         | 256,290   |   |
|------------------------------|--------|-----------|-----------|--------|
| Non-current assets           |   | 252,613   |      |
| Total assets  acquired       |   | 508,903   |      |
| Current  liabilities assumed |   | (73,016   | )         |
| Net assets  acquired         |   | 435,887   |      |
| Purchase price               |   | 1,500,000 |      |
| Excess purchase price        |   | $         | 1,064,113 |   |

 

The excess of the purchase price over the fair valueof the net identifiable assets acquired represents goodwill and is notdeductible for income tax purposes.  Asfurther described in the accounting policies, the results of Intac Purunoperations have been included in the consolidated financial statements sincethe inception of Intac Purun.

Aggregate minority interest in losses have beenrecorded by the Company (since inception $432,524 at September 30, 2006)to reduce the minority interest in Intac Purun to zero. The Company will record100% of income related to the minority interest, if any, until the amount ofthe previously reported losses of the minority interests in shareholders’equity (deficit) in Intac Purun by the Company have been restored.

**4.  SALE OFINVESTMENT IN NEW TECH HANDELS**

On September 1, 2004, Holdings sold all of theoutstanding shares of New Tech. The results of operations of New Tech have beenincluded in the consolidated financial statements through the date of disposal.The aggregate sales price of $365,370 was received in the form of an unsecured,non-interest bearing short-term note which was collected in the second quarterof 2005.

The following table summarizes the investment in NewTech as of the date of sale and the gain on disposal.
| Current assets                           |   | $        | 850,644 |   |
|------------------------------------------|--------|----------|---------|--------|
| Property and  equipment                  |   | 57,589   |    |
| Total assets                             |   | 908,233  |    |
| Total  liabilities                       |   | (557,918 | )       |
| Investment in  New Tech                  |   | 350,315  |    |
| Consideration                            |   | 365,370  |    |
| Gain on sale (included  in other income) |   | $        | 15,055  |   |

 

**5.  PURCHASE OF HUANA XINLONG**

InDecember 2004, the Company acquired Beijing Huana Xinlong Information andTechnology Development Co., Ltd. (“Huana Xinlong”). Huana Xinlong, a leadingChinese developer of management software for educational institutionadministration, is located in Beijing, China. The acquisition was accounted forusing the purchase method of accounting. The acquisition consideration issued by the Company in the transactionconsisted of up to 2,000,000 shares of Company common stock, including1,000,000 shares issued on closing and up to an additional 1,000,000 sharescontingent on achieving net income of $13 million during the thirteen monthperiod ending December 31, 2005 (and the Company will issue a lessernumber of shares on a pro rata basis in the event net income is less than $13million).  The Company issued a total of 1,601,272 shares as considerationfor the transaction.

Thefollowing table summarizes the estimated fair value of the assets acquired andliabilities assumed as of the date of acquisition:
|                              | ** ** | **September 30,** | ** ** |
|------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Current assets               |       | $                      | 306,333    |   | $ | 306,333 |   |
| Acquired  software           |       | 2,039,307              |       | 2,039,307 |   |
| Other  non-current assets    |       | 192,801                |       | 192,801 |   |
| Total assets  acquired       |       | 2,538,441              |       | 2,538,441 |   |
| Current  liabilities assumed |       | 1,274,097              |       | 1,274,097 |   |
| Net assets  acquired         |       | 1,264,344              |       | 1,264,344 |   |
| Purchase price               |       | 16,942,701             |       | 13,000,000 |   |
| Excess purchase price        |       | $                      | 15,678,353 |   | $ | 11,735,656 |   |

 

78

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The excess of thepurchase price over the fair value of the net identifiable assets acquiredrepresents goodwill and is not deductible for income tax purposes.  The allocation of the purchase price includesinformation used in an independent valuation of the software which wascompleted in December 2004.

**6.****          INVENTORIES**

As of September 30, 2006 and 2005, inventories totaled$45,561 and $9,659, respectively; consisting of $34,225 and $8,163,respectively, for training material and $11,336 and $1,496, respectively, forother inventories.

**7.  PROPERTYAND EQUIPMENT, NET**

As ofSeptember 30, 2006 and 2005, property and equipment consisted of thefollowing:
|                                                        | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                                   |       |                         |       |                         |       |
| Furniture and fixtures                                 |       | $                            | 976,480    |                         | $          | 834,840 |   |
| Leasehold improvements                                 |       | 274,539                      |       | 124,989                      |       |
| Motor vehicles                                         |       | 595,636                      |       | 813,309                      |       |
| Other                                                  |       | 29,069                       |       | 24,395                       |       |
|                                                   |       |                         |       |                         |       |
| Less:  Accumulated  depreciation and amortization |       | (744,604                     | )          | (452,211                     | )          |
|                                                   |       | $                            | 1,131,120  |                         | $          | 1,345,322 |   |

 

**8.  OTHER ASSETS**

As of September 30,2006 and 2005, other assets consisted of the following:
|                                               | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                          |       |                         |       |                         |       |
| Deposit for  software development costs       |       | $                            | —     |                         | $          | 99,490 |   |
| Deposits and  memberships                     |       | 199,015                      |       | 176,748                      |       |
| Prepaid  administrative and professional fees |       | 285,582                      |       | 88,063                       |       |
| Other                                         |       | —                       |       | 103,655                      |       |
|                                          |       | $                            | 484,597    |                         | $          | 467,956 |   |

 

**9.  CONCENTRATION OF RISKS**

For the year endedSeptember 30, 2006 and the nine months ended September 30, 2005 we derivedsubstantially all of our distribution revenue from one customer,  Mr. Lam at September 30, 2006.   This distribution customer also accounts formost of our total distribution trade receivables.

For the year endedSeptember 30, 2006 and the nine months ended September 30, 2005 onedistribution vendor accounted for more than 10% of our total purchases:T-Mobile Deutschland.

Additionally, themajority of our career development services revenue and receivables are derivedfrom Chinese customers.

**10.****       INCOME TAXES**

The Company issubject to income taxes on income arising in or derived from the taxjurisdictions in which it is domiciled and operates.  Pursuant to an expense sharing arrangement,the Company’s U.S. losses have been allocated to the Hong Kong operatingsubsidiaries based upon the relative amount of each Hong Kong subsidiary’sgross profit margin.
|                                           | ** ** | **Year ended  September 30, 2006** | ** ** | **Nine Months ended  September 30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Current:                                  |       |                                              |       |                                                          |       |                                             |       |
| United States Federal and State           |       | $                                                 | —     |                                                          | $          | —                                           |       | $ | — |   |
| Foreign                                   |       | —                                            |       | 0                                                             |       | 0                                                |       |
| Total current  provision for income taxes |       | $                                                 | —     |                                                          | $          | 0                                                |       | $ | 0 |   |
|                                      |       |                                              |       |                                                          |       |                                             |       |
| Deferred:                                 |       |                                              |       |                                                          |       |                                             |       |
| United States Federal and State           |       | $                                                 | —     |                                                          | $          | —                                           |       | $ | — |   |
| Foreign                                   |       | $                                                 | 426,447    |                                                          | 0          |                                             | 0          |   |
| Total current  provision for income taxes |       | $                                                 | 426,447    |                                                          | $          | 0                                                |       | $ | 0 |   |

 

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The Company hassubstantial net operating loss carryforwards in some of its Hong Kong and PRCoperating entities.  As a result, most ofthese entities have net deferred tax assets. The Company has provided a valuation allowance to reduce these deferredtax assets to $0 based on the uncertainty of generating future taxable income.  During the year ended September 30, 2006one of the Company’s PRC entities generated accrual basis taxable income andrecorded a deferred income tax liability of $424,447.

The provision for incometaxes for the year ended September 30, 2006, the nine months endedSeptember 30, 2005 and the year ended December 31, 2004 differed fromthe amount computed by applying the U.S. income tax rate of 34% to income(loss) before income taxes as follows:
|                                                                                      | ** ** | **Year Ended  September 30,  2006** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                                                 |       |                                          |       |                                                  |       |                                             |       |
| Computed  “expected” tax expense                                           |       | $                                             | (1,268,173 | )                                                     | $          | (316,851                                         | )          | $ | 300,308 |   |
| Rate differences  resulting from differing tax rates for different tax jurisdictions |       | (66,283                                       | )          | 17,036                                                |       | 27,163                                           |       |
| Tax holiday  effect for PRC entities not currently subject to income taxes           |       | 63,678                                        |       | (561,483                                              | )          | (754,337                                         | )          |
| Expiration of  tax holiday                                                           |       | 426,447                                       |       | —                                                |       | —                                           |       |
| Non-deductible  expenses                                                             |       | 249,751                                       |       | (59,636                                               | )          | —                                           |       |
| Change in  valuation allowance                                                       |       | 1,021,027                                     |       | 912,458                                               |       | 419,204                                          |       |
| Other                                                                                |       | 0                                             |       | 8,476                                                 |       | 7,662                                            |       |
|                                                                                 |       | $                                             | 426,447    |                                                  | $          | —                                           |       | $ | — |   |

 

The tax holiday earningsper share for the year ended September 30, 2006, the nine months endedSeptember 30, 2005 and the year ended December 31, 2004 total 0, .03 and $.04,respectively.

The tax effects oftemporary differences that give rise to significant portions of the netdeferred tax asset and liability at September 30, 2006 and 2005, are asfollows:
|                                  | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Deferred tax  assets:            |       |                         |       |                         |       |
| Net operating loss carryforwards |       | $                            | 1,573,548  |                         | $          | 1,676,495 |   |
| Depreciation of fixed assets     |       | —                       |       | —                       |       |
| Restricted Stock                 |       | —                       |       | 80,920                       |       |
| Total deferred  tax assets       |       | 1,573,548                    |       | 1,757,415                    |       |
| Deferred tax  liabilities:       |       |                         |       |                         |       |
| Accrual basis receivables        |       | (499,462                     | )          | (75,730                      | )          |
| Depreciation of fixed assets     |       | —                       |       | (9,093                       | )          |
| Other                            |       | —                       |       | (5,699                       | )          |
| Valuation allowance              |       | (1,500,533                   | )          | (1,666,893                   | )          |
| Net deferred tax  liability      |       | $                            | (426,447   | )                            | $          | — |   |

 

The net operatinglosses available at September 30, 2006, to offset future taxable income inthe U.S., Hong Kong, and China are $753,000, $1,051,020 and $3,528,000respectively.  The income tax rates forHong Kong and China are 17.5% and 33.0%, respectively. A portion of the netoperating losses generated in China expire beginning in 2007 if notutilized.  The net operating lossesgenerated in Hong Kong have no expiration date and carry forwardindefinitely.  The net operating lossesgenerated in the U.S. resulted from stock compensation benefits and expire ifnot used by 2026.  When the tax benefitsof these net operating losses are realized, they will be credited tostockholder’s equity.

 

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The Company hassubstantial net operating loss carryforwards in some of its Hong Kong and PRCoperating entities.  As a result, most ofthese entities have net deferred tax assets. The Company has provided avaluation allowance to reduce these deferred tax assets to $0 based on theuncertainty of generating future taxable income. Accordingly, the Company hasrecorded a deferred income tax benefit of $0 for the year ended September 30,2006 and $0 for the nine months ended September 30, 2005.

**11.  RELATED PARTY TRANSACTIONS**

(a)           As of September 30, 2006 and2005, the Company’s majority shareholder, Mr. Wei Zhou was the beneficialowner of 52.0% and 54.0%, respectively, of the Company’s issued outstandingcommon stock.

(b)           Mr. Zhou is the CEO, President,Treasurer and a Director of the Company. As of September 30, 2006 and2005, Mr. Zhou had made net advances to the Company amounting to $159,057and $116,661, respectively.  Theseadvances are included in liabilities held for sale on the consolidated balancesheets.

(c)           As described in Notes 1 and 2, theCompany has entered into an agreement to sell its Distribution Business to itsChairman and CEO Wei Zhou in accordance with a letter of intent signed August8, 2006.

**12.  STOCKHOLDERS’ EQUITY**

(a) CommonStock

In December 2004, the Company entered into aStock for Stock Exchange Agreement to acquire all of the outstanding equitysecurities of Huana Xinlong, a company organized under the laws of the PRC. Theacquisition consideration issued by the Company in the transaction consisted of1,000,000 shares of the Company’s common stock issued on closing and 341,272shares issued as a result of the acquired business meeting certain net incomethresholds for the thirteen month period ending December 31, 2005. Inaddition, in accordance with an amendment to the original stock for stockexchange agreement, in March 2006 an additional 260,000 shares were issued.

In May 2004, the Company sold 800,000 shares ofits unregistered, restricted common stock to an accredited investor in aprivate placement transaction for proceeds of $12.0 million. This transactionwas exempt from the registration requirements of the Securities Act underRule 506 of Regulation D. Proceeds from the $12.0 million privateplacement were used to expand Intac Purun’s career development and Internetportal business and for general working capital purposes.  In May 2004, the Company filed aregistration statement with the Securities and Exchange Commission, registeringthe resale of these shares plus 1,000,000 shares from the private placement toa different shareholder completed in September 2003.  The registration statement also registered anadditional 2,000,000 shares for possible future issuances.  The registration statement was effectiveJuly 29, 2004.

In September 2003, the Company issued 1,000,000shares of its unregistered, restricted common stock to an accredited investorin a private placement transaction for proceeds of $4.5 million. Thistransaction was exempt from the registration requirements of the Securities Actunder Rule 506 of Regulation D.

(b) Stock Options and Stock Awards

OnNovember 28, 2001, INTAC adopted a stock purchase plan entitled the “2001Long Term Incentive Plan” to attract, retain and motivate its management andother persons, to encourage and reward their contributions to the performanceof the Company and to align their interests with the interests of the Company’sshareholders. The Company authorized 2,500,000 shares to be available for grantas part of the long term incentive plan. Options are generally granted at fair value on the date of issuance.

On August 28, 2005 the Company completed a stockoption grant to four of its Directors to purchase 25,000 shares of the Company’scommon stock (an aggregate of 100,000 shares) at an exercise price of $6.40 pershare, representing the market value on the date of the grant. These stockoptions vest in two equal annual installments on the first two anniversaries ofthe date of the grant. The per share fair value of the stock options granted,estimated on the date of the grant using the Black-Scholes options pricingmodel was $1.97. The fair value of the option grant was estimated on the dateof the grant using the following assumptions: no dividend yield; expectedvolatility of 50%; risk-free interest rate of 4.09%; and expected life of twoyears. For purposes of pro forma disclosure, the estimated fair value of theoptions is amortized to expense over the options’ vesting period.

On August 28,2005 the Company completed a stock option grant to four of its Directors topurchase 12,500 shares of the Company’s common stock (an aggregate of 50,000shares) at an exercise price of $6.40 per share, representing the market valueon the date of grant.  These stockoptions vest in three equal annual installments on the first three anniversarydates of

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the grant.  The per share fair value of the stock optionsgranted, estimated on the date of the grant using the Black-Scholes optionspricing model was $2.19.  The fair valueof the option grant was estimated on the date of the grant using the followingassumptions:  no dividend yield; expectedvolatility of 44%; risk-free interest rate of 4.09%; and expected life of threeyears.  For purposes of pro formadisclosure, the estimated fair value of the options is amortized to expenseover the options’ vesting period.

OnDecember 3, 2004, the Company made a stock option grant to an employee topurchase 50,000 shares of the Company’s common stock at an exercise price of$9.50 per share, representing the market value on the date of the grant. Thesestock options were cancelled in the third quarter of 2005 upon resignation ofthe employee.

On March 2, 2004 and March 11, 2004, theCompany completed a stock option grant to four of its Directors to purchase50,000 shares of the Company’s common stock (an aggregate of 200,000 shares) atan exercise price of $15.75 per share for three of the Directors and $14.72 pershare for the remaining Director, representing the market values on the date ofeach grant.  These stock options vest inthree equal annual installments on the first three anniversary dates of thedate of grant.  The per share fair valueof the stock options granted on March 2, 2004 and March 11, 2004,estimated on the date of grant using the Black-Scholes options pricing model,was $6.03 and $5.63, respectively.  Thefair value of the option grant was estimated on the date of grant using thefollowing assumptions: no dividend yield; expected volatility of 55%; risk-freeinterest rate of 2.0%; and expected life of three years.  For purposes of proforma disclosure, theestimated fair value of the options is amortized to expense over the optionsvesting periods. On March 31, 2005, 50,000 of these options were cancelleddue to the resignation of a director.  OnJune 30, 2005 another 50,000 of these options were cancelled when anotherdirector did not stand for re-election. On August 28, 2005, the Board of Directors accelerated the vestingof the remaining options as described in “General and Summary of SignificantAccounting Policies”.

A summary of stockoption activity and related information for the year ended September 30, 2006,the nine months ended September 30, 2005 and year ended December 31, 2004is as follows:
|                                     | ** ** | **Year Ended September 30,  2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Plan Category**              | ** ** | **Number  of options**                       | ** ** | **Weighted-  average  exercise  price**                       | ** ** | **Number  of   options**                    | ** ** | **Weighted-  average  exercise  price** | ** ** | **Number of  options** | ** ** | **Weighted-  average  exercise  price** | ** ** |
|                                |       |                                              |       |                                                          |       |                                             |       |   |   |   |   |   |   |
| Outstanding at  beginning of year   |       | 600,000                                           |       | $                                                             | 6.80       |                                             | 600,000    |   | $ | 8.53 |   | 350,000 |   | $ | 4.41 |   |
| Grant                               |       | —                                            |       | $                                                             | —     |                                             | 150,000    |   | $ | 6.40 |   | 250,000 |   | $ | 14.29 |   |
| Cancelled                           |       | —                                            |       | $                                                             | —     |                                             | (150,000   | ) | 13.32 |   | — |   | — |   |
| Exercised                           |       | (150,000                                          | )          | 3.50                                                          |       | —                                           |       |   |   | — |   | — |   |
| Total                               |       | 450,000                                           |       | $                                                             | 7.90       |                                             | 600,000    |   | $ | 6.80 |   | 600,000 |   | $ | 8.53 |   |
| Options exercisable at  end of year |       | 366,668                                           |       | $                                                             | 8.24       |                                             | 450,000    |   | $ | 6.93 |   | 216,667 |   | $ | 3.99 |   |

 

Information related tostock options outstanding at September 30, 2006, is summarized below:
|                                                 | ** ** | **Options Outstanding**     | ** ** | **Options Exercisable**                        | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------|------------|
| **Range of   Exercise   Prices** | ** ** | **Outstanding  at 9/30/06** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Exercisable  at 9/30/06** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $ 3.50                                     |       | 150,000                          |       | 2.8  years                                          |       | $ | 3.50 |   | 150,000 |   | $ | 3.50 |   |
| $ 6.40                                     |       | 150,000                          |       | 4  years                                            |       | $ | 6.40 |   | 66,668 |   | $ | 6.40 |   |
| $ 9.89                                     |       | 50,000                           |       | 4.4  years                                          |       | $ | 9.89 |   | 50,000 |   | $ | 9.89 |   |
| $ 15.75                                    |       | 100,000                          |       | 6 years                                             |       | $ | 15.75 |   | 100,000 |   | $ | 15.75 |   |
|                                            |       | 450,000                          |       |                                                |       |   |   | 366,668 |   |   |   |

 

(c) EarningsPer Share

The Company has 100,000,000 common shares authorized.The Company has granted options to purchase common shares to employees anddirectors of the Company. Certain options have a dilutive effect on thecalculation of earnings per share. The

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following is a reconciliation of the numerators anddenominators of the basic and diluted earnings per share computations.
|                                                    | ** ** | **Year Ended  September 30,  2006** | ** ** | **Nine Months  Ended September  30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Earnings per share:**                            |       |                                          |       |                                                      |       |                                             |       |
| Income (loss) from  continuing operations          |       | $                                             | (4,156,367 | )                                                         | $          | (931,916                                         | )          | $ | 883,259 |   |
| Income (loss) from  discontinued operations        |       | (3,985,629                                    | )          | (534,466                                                  | )          | 4,933,238                                        |       |
| Net income (loss)                                  |       | $                                             | (8,141,996 | )                                                         | $          | (1,466,382                                       | )          | $ | 5,816,497 |   |
|                                               |       |                                          |       |                                                      |       |                                             |       |
| Weighted average shares  outstanding               |       | 22,587,806                                    |       | 22,149,122                                                |       | 20,711,122                                       |       |
| **Basic income (loss per share):**                 | ** ** | ** **                                    | ** ** | ** **                                                | ** ** | ** **                                       | ** ** |
| Income (loss)  from continuing operations          |       | $                                             | (0.18      | )                                                         | $          | (0.04                                            | )          | $ | 0.04 |   |
| Income (loss)  from discontinued operations        |       | (0.18                                         | )          | (0.03                                                     | )          | 0.24                                             |       |
| Net income  (loss)                                 |       | $                                             | (0.36      | )                                                         | $          | (0.07                                            | )          | $ | 0.28 |   |
| **Diluted earnings per share:**                    |       |                                          |       |                                                      |       |                                             |       |
| Income (loss)  from continuing operations          |       | $                                             | (0.18      | )                                                         | $          | (0.04                                            | )          | $ | 0.04 |   |
| Income (loss)  from discontinued operations        |       | (0.18                                         | )          | (0.03                                                     | )          | 0.24                                             |       |
| Net income  (loss)                                 |       | $                                             | (0.36      | )                                                         | $          | (0.07                                            | )          | $ | 0.28 |   |
|                                               |       |                                          |       |                                                      |       |                                             |       |
| Weighted average shares  outstanding               |       | 22,587,806                                    |       | 22,149,122                                                |       | 20,711,122                                       |       |
| Dilutive stock options  and restricted stock award |       | —                                        |       | —                                                    |       | 296,856                                          |       |
| Total common shares and dilutive securities        |       | 22,587,806                                    |       | 22,149,122                                                |       | 21,007,978                                       |       |

 

Stock options and therestricted stock award outstanding at September 30, 2006 and 2005 are notincluded in the diluted earnings per share computation because they areanti-dilutive.

(d)           Dividend Payment Restrictions

There are norestrictions on the Company’s payment of dividends.  Although there are certain ministerialrequirements with respect to dividends by our PRC domiciled subsidiaries, theseministerial requirements do not rise to the level of “restrictions”.  Substantially all of our retained earningsare attributable to our PRC and Hong Kong domiciled subsidiaries.

**13.  COMMITMENTS AND CONTINGENCIES**

As of September 30,2006, the total future minimum lease payments under non-cancelable operatingleases of the Company’s office facilities are as follows:
| Fiscal 2007 |   | $       | 521,268   |   |
|-------------|--------|---------|-----------|--------|
| Fiscal 2008 |   | 191,084 |      |
| Fiscal 2009 |   | 151,260 |      |
| Fiscal 2010 |   | 151,260 |      |
| Fiscal 2011 |   | 12,605  |      |
| Thereafter  |   | —  |      |
|        |   | $       | 1,027,477 |   |

 

For the year endedSeptember 30, 2006, the nine months ended September 30, 2005 and the yearended December 31, 2004, rental expense which is included in selling,general and administrative expense amounted to $105,784, $30,094, and $31,130, respectively.

There areuncertainties regarding the indirect ownership and the legal basis of theCompany’s ability to operate an Internet portal business in China. AlthoughChina has implemented a wide range of market-oriented economic reforms, thetelecommunication, information and media industries remain highly regulated.Not only are restrictions currently in place, but regulations are unclearregarding in what specific segments of these industries companies with foreigninvestors, including the Company, may operate. Therefore, the Company might berequired to limit the scope of its operations in China, and this could have amaterial adverse effect on the Company’s financial position, results ofoperations and cash flows.

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**14.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)**

The following table setsforth, for the periods presented, our unaudited quarterly results of operationsfor the eight quarters ended September 30, 2006.
| ** **                                                     | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **Sept, 30  2006**          | ** ** | **Jun. 30,  2006** | ** ** | **Mar. 31,  2006** | ** ** | **Dec. 31,  2005** | ** ** | **Sept. 30,  2005** | ** ** | **Jun. 30,  2005** | ** ** | **Mar. 31,  2005** | ** ** | **Dec. 31,  2004** | ** ** |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Career development  services revenue                           |       | $                                | 1,562,048  |   | $ | 1,687,001 |   | $ | 1,310,253 |   | $ | 1,190,630 |   | $ | 1,117,396 |   | $ | 1,416,238 |   | $ | 1,685,145 |   | $ | 4,172,101 |   |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Career development  services gross profit                      |       | 869,138                          |       | 1,282,382 |   | 1,117,041 |   | 872,845 |   | 887,004 |   | 942,811 |   | 1,349,665 |   | 2,938,611 |   |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations, (before income tax) |       | (3,023,533                       | )          | (791,065 | ) | (509 | ) | (341,260 | ) | (575,445 | ) | (192,414 | ) | (164,057 | ) | 1,910,180 |   |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from  discontinued operations, net of tax        |       | (2,555,740                       | )          | (1,247,523 | ) | 210,804 |   | (393,170 | ) | (278,684 | ) | (244,710 | ) | (11,072 | ) | 2,931,988 |   |
| Net income (loss)                                              |       | $                                | (5,579,273 | ) | $ | (2,038,588 | ) | $ | 210,295 |   | $ | (734,430 | ) | $ | (854,129 | ) | $ | (437,124 | ) | $ | (175,129 | ) | $ | 4,842,168 |   |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic income (loss) per  share                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations                      |       | $                                | (0.13      | ) | $ | (0.04 | ) | $ | 0.00 |   | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.09 |   |
| Income (loss)  from discontinued operations                    |       | (0.1411                          | )          | (0.06 | ) | 0.01 |   | (0.02 | ) | (0.01 | ) | (0.01 | ) | (0.00 | ) | 0.14 |   |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss)                                             |       | $                                | (0.24      | ) | $ | (0.10 | ) | $ | 0.01 |   | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.23 |   |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted income (loss)  per share                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations                      |       | $                                | (0.13      | ) | (0.04 | ) | 0.00 |   | (0.02 | ) | (0.03 | ) | (0.01 | ) | (0.01 | ) | 0.09 |   |
| Income (loss)  from discontinued operations                    |       | (0.11                            | )          | (0.06 | ) | 0.01 |   | (0.02 | ) | (0.01 | ) | (0.01 | ) | (0.00 | ) | 0.14 |   |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                              |       | $                                | (0.24      | ) | $ | (0.10 | ) | $ | 0.01 |   | $ | (0.04 | ) | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.23 |   |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares  outstanding – basic              |       | 22,940,727                       |       | 22,468,873 |   | 22,284,993 |   | 22,196,599 |   | 21,889,455 |   | 22,141,455 |   | 22,141,455 |   | 21,121,455 |   |
|                                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding – diluted             |       | 22,9400,727                      |       | 22,468,873 |   | 23,059,999 |   | 22,196,599 |   | 21,889,455 |   | 22,141,455 |   | 22,141,455 |   | 21,373,234 |   |

 

*Significantadjustments in the fourth quarter ended September 30, 2006, the thirdquarter for the nine months ended September 30, 2005 and the fourthquarter for the year ended December 31, 2004.*

InSeptember 2006, the Company recorded a $2.2 million provision for doubtfulsupplier rebates receivable as a result of the uncertainty surrounding theCompany’s ability to fully utilize its remaining rebates from T-Mobile.  This provision is included in discontinuedoperations.  In addition, a reserve for$951,000 was recorded as a provision for doubtful accounts for receivablesrelated to the Company’s career development services business.

InSeptember 2005, the Company was awarded a volume discount incentive rebaterelated to the third quarter of 2005 from a major supplier in the amount of$1,085,220. The volume discount was recorded as a decrease to cost of revenuein the third quarter of 2005.

InDecember of 2004, the Company entered into an agreement with a majorcustomer whereby the customer would pay an additional premium of $489,755 tothe Company for wireless handset products previously purchased. The premium wasrecorded as an increase in revenue for the fourth quarter of 2004.

InDecember 2004, the Company was awarded a volume incentive rebate relatedto the fourth quarter of 2004 from a major supplier in the amount of$1,904,357. The volume discount was recorded as a decrease to cost of revenuein the fourth quarter of 2004.

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Valuationand Qualifying Accounts

Yearsended September 30, 2006 and 2005 and year ended December 31, 2004
|                                  | ** ** | **Balance at  Beginning of   Year** | ** ** | **Charged to  Expenses** | ** ** | **Write-Offs Net  of Recoveries** | ** ** | **Balance at  End of Year** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|-------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| Accounts receivable              |       |                                               |       |                          |       |                                        |       |                                       |       |
| Allowance for  doubtful accounts |       |                                               |       |                          |       |                                        |       |                                       |       |
| 2004                             |       | $                                                  | —     |                          | $          | —                                      |       | $                                          | —     |   | $ | — |   |
| 2005                             |       | —                                             |       | —                        |       | —                                      |       | —                                     |       |
| 2006                             |       | —                                             |       | $                             | 3,181,918  |                                        | —     |                                       | $          | 3,181,918 |   |
|                                  |            |                                                    |            |                               |            |                                             |            |                                            |            |  |  |  |  |

 
|                            | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged  (Credited)  to Expenses** | ** ** | **Charged  (Credited)  to Other  Accounts** | ** ** | **Balance at  End of Year** | ** ** |
|----------------------------|------------|------------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| Deferred income tax  asset |       |                               |       |                                 |       |                                        |       |                        |       |
| Valuation  allowance       |       |                               |       |                                 |       |                                        |       |                        |       |
| 2004                       |       | $                                  | 228,069    |                                 | $          | —                                      |       | $                           | 516,914    |   | $ | 744,893 |   |
| 2005                       |       | 744,893                            |       | —                               |       | 921,910                                     |       | 1,666,893                   |       |
| 2006                       |       | 1,666,893                          |       | (166,360                             | )          |                                        |       | 1,500,533                   |       |
|                            |            |                                    |            |                                      |            |                                             |            |                             |            |  |  |  |  |

 

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