**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-KSB**

 

**ý****ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the year ended December 31, 2003**

 

**OR**

 

**o****TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from           to          **

 

**Commission File Number: 000-32621**

 

| **INTAC INTERNATIONAL, INC.**                                                            |
|------------------------------------------------------------------------------------------|
| (Exact name of Small Business Issuer in its charter)                                     |
|                                                                                     |
| **NEVADA**                                                                               |   | **98-0336945** |
| (State or other jurisdiction of  incorporation or organization)                          |   | (IRS Employer Identification No.) |
|                                                                                     |
| **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) |
|                                                                                     |
| (Issuer’s telephone number, including area code) **011 (852) 2385-8789**            |
|                                                                                     |
| Securities registered pursuant to Section 12(b) of the Exchange Act: **None**            |
|                                                                                     |
| Securities registered under Section 12(g) of the Exchange Act                            |
| **Common Stock, par  value $.001**                                                       |

 

Check whetherthe Issuer (1) filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the past 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

ý   Yes     o   No

 

Check if thereis no disclosure of delinquent filers in response to Item 405 of Regulation S-Bis not contained in this form, and no disclosure will be contained, to the bestof the Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB ý.

 

The Issuer’srevenues for its most recent fiscal year were $91,353,172.

 

The aggregatemarket value of the voting common equity held by non-affiliates of theRegistrant on March 29, 2004 was $121,620,124 based on the closing price of theRegistrant's common stock on the Nasdaq Small Cap Stock Market. Shares held bynon-affiliates were determined by beneficial ownership rules adopted pursuantto Section 13 of the Exchange Act, and exclude stock owned by directors,officers and ten-percent stockholders, some of which may not be held to beaffiliates upon judicial determination.

 

The number ofshares of the Registrant’s common stock, $0.001 par value per share,outstanding as of March 29, 2004 was 20,189,455.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Theinformation required by Part III of this Report, to the extent not set forthherein, is incorporated by reference from the Registrant’s definitive proxystatement to be filed with the Commission within one hundred and twenty (120)days following the Registrant’s fiscal year end, or on or before April 29,2004.

 

TransitionalSmall Business Disclosure Format oYes ý No

 

 

----

 

**TABLE OF CONTENTS**

 
| PART I                            |                                                                                                              |   |
|-----------------------------------|-------------------------------------------------------------------------------------------------------------------|--------|
|                              |                                                                                                              |   |
| ITEM 1                            | DESCRIPTION OF BUSINESS.                                                                                          |   |
| ITEM 2                            | DESCRIPTION OF PROPERTY                                                                                           |   |
| ITEM 3                            | LEGAL PROCEEDINGS.                                                                                                |   |
| ITEM 4                            | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                              |   |
|                              |                                                                                                              |   |
| PART II                           |                                                                                                              |   |
|                              |                                                                                                              |   |
| ITEM 5                            | MARKET FOR COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND SMALL  BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES  |   |
| ITEM 6                            | MANAGEMENT’S DISCUSSION AND ANALYSIS OR  PLAN OF OPERATION                                                   |   |
| ITEM 7                            | FINANCIAL STATEMENTS                                                                                              |   |
| ITEM 8                            | CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE                            |   |
| ITEM 8A                           | CONTROLS AND PROCEDURES                                                                                           |   |
|                              |                                                                                                              |   |
| PART III                          |                                                                                                              |   |
|                              |                                                                                                              |   |
| ITEM 9                            | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS  AND CONTROL PERSONS;  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT |   |
| ITEM 10                           | EXECUTIVE COMPENSATION                                                                                            |   |
| ITEM 11                           | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT AND  RELATED STOCKHOLDER MATTERS                  |   |
| ITEM 12                           | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                                                   |   |
| ITEM 13                           | EXHIBITS AND REPORTS ON FORM 8-K                                                                                  |   |
| ITEM 14                           | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                            |   |
|                              |                                                                                                              |
| SIGNATURES                        |                                                                                                              |
|                              |                                                                                                              |
| INDEX  TO EXHIBITS                |                                                                                                              |
|                              |                                                                                                              |
| CONSOLIDATED FINANCIAL STATEMENTS |                                                                                                              |

 

2

----

 

**CAUTIONARY STATEMENTREGARDING FORWARD-LOOKING STATEMENTS**

 

“Forward-looking”statements have been included throughout this report on Form 10-KSB (this“Report”). These statements describe our attempt to predict future events, suchas our plans for future expansion, our ability to achieve satisfactoryoperating performance, the viability of our business model, our expansion intoother businesses and pursuit of other business opportunities, and our intent tofocus our business operations in specific geographic markets. The words “may,”“will,” “expect,” “believe,” “plan,” “intend,” “anticipate,” “estimate,”“continue,” and similar expressions, as well as discussions of our strategy andpending transactions, are intended to identify forward-looking statements.Although we believe that these forward-looking statements are based onreasonable assumptions, we can give no assurance that our expectations will infact occur and caution that actual results may differ materially from those inthe forward-looking statements. The important factors listed in the sectionentitled “Business Risk Factors,” as well as any cautionary language in thisReport, provide examples of risks, uncertainties and events that may cause ouractual results to differ materially from the expectations described in anyforward-looking statements. You should be aware that the occurrence of theevents described in these factors and elsewhere in this Report could have anadverse effect on our business, results of operations or financial condition.You should also be aware that the “forward-looking” statements are subject to anumber of risks, assumptions and uncertainties, such as:

 

•                  our ability toeffectively execute the business plan;

 

•                  our status as anearly-stage company with an evolving, unproven and unpredictable businessmodel;

 

•                  our ability tocontinue to raise additional working capital, the lack of which would likelyhave a significant negative impact on our long-term business plan and ourability to take advantage of our strategic alliances and to successfullyexecute our expansion plan;

 

•                  statements madeconcerning the revenues or operating performance expected for the year endingDecember 31, 2004;

 

•                  the increasedexpense structure assumed by us as a U.S. public company;

 

•                  our plans forfuture expansion;

 

•                  our ability toachieve satisfactory operating performance;

 

•                  the viability ofour business model;

 

•                  our expansioninto other businesses and pursuit of other business opportunities;

 

•                  the results ofour intended diversification into other industries and geographic regions;

 

•                  the impact ofthe SARS virus on the economic environment;

 

•                  the PRCgovernment which may prevent us from conducting business in China;

 

•                  political andeconomic events and conditions in China and other geographic markets in whichwe operate;

 

•                  the anticipatedbenefits of our industry contacts and strategic relationships;

 

•                  our ability toestablish and take advantage of contacts and strategic relationships;

 

•                  our ability tooffset increased operating expenses by increasing revenues and operatingefficiencies;

 

•                  our ability toreact to market opportunities;

 

•                  the advent ofnew technology;

 

•                  complexregulations that apply to us as an operating company in China and elsewhere;

 

3

----

 

•                  changes ininterest rates, foreign currency fluctuations and capital market conditions,particularly those that may affect the availability of credit for our productsand services;

 

•                  statements thatcontain the words “may,” “will,” “expect,” “believe,” “plan,” “intend,”“anticipate,” “estimate,” “continue,” and similar expressions; and

 

•                  other factorsincluding those detailed under the heading “Business Risk Factors”.

 

You should also be aware thatthose “forward-looking” statements in regards to our Internet portal businessare subject to a number of further risks, assumptions and uncertainties, suchas:

 

•                  our ability tocapitalize on the Internet portal business joint venture;

 

•                  our lack ofprior experience with the Internet portal business and our ability to developand execute an effective business plan;

 

•                  our ability todevelop the fee-based services of the Internet portal business, includingassembling an experienced management team;

 

•                  the high cost ofInternet access that may limit the growth of the Internet in China and impedeour growth;

 

•                  e-commercecustomers that have only limited experience using the Internet for advertisingor commerce purposes;

 

•                  the acceptanceof the Internet as a commerce platform in China which depends in part on theresolution of problems relating to fulfillment and electronic payment;

 

•                  concerns aboutsecurity of e-commerce transactions and confidentiality of information on theInternet that may increase our costs, reduce the use of our portal and impedeour growth;

 

•                  our networkoperations that may be vulnerable to hacking, viruses and other disruptions,which may make our products and services less attractive and reliable;

 

•                  PRC Internetlaws and regulations that are unclear and will likely change in the nearfuture;

 

•                  restrictions onforeign investment in the PRC Internet sector that are imposed by the PRCgovernment; and

 

•                  regulation andcensorship of information distribution in China which may adversely affect ourbusiness.

 

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

 

•                  the low-marginnature of our distribution businesses;

 

•                  changes ingeneral business conditions or distribution channels in the wireless handset orautomobile industries, and our ability to react to these changes;

 

•                  the impact ofcompetition in the wireless handset distribution and automobile distributionindustries, as well as in industries that we may operate in the future;

 

•                  our ability tocontinue to sell products outside of traditional distribution channels;

 

•                  our ability tocontinue to purchase sufficient inventory on terms favorable to us;

 

•                  our small numberof current suppliers and customers;

 

•                  our lack ofsupply contracts with our vendors or distribution contracts with our customers;

 

4

----

 

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

 

•                  the highlycompetitive and constantly changing nature of the international wireless andautomobile distribution industries.

 

You should notunduly rely on these forward-looking statements, which speak only as of thedate of this filing. Except as required by law, we are not obligated topublicly release any revisions to these forward-looking statements to reflectevents or circumstances occurring after the date of this filing or to reflectthe occurrence of unanticipated events. 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.

 

5

----

 

**PART I**

 

**ITEM1 - DESCRIPTION OF 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.  The Company currently maintains offices in China (Hong Kong,Beijing and Tianjin), Germany (Frankfurt) and the United States (Dallas,Texas).  During the period reported, theCompany’s principal operations involved the distribution of premium brandwireless handsets from manufacturers and other distributors to network operators,agents, resellers, dealers and retailers and, to a much lesser extent,automobile distribution from Europe into mainland China.

 

On January 15,2004, INTAC announced the redirection of its business plan from the traditionaldistribution of premium brand wireless handsets to its new Internet jointventure, Beijing Intac Purun Educational Development Ltd (“Intac Purun”).  Intac Purun was formed in October 2003 withChina Putian Corporation (“Putian”) and the Ministry of Education in The People’sRepublic of China (“PRC”).  The newlyfounded Internet joint venture is owned 45% by INTAC, 15% by Putian, 30% by aprivate investor group and 10% by the Ministry of Education.

 

In October of2001, we acquired all of the outstanding shares of INTAC International HoldingsLimited, a Hong Kong corporation (“Holdings”), and its wholly owned subsidiary,New Tech Handels GmbH, a German corporation (“New Tech”). In 2002, Holdingsincorporated two wholly owned subsidiaries; Global Creative InternationalLimited, a Hong Kong corporation (“Global Creative”) and INTACTelecommunications Limited, a Hong Kong corporation(“Telecommunications”).  Today, thesesubsidiaries operate our telecommunications wireless handset distributionsegment (the “Wireless Handset Distribution Segment”). Through thesesubsidiaries, we distribute wireless handset products to mobile communicationsequipment wholesalers, agents, retailers and other distributors worldwide.Through our wholly owned subsidiaries FUTAC Group Limited, a British VirginIslands corporation (“FUTAC”) incorporated in 2002, and Intac (Tianjin)International Trading Co., formerly “Intac Auto Mobile Trading CompanyLimited”, a China corporation (“Intac Tianjin”) incorporated in 2002, weoperate our automobile distribution segment (the “Automobile Distribution Segment”).  Through these subsidiaries, we distributeluxury automobiles from Europe to mainland China.

 

Our initialobjective in 2002 was to focus on our wireless handset distribution businessand establish customer relationships and supply channels in China and theAsia-Pacific Rim.  Our objective in 2003was to continue to expand our distribution business and improve gross profitmargins.  Also in 2003, our strategy wasto establish relationships with Chinese telecommunications enterprises andChinese Government entities which might lead to opportunities in other fieldsof interest.

 

As a result ofestablishing these relationships and bringing them to fruition, Intac Purun wasestablished under the project name Career Net to meet the growing need forexpanding the employment opportunities for graduates of higher level educationinstitutions in the PRC.  The Ministryof Education has already established a database of more than 3.3 milliongraduates which has been made exclusively available to Intac Purun.  Intac Purun will provide comprehensiveemployment information over its Internet portal to facilitate these graduates'employment search and future career development.

 

This Internetportal will also offer employers a platform to list open positions available tofinal year graduates contained within this unique and exclusive database.  This fee based premium service will belinked to an employment service website of The Ministry of Education, anon-profit website used to communicate information to these universitygraduates.

 

The Companyhas consolidated Intac Purun for the period since inception through December31, 2003 based on INTAC being designated as the operating partner for the jointventure and exercising effective control that INTAC has through the Board ofDirectors.  INTAC appoints the majorityof the Board of Directors which hires management and controls the day to dayactivities of Intac Purun making it the primary controlling shareholder.  Accordingly, management has concluded thatit is necessary to consolidate Intac Purun in order to properly reflect thesubstance of the Company’s control position.

 

Our objectivein 2004 is to further enhance the business prospects and opportunities affordedby this unique database of graduate students. The Company is exploring an array of premium products and services whichwill be made available through our Internet portal business.  The portal is being tailored to meet theever-growing student demand for these

 

6

----

 

types ofproducts and services.

 

In addition,we continually evaluate investment opportunities in other business segmentswithin China, the Asia-Pacific Rim and, to a lesser extent, Europe. Our entryinto these new business segments is contingent upon our identifying bothfavorable investment opportunities and strategic partners with expertise insuch business segments as well as available capital.

 

The Companyraised equity financing of $4.5 million in September 2003 in a privateplacement.  Proceeds of the $4.5 millionprivate placement are being used to fund the Company’s participation in ourInternet portal business, as well as for working capital.

 

The Companycurrently believes it has adequate capital for the next twelve months; however,long-term plans will require the Company to obtain additional financing throughthe issuance of debt, equity, other securities or a combination thereof inorder to take advantage of our strategic agreements and businessalliances.  In addition, the Company mayseek to obtain a working capital or other traditional loan facility from a bankor other lending source in addition to the existing short-term note.  Unless the Company is able to continue toimprove its operating performance, additional outside financing required toexecute its long-term business plan would be difficult to obtain on acceptableterms, if at all. As of the date of this Report, other than a short-term notepayable, we do not have any other financing arrangements, nor do we have anycommitments to obtain such an arrangement with any bank or other third partyexcept for those currently disclosed. If the Company raises capital by issuingequity or convertible debt securities, the percentage ownership of itsstockholders will be reduced. Any new securities may have rights, preferencesor privileges senior to those of its common shareholders. There can be noassurances that the Company will be able to obtain additional financing onterms which are acceptable to it.

 

In addition to our currentobligations, we continue to negotiate other strategic agreements and businessalliances, many of which will be dependent upon our obtaining additionalworking capital, or whose value will be materially less to the Company if we donot have the financial resources to fully exploit such opportunities.

 

Our 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“WKN 805768”.

 

**GENERAL BACKGROUND**

 

We were incorporated under thename “Commodore Minerals, Inc.” under the laws of the State of Nevada onSeptember 20, 2000, as a developmental stage corporation. Our initial businessoperations concentrated on mineral exploration. Although we never conducted anymineral exploration activities directly, we partnered with others in mineralexploration activities.

 

On September 28, 2001, Mr. WeiZhou acquired a controlling interest in us by purchasing 7,000,000 shares ofour stock in a private transaction with one of the organizers of CommodoreMinerals, Inc. (“Commodore”). On October 13, 2001, we entered into areorganization agreement with Holdings and the shareholders of Holdings,including Mr. Zhou (the “Reorganization Agreement”), pursuant to which Mr. Zhouand the other shareholders of Holdings conveyed their stock in Holdings to usin exchange for the issuance of an aggregate of 5,000,000 shares of our commonstock (the “Reorganization”). Pursuant to that transaction, Holdings became ourwholly owned subsidiary and New Tech, previously a subsidiary of Holdings,became our indirect subsidiary. For more detailed information on the change ofcontrol, please see our Current Report on Form 8-K, filed with the U.S.Securities and Exchange Commission (“SEC”) on October 15, 2001. For accountingpurposes, the Reorganization was treated as a recapitalization of Holdings,with the effect that our consolidated financial statements reflect the historicbusiness operations of Holdings.

 

Upon the consummation of theReorganization Agreement, we became a distributor of wireless handsets in theglobal wireless telecommunications marketplace. Our customers includewholesalers, agents, retailers and other wireless equipment distributorsworldwide. During the years ended December 31, 2003 and 2002, we distributedsubstantially all of our wireless handset products into Hong Kong, although wealso distributed into other parts of the Asia-Pacific Rim and Europe. Wegenerally do not sell our products to end-users. We distribute wirelesshandsets manufactured by major mobile communications equipment manufacturersincluding Siemens, Samsung, Nokia, Motorola and Ericsson. We currently maintainoperations and sales offices in Frankfurt, Germany, and Hong Kong, Beijing, andTianjin, China.

 

Our founder and Chief ExecutiveOfficer has over seven years of experience in supply channel and distributionchannel development for the wireless handset industry. We believe that we havedeveloped a distribution system that will allow us to capture an increasinglylarger portion of the expanding worldwide wireless handset market withoutincurring significant added infrastructure cost.

 

Whereas our objective in 2002and 2003 was to focus on our wireless handset distribution business, in 2004,we intend

 

7

----

 

to focus on the enhancedbusiness prospects and opportunities afforded by Intac Purun and its uniquedatabase of graduate students.  Weformed Intac Purun in October 2003 with Putian and the Ministry of Education inthe PRC.  Intac Purun was establishedunder the project name Career Net to meet the growing need for expanding theemployment opportunities for graduates of higher level education institutionsin the PRC.  The Ministry of Educationhas already established a database of more than 3.3 million graduates which hasbeen made exclusively available to Intac Purun.  Intac Purun will provide comprehensive employment informationover its Internet portal to facilitate these graduates’ employment search andfuture career development.

 

Intac Purun has beenexclusively selected by the Education Management Information Center (“EMIC”), adepartment under China’s Education Ministry, to establish and operate the“Career Service Centers” for Chinese students. These Career Service Centers will provide Chinese students exclusivelywith a full-range of career development services, which will assist thesestudents in finding jobs and managing their careers.

 

Although the Company willde-emphasize the wireless handset and automobile distribution business, asignificant portion of short-term revenues will be generated by thisbusiness.  At the present time, theCompany continues to assemble an experienced management team for Intac Purun inorder to execute an effective business plan while at the same time, seeking toensure that the joint venture has adequate capital to accomplish itsgoals.  Intac Purun is expected togenerate revenues in the first half of 2004.

 

We are an early stage company,with a very limited operating history upon which investors and others canevaluate our Company, our current business and our prospects. See “BusinessRisk Factors - We are an early stage company and therefore our business andprospects are difficult to evaluate.”

 

**THE CHINESE MARKET**

 

China’s economy grew at a rapidpace last year.  Substantial investmentsin factories, real estate and other fixed assets caused gross domestic product– the total output of goods and services – to increase at an annual rate of9.9% during the fourth quarter. The National Bureau of Statistics reported thatthe economy expanded at a faster-than-estimated 9.1% rate during 2003, comparedwith an 8% pace in 2002. That was China’s best economic performance since 1996,when the Asian financial crisis halted the economy’s upward trajectory.

 

The growth rate for all of 2003was higher than the consensus forecasts of many economists and a preliminaryestimate of 8.5% announced by the commissioner of China’s tax administration.The Wall Street Journal reported that the rates showed that the economy hadshrugged off the epidemic of severe acute respiratory syndrome (SARS) and Chinawould maintain rapid growth during the first quarter and through 2004.

 

The Wall Street Journalreported that the latest data underscore that China’s economy is growing fasterthan those of most of the rest of the world. Germany, for instance, reportedrecently that its economy shrank slightly in 2003, and the European Commissionreported that its forecasting gauge suggests the economy of the countriessharing the euro grew only between 0.3% and 0.7% in the fourth quarter of 2003.The U.S. economy, doing better than many other developed economies, surged atan annual rate of 8.2% in the third quarter, with an estimated growth ofbetween 4% and 5% in the fourth quarter. It is anticipated that for the full year, the U.S. economy grew at lessthan half of China’s pace.

 

In Asia, China’s GDP growthrate for 2003 was by far the highest. Goldman Sachs Group in Hong Kong reported that they expect the Chineseeconomy could grow 9.5% in 2004.  Onespur to further growth is the increasing purchasing power of ordinary Chinese.Goldman Sachs Group further reported that last year’s gross domestic productreached $1.4 trillion, pushing the per capita GDP above $1,000 for the firsttime. Incomes also rose, even in recently stagnant rural areas. The result hasbeen a huge demand among consumers for automobiles, computers, appliances andnew housing.  New telephone subscribers,for example, totaled 112 million last year, more than the combined populationsof the U.K. and France.

 

The China Economic Reviewreported that according to a study by Asian Demographics, China’s economy isexpected to continue growing at around the current rate of 8 percent for yearsto come and the number of households considered “high income” is expected toincrease exponentially accompanied by a steady shift in spending patterns.  Increasing population and smaller householdsin the cities means that by 2009 there will be more urban households, 207.7million by 2012, primarily in the eastern coastal regions.  With the government eager to make consumerspending the primary engine of the Chinese economy, the number and distributionof these households have a direct impact on any company selling products orservices with a higher price point.  Thecombined effects of increased number of households and expenditure perhousehold means that even under the 6 per cent average GDP growth scenariototal expenditure of urban households earning $4,800 and above will grow at17.5 percent per annum to 2012 and those earning $9,600 and over will grow at23.2 percent per annum to 2012.

 

8

----

 

**BUSINESS STRATEGY**

 

Our primary business strategyinvolves participating in selective business opportunities in the Asia-PacificRim, with particular emphasis on China. Our initial business activities havefocused on distribution opportunities in the wireless handset and automobileindustries. Our objective in 2002 was to build our distribution channels andestablish customer relationships and supply channels. In 2003, our objectivewas to continue to expand our distribution business and improve gross profitmargins.  Also in 2003, our strategy wasto establish relationships with Chinese telecommunications enterprises andChinese Government entities which might lead to other business opportunities.

 

As a result, on January 15,2004, INTAC announced the redirection of its business plan from the traditionaldistribution of premium brand wireless handsets to its new Internet jointventure, Intac Purun.  Intac Purun wasformed in October 2003 with Putian and the Ministry of Education in thePRC.  In 2004, we intend to focus on theenhanced business prospects and opportunities afforded by this unique databaseof graduate students.  The Company isexploring an array of premium products and services which will be madeavailable through Intac Purun.  Theportal is being tailored to meet the ever-growing student demand for thesetypes of products and services.  Our aimis to become one of the leading Internet portals in China in terms of brandrecognition.  At the present time, theCompany continues to assemble an experienced management team for Intac Purun inorder to execute an effective business plan while at the same time, seeking toensure that the joint venture has adequate capital to accomplish itsgoals.  Intac Purun is expected togenerate revenues in the first half of 2004. Although the Company will de-emphasize the wireless handset distributionbusiness, a significant portion of short-term revenues will be generated bythis business.

 

We will continue to apply thesame “efficient distribution strategy” that we use for our wireless handsetbusiness to the automobile business segment, and we expect to partner withexisting Chinese car dealers and distributors to further develop this businesssegment. As with our wireless handset business segment, we believe that ourefficient distribution-premised business model will allow us to operate withgreater flexibility than our competitors in the Automobile DistributionSegment.

 

We expect to realize highergross margins from our distribution business while under-pricing ourcompetitors because we do not anticipate adding additional layers ofdistribution (i.e., middlemen). Currently, we believe our competitors,particularly our Hong Kong competitors, have two or more layers ofdistribution, each of which adds to the final cost of the product to theultimate consumer.

 

In addition, to the extent thatour business model can be readily applied outside of our primary targetgeographical region, we will also pursue opportunities in other regions. Ourprimary focus of pursuing business opportunities in China and nearby areas isintended to capitalize on the economic growth in China and the Asia-PacificRim, our ability to leverage our business relationships in China, and ourability to quickly react to changing market conditions to take advantage ofwindows of opportunity in various business segments.

 

**Internet Portal Strategy**

 

Intac Purun was establishedunder the project name Career Net to meet the growing need for expanding theemployment opportunities for graduates of higher level education institutionsin the PRC.  Currently there are over 14million college students in China and this number is expected to grow to 21million in 2006.  If new graduates(defined as those who graduated from college less than three years before) areincluded, the number is expected to be 31 million in 2006.  Most of these people have either juststarted their professional career or are about to start, and most of them areinexperienced and unprepared for the professional life.  The Ministry of Education (“MOE”) hasalready established a database of more than 3.3 million graduates which hasbeen made exclusively available to Intac Purun.  Intac Purun will provide comprehensive employment informationover its Internet portal to facilitate these graduates’ employment search andfuture career development.

 

This Internet portal will alsooffer employers a platform to list open positions available to final yeargraduates contained within this unique and exclusive database.  This fee based premium service will belinked to an Employment Service Website of The Ministry of Education, anon-profit website used to communicate information to these universitygraduates.

 

On January 20, 2004, INTACannounced that Intac Purun had been exclusively selected by the EducationManagement Information Center (“EMIC”), a department under China’s EducationMinistry, to establish and operate the “Career Service Centers” for Chinesestudents.  These Career Service Centerswill provide Chinese students exclusively with a full-range of careerdevelopment services, which will assist these students in finding jobs and managingtheir careers.  The goal of Intac Purunis to build the largest career service portal for Chinese students through itsexclusive resources and innovative technologies. As the exclusiverepresentative and sole operator of the Career Service Centers, whichrepresents the MOE in handling all student career services, Intac Purunbelieves it is the de facto representative of MOE to provide all careerservices to students.

 

9

----

 

These Career Service Centers’ tasks are three-fold.  First, they will provide guidance to localeducation authorities in providing career services to local students.  Second, they will collect complete and authenticatedstudent information through local education authorities and universities.  Third, they will introduce Intac Purun’sservices and products to students.  Inaddition, Intac Purun will liaise with other government agencies andcorporations as the career service provider of MOE.  We believe that this relationship gives Intac Purun competitiveadvantages over its competitors.

 

Initially, Intac Purun will launch a job information subscriptionservice on its Internet portal www.joyba.com. This service will providesubscribers with daily job information and open positions on their mobilephones through text messaging. Intac Purun ́s sophisticated database softwarewill have the capability to match open positions with eligible candidates, whowill receive an individual entry code to Intac Purun ́s website where they willfind the individually offered job. In the future, the Internet portal will alsoprovide various paid services, including online career assessments and careerdevelopment counseling, to Chinese students. In addition, the Internet portalwill enable hiring companies to perform comprehensive background checks ontheir prospective employment candidates. The company also intends to provide various paid career services such asjob information, assessments, and trainings to these students.

 

An important factor in the assessment and training market iscredibility.  One has to be credible forstudents to take the assessments and for companies to use the results. Webelieve that Intac Purun’s selection as the exclusive career service providerfor MOE provides credibility for Intac Purun in this market.  Again in this market, Intac Purun is goingto deploy the same aggressive marketing strategy, i.e. to push the assessmentsand trainings to students through local education authorities and universities.  With MOE’s backing, Intac Purun expects toachieve substantial market share.

 

To further develop the already existing exclusive student database ofmore than 3.3 million graduates, Intac Purun has also been authorized toestablish local Career Service Centers to work closely with provincialeducation authorities. Under the direction of these local Career ServiceCenters and education authorities, universities and schools will be responsiblefor collecting and authenticating their complete student information for IntacPurun and for encouraging students to subscribe to these services. The servicesoffered by Intac Purun are expected to attract Chinese students because theseservices are sanctioned by the MOE through the Career Service Centers.  This gives Intac Purun 3.3 million registeredusers to start with.  Furthermore,through compulsory student biographic data collection, Intac Purun expects toquickly grow its pool of registered users. By the end of 2006, we expect to have over 15 million registeredusers.  These factors mean that theCompany’s Internet portal will not only reach most Chinese college students,but also have great influence over their career development.

 

Under the guidance of local Career Service Centers, local educationauthorities and universities will encourage students to sign up for the serviceand some universities also plan to package the Job Information Subscription aspart of their education program and to include the charges in thetuitions.  Under Intac Purun’s direction,universities will make biographic data collection compulsory for every existingstudent and part of new student enrollment process to ensure everybody’s datais collected and authenticated.  Oncethe data are collected, the database will be an invaluable resource to IntacPurun.

 

Using the exclusive and MOE authenticated information on collegegraduates and students, Intac Purun believes its comprehensive studentbackground check service will be extremely valuable to corporations that cannotvalidate candidates’ background and credentials otherwise. Also, since IntacPurun is the exclusive representative of these Career Service Centers, webelieve that many companies will to be eager to cooperate with Intac Puruneither to search for talent or to market themselves to college students. Intac Purunalso plans to support corporations in listing their jobs and helping them inlocating employees with specific skill-sets.

 

In order to create the most comprehensive database of job opportunitiesfor college graduates and students, Intac Purun has also obtained the completedatabase of government job openings through the EMIC.  This database is being kept up to date by this same departmentalagency.

 

We believe that this opportunity represents a significant growthpotential and improved gross margin potential in excess of that of the currentdistribution business.

 

Our Internet portal business involves substantial risk. Our businessmodel is based on a belief that Intac Purun will be able to maintain a closerelation with the EMIC and our ability to remain as the exclusive operator ofthese Career Service Centers.  We cannotprovide any assurance that our model will prove successful or will lead to theachievement of our objectives. If we are unable to implement our business modeleffectively, our business, results of operations and financial condition wouldbe materially adversely affected.  See“Risk Factors – Risks Related to the Internet Portal Industry, Internet and OurTechnology Infrastructure.”

 

10

----

 

**Efficient Distribution Strategy**

 

In ourWireless Handset Distribution Segment and Automobile Distribution Segment, wepursue an “efficient distribution” strategy that we believe provides us with acompetitive advantage in these markets. We believe that each of these marketsis characterized by multiple distribution levels that add costs to the ultimateconsumer without providing corresponding value added services or productdistinction. By reducing the number of distribution layers between themanufacturer and the retail distributors, we are able to compete based uponprice with other distribution networks. Within the Wireless HandsetDistribution Segment we also have an established customer base, which at thistime has increasing volume demands which we believe we are prepared tomeet.  We have strong and trustedrelationships with our customers with a reputation for reliability, low cost,experience and trust.

 

In addition,we seek to take advantage of windows of opportunity to acquire othercomplementary products at discounted prices that may become available from timeto time.

 

We believethat our ability to take advantage of perceived inefficiencies in thedistribution markets for the wireless handset and automobile industries willprovide us with the following competitive advantages:

 

•                  Focus on BestSelling Products. In our distribution business, we have establishedrelationships with industry leaders, including network operators, largeretailers and other worldwide distributors. Through these relationships, weexpect to receive up-to-date industry information regarding trends in consumerbuying patterns. This information should enable us to trade in only thosemodels that we believe are the most popular among end-users, thereby reducingour inventory risk and increasing the number of inventory turns per month whencompared to that of our competitors.

 

•                  Ability toQuickly Modify Inventory Mix. We differ from other distributors in that we donot 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 canoffer a higher proportion of low cost inventory than our competitors. Webelieve that this strategy permits us to be more flexible in our inventorypurchases than we would be if governed by certain manufacturers’ distributionagreements.

 

•                  Reputation as a“Best Source” Provider. In our wireless handset business, we compete primarilyon price and availability. We are capable of shipping orders for as few as 100wireless handset units, although our average order is much larger. Accordingly,we believe we are well positioned to serve the growing unaffiliated retailerbase. Further, we believe that our ability to quickly source mobiletelecommunications equipment at favorable prices provides us with a keycompetitive advantage as a secondary supplier to the operator-affiliatedretailers.

 

•                  Exploitation ofthe Spot Market. As a participant in the “spot market” for wireless handsets,there is no set price to us for the purchase 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, andother relevant factors. Likewise, we determine our selling prices on the basisof current market conditions, the number of items we have on hand, targetprofit margins for various products and other relevant factors.  Consequently, unlike other distributors whobuy and sell equipment at predetermined prices or formula, we operate on anopportunity basis, buying and selling inventory during periods of marketopportunity.

 

Our system ofefficient distribution involves substantial risk. Our business model is basedon a belief in the future of the wireless handset industry that is contrary tothe generally held belief that such industry is shifting away from puredistribution services to a mix of distribution services and ancillary services,such as logistics services. We cannot provide any assurance that our model willprove successful or will lead to the achievement of our objectives. If we areunable to implement our business model effectively, our business, results ofoperations and financial condition would be materially adversely affected.  See “Business Risk Factors — Risks relatedto the Distribution Industry.”

 

11

----

 

**Growth Strategy**

 

**Internet Portal Business**

 

According to state data, Chinahas nearly 80 million internet users at the end of last year, more than 10million of those on broadband connections, the second largest number ofInternet users in the world. According to a survey conducted by the ChinaInternet Network Information Center (“CNNIC”), if China’s growth ratecontinues, it could surpass the United States and become the country with thelargest Internet user base by 2005. Because we intend to become a leading onlinemedia company in China, Intac Purun would be expected to benefit directly fromthis tremendous growth rate as China’s economy continues to expand.

 

Sina.com, China’s leadinginternet portal, saw revenue rise 203 percent year-on-year for the third quarterof 2003 to $31.9 million.  Rivals,Sohu.com and NetEase, also saw more than one hundred percent growth.  Healthy advertising sales and increaseddemand for mobile phone-related services were credited for the impressivegrowth.

 

The number of Chinese collegegraduates has increased rapidly over the past few years, with the number ofstudents estimated to exceed 2.8 million in 2004, a 32 percent increase over2003.  We believe that more and morecollege students and young professionals need job placement assistance andcareer development counseling.  At thesame time, corporations and government entities lack efficient and effectivechannels to reach qualified candidates. These changes are happening while mobile phones and the Internet arebecoming more pervasive than ever in Chinese daily life.  To bridge the gap between college studentsand corporations and government entities, Intac Purun plans to launch anInternet portal dedicated to provide full-range career services to Chinesestudents and hiring companies.

 

Our objective is to launch ajob information subscription service on Intac Purun’s Internet portalwww.joyba.com. This service will provide subscribers with daily job informationand open positions on their mobile phone through text messaging. Intac Purun’ssophisticated database software will have the capability to match openpositions with eligible candidates, who will receive an individual entry codeto Intac Purun ́s website where they will find the individually offered job. Inthe future, the Internet portal will also provide various paid services,including online career assessments and career development counseling, toChinese students. In addition, the Internet portal will enable hiring companiesto perform comprehensive background checks on their prospective employmentcandidates. We intend to pursue this objective by implementing the followinggrowth strategies:

 

•                  Establish localCareer Service Centers to work closely with provincial education authorities.Under the direction of these local Career Service Centers and educationauthorities, universities and schools will be responsible for collecting andauthenticating their complete student information for Intac Purun and forencouraging students to subscribe to these services.

 

•                  Establish acomprehensive student background check service using the exclusive and MOEauthenticated information on college graduates and students.  We believe this will be an extremelyvaluable service to corporations that cannot validate candidates’ backgroundand credentials otherwise. Also, since Intac Purun is the exclusiverepresentative of these Career Service Centers, many companies are expected tobe eager to cooperate with Intac Purun either to search for talent or to marketthemselves to college students.

 

•                  Assemble anexperienced management team for Intac Purun in order to execute an effectivebusiness plan while at the same time seeking to ensure that the joint venturehas adequate capital to accomplish its goals.

 

•                  Supportcorporations in listing their jobs and helping them in locating employees withspecific skill-sets.

 

•                  Explore an arrayof premium products and services that can be made available through IntacPurun, tailoring this Internet portal to meet the ever growing student demandfor these types of products and services.

 

•                  Ensure thisdatabase is maintained and continually updated in order to create the mostcomprehensive database of job opportunities for college graduates and students.

 

**Distribution Business**

 

As of December2002, the number of mobile phone users in China exceeded 200 million,making China the country with the largest number of mobile phone users.

 

According toInternational Data Group, the estimated number of mobile telephone subscribersin China has surpassed 200 million and according to J. P. Morgan Chase thisnumber will expand to almost 300 million by the end of 2005.

 

12

----

 

This estimateis also supported by the forecast of the Interactive Data Corporation (“IDC”)which has estimated that the total number of mobile phone users in China willreach 325 million by the end of 2005. We expect to capitalize on our existing presence in China and theAsia-Pacific Rim to successfully expand our distribution channels. Although theCompany will de-emphasize the wireless handset business, our objective is tocontinue to expand our position in the industry and to enhance our operatingperformance.  We will pursue thisobjective by implementing the following growth strategies:

 

•                  Continue to expandon our core competencies. We intend to improve on our system of efficientdistribution for wireless handsets. We do not currently intend to migratetoward a mix of product sales and accessory sales, nor do we expect to beginproviding distribution services or other ancillary logistics services. Webelieve that this approach will provide us with greater flexibility to meet thedemands of our customers, while at the same time providing us with theopportunity to grow a worldwide distribution network without significant addedinfrastructure cost.

 

•                  Capitalize onour existing geographic footprint. We believe that the rapidly expanding growthin mobile telephone subscribers in China and the Asia-Pacific Rim has beencaused by:

 

•                                          thelack of available landline service in China;

 

•                                          thesheer size of the population of China, being the most populous nation in theworld; and

 

•                                          therecent dramatic economic growth in the region.

 

•                  Capitalize onmanagement’s experience.  We believe ourCompany and management team has the expertise to take advantage of the growingeconomy and the business opportunities we perceive as existing in the rapidlyexpanding field of telecommunication services in China.  The Company and its management team intendto use its flexibility, entrepreneurial expertise, quick decision makingability and speed-to-market to further its goals and objectives.

 

•                  Expand ourglobal sales capabilities. We target our customers predominantly through directsales channels complemented by a range of external alliances and channels.  We believe that in addition to expanding ourpresence in the markets currently served, we must also expand into other worldmarkets.

 

•                  Complement ourexisting business with selective strategic acquisitions. In order to grow intoa leading worldwide provider of wireless handsets, we believe that expansionthrough acquisitions, as well as internal growth, will be necessary.  Accordingly, we expect to pursue theacquisition of companies that sell products and services that either complementor expand our existing business. We may also expand to other businesses oropportunities in areas or industries that we believe present attractiveopportunities for our stockholders but which are outside of pure handsetdistribution. We believe that significant acquisition opportunities exist andthat our willingness to retain existing management will make us an attractiveacquiring party.

 

•                  Pursue strategicalliances with major players in the telecommunications industry in China andthe Asia-Pacific Rim.  For example, onFebruary 11, 2003, INTAC signed an exclusive agreement with T-Mobile, underwhich T-Mobile will sell to us the handsets it obtains through its trade-inprogram in Germany for distribution into the Asia-Pacific Rim.  This agreement is valid through December 31,2004.  While T-Mobile is currentlytesting their program within a small proportion of their stores, initialindications suggest less than satisfactory results.  T-Mobile is expected to increase their marketing campaign designedto inform and educate the public.  Wewill continue to monitor their performance.

 

We have announced theredirection of our business plan from the wireless handset distribution to theInternet portal business including Intac Purun, because of the opportunitiesafforded by the Internet portal business. Therefore, the Company is no longer actively pursuing with China PutianCorporation (“Putian”), the largest telecommunication equipment manufacturingcompany owned by the Chinese government, for a strategic alliance to introduceadvanced technologies and product designs into China through Putian’sproduction facilities and distribution networks.  Furthermore we are also no longer pursuing a definitive agreementwith China United Telecommunications Corporation (“China Unicom”), astate-owned telecommunications service provider in China, for a strategicalliance to become an authorized reseller of wireless mobile services offeredby the Chengdu Branch of China Unicom in the Sichuan Province in mainland China.

 

13

----

 

**Geographic Focus**

 

In December of2001, China entered the World Trade Organization (“WTO”).  Membership in the WTO represents a majormilestone of a decade-long shift from a centrally planned economy to a marketeconomy.  With its entry into the WTO,China embarked on an ambitious series of steps to reform its trade and businessenvironment. For example, China has undertaken major changes in import andexport rights; however, until the reform has been completed and come intoeffect, trading rights will remain the subject of government approval. We haveleveraged our contacts in China to allow us to take advantage of emergingopportunities in the wake of these reforms. We will continue to develop strategiccontacts in the region as the plan for liberalizing Chinese Internet portal anddistribution services continues 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 membership has allowed China to defendits trade interests using the WTO dispute-settlement system. Chinese exportershave benefited from the certainty that their trading partners must comply withWTO rules. For example, WTO members can no longer discriminate against Chineseproducts in their home markets. China’s membership into the WTO has made itmore attractive to foreign investors, and foreign investments have resulted inmore high-paying jobs, more government tax receipts, more technology transfersand, ultimately, more consumer spending. China’s WTO commitments havefacilitated increased competition in every sector of the economy. As a result ofincreased trading opportunities, Chinese consumers are expected to benefit fromthe increased competition encouraging a larger range of choices, lower prices,and higher quality in consumer products and sources. The combination of reducedtrade barriers and the increase in the standard of living in China has andshould continue to significantly increase the demand for consumer products andservices in China, including wireless handsets and automobiles, as well asdemand for Internet services.

 

We believethat these continuing reforms in China will enable us to participate in variousinvestment opportunities in China. Our first entry into the Chinesedistribution market was accomplished in October of 2001 through our acquisitionof operating subsidiaries that distribute premium brand wireless handsetproducts to mobile communications equipment wholesalers, agents, retailers andother distributors into Hong Kong and mainland China (and throughout theworld). In early 2002, we began importing and distributing automobiles intomainland China. The automobiles are imported primarily from Europe and Asia,and are resold to dealers and other distributors in “free trade” zones withinChina.  In 2004, INTAC announced theredirection of its business plan from the traditional distribution of premiumbrand wireless handsets to its new Internet joint venture, Intac Purun.  Intac Purun was established under theproject name Career Net to meet the growing need for expanding the employmentopportunities for graduates of higher level education institutions in the PRC.

 

**THE CHINESE INTERNET PORTAL INDUSTRY**

 

**Overview**

 

Certain areasrelated to the Internet, such as telecommunications, Internet informationservices, international connections to computer information networks, informationsecurity and censorship are covered in detail by a number of existing laws andregulations in China. The PRC Internet industry is regulated by variousgovernmental authorities, such as The Ministry of Information Industry (“MII”),the State Administration of Industry and Commerce, or SAIC, the State Press andPublications Administration, or SPPA, and the Ministry of Public Security.

 

**Telecommunications**

 

On October 1,2000, the Telecommunications Regulations of the People’s Republic of China, orthe Telecom Regulations, went into effect. The Telecom Regulations set out thegeneral framework under which domestic Chinese companies may engage in varioustypes of telecommunications services in the PRC. The Telecom Regulationsreiterate the long-standing principle that telecommunications service providersneed to procure operating licenses as a mandatory precondition for thecommencement of operations. A distinction is drawn between “basictelecommunications services” and “value-added telecommunications services.”“Value-added telecommunications services” are defined as telecommunications andinformation services provided through public networks. A “Catalogue ofTelecommunications Business,” which is attached to the Telecom Regulations andwas updated on June 2001, categorizes various types of telecommunications andtelecommunications-related activities into basic or value-added services. TheCatalogue lists the following 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 and exchange, (f)value-added fax, (g) Internet access services, (h) Internet informationservices, (i) Internet data center services and Internet virtual private networkservices, (j) video-conferencing, (k) call center and voice mail services, and(l) certain mobile and satellite telecommunications services.

 

14

----

 

On December20, 2001, the PRC State Council promulgated the Regulations for theAdministration of Foreign-Invested Telecommunications Enterprises, or the FITERegulations, which became effective on January 1, 2002. The FITE Regulationsstipulate that foreign-invested telecommunications enterprises, or FITEs, mustbe established as Sino-foreign equity joint ventures. FITEs can undertakeoperations in basic telecom services and value-added telecom services. Underthe FITE Regulations and in accordance with WTO-related documentation, theforeign party to a value-added FITE may currently hold up to 49% equity, andvalue-added FITEs may conduct business only within Beijing, Shanghai andGuangzhou and 14 other PRC cities. The equity limit of foreign investors wasincreased to 50% and the geographical restriction lifted on December 11, 2003.

 

The *AdministrativeMeasures for Telecommunications Business Operating Licenses*, orTelecom License Measures, were promulgated by MII on January 4, 2002, tosupplement the FITE Regulations. The Telecom License Measures confirm that thereare two types of telecom operating licenses for operators in China (includingFITEs), namely: licenses for basic services and licenses for value-addedservices. With respect to the latter, a distinction is made as to whether alicense is granted for intra-provincial or “trans-regional” (inter-provincial)activities. An appendix to the license will detail the permitted activities ofthe enterprise to which it was granted. An approved telecom service operatormust conduct its business (whether basic or value-added) in accordance with thespecifications recorded on its Telecom Service Operating License. TheTelecommunications License Measures also confirm that the MII is the competentapproval authority for foreign-invested telecom enterprises.

 

Intac Purun isstructured as an Internet content provider, or ICP, and has obtained approvalfrom the MII to develop Internet information services. Intac’s interest was setat 45% as a result of these regulations. Subject to the promulgation of additional regulations on foreigninvestment in the PRC telecom sector, INTAC might undertake other restructuringmeasures in order to increase the solidity and flexibility of our structure andoptimize our position under current Chinese law.

 

**InternetInformation Services**

 

On September25, 2000, the State Council approved the Measures for the Administration ofInternet Information Services, or the ICP Measures. Under the ICP Measures, anyentity that provides information to online users of the Internet is obligatedto obtain an operating license from the MII or its local branch at theprovincial or municipal level in accordance with the Telecom Regulationsdescribed above.

 

The ICPMeasures stipulate further that entities providing online information servicesregarding news, publishing, education, medicine, health, pharmaceuticals andmedical equipment must procure the consent of the national authoritiesresponsible for such areas prior to applying for an operating license from theMII or its local branch at the provincial or municipal level. Moreover, ICPsmust display their operating license numbers in a conspicuous location on theirhome page. ICPs are obligated to police their Web sites in order to removecategories of harmful content that are broadly defined. This obligation reiteratesInternet content restrictions that have been promulgated by other ministriesover the past few years.

 

Mostimportantly for foreign investors, the ICP Measures stipulate that ICPs mustobtain the prior consent of the MII prior to establishing an equity orcooperative joint venture with a foreign partner.

 

On December28, 2003 the Beijing Telecommunications Administration (the municipal branch ofthe MII) issued to Intac Purun a Telecommunications and Information ServicesOperating License.  We believe we haveall necessary licenses to operate the Internet portal.

 

**InformationSecurity and Censorship**

 

The principal pieces of PRClegislation concerning information 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 of thePeople’s Republic of China for Protecting the Security of Computer InformationSystems (1994);

 

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

 

15

----

 

•                  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); and

 

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

 

These pieces of legislationspecifically prohibit the use of Internet infrastructure where it results in abreach of public security, the provision of socially destabilizing content orthe divulgence of State secrets, 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.

 

•                  “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 national defense, diplomatic affairs, policydecisions on state affairs, national economic and social development, politicalparties and “other State secrets that the State Secrecy Bureau has determinedshould be safeguarded.”

 

According to the aforementionedlegislation, it is mandatory for Internet companies in the PRC to completesecurity filing procedures with the local public security bureau and for themto update regularly with the local public security bureau regarding informationsecurity and censorship systems for their Web sites. In this regard, the *Detailed Implementing Rules for the Measures for theAdministration of Commercial Web Site Filings for the Record*,promulgated in July 2002 by the Beijing Administration for Industry andCommerce (“AIC”), state that Web sites must comply with the followingrequirements:

 

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

 

•                  they must placethe registration marks on their Web sites’ homepages; and

 

•                  they mustregister their Web site names with the Beijing AIC.

 

We are in theprocess of registering a domain name for Intac Purun with Network Solutions.  We plan to have full legal rights over thesedomain names.

 

In addition, the State SecurityBureau has issued regulations authorizing the blocking of access to any site itdeems to be leaking State secrets or failing to meet the relevant legallegislation regarding the protection of State secrets in the distribution ofinformation online. Specifically, Internet companies in China with messageboards, chat rooms or similar services, must apply for the approval of theState Secrets Bureau prior to operating such services.

 

**The Internet and Mobile Telecommunications inChina**

 

According to China InternetNetwork Information Center, the number of Internet users in China increasedfrom approximately 9 million as of December 31, 1999 to approximately 80million as of December 31, 2003, making China the second largest Internetmarket in the world, behind only the US. China has also experienced rapidgrowth in mobile telecommunications use in recent years. According to China’sMinistry of Information Industry, China is now the largest mobiletelecommunications market in the world with approximately 269 million mobilephone users as of December 31, 2003. In addition, China has experienced asignificant increase in the use of wireless value-added services, the most

 

16

----

 

popular form of which is shortmessaging services, or SMS. The most common application for SMS ispoint-to-point SMS, which allows users to send short messages between mobilephones. In 2000, China Mobile Communications Corporation (“China Mobile”),launched its Monternet wireless value-added services platform, and in 2001,China United Telecommunications Corporation, (“China Unicom”), launched itsUNI-Info wireless value-added services platform. These platforms enabled thedevelopment of an additional type of SMS, which allows users to access productsand services provided by third parties, such as Intac Purun. China Mobile andChina Unicom also began to allow these third party providers to use theirbilling and collection systems to charge fees for products and services thatare delivered through the Monternet and UNI-Info platforms. This created anopportunity for Internet companies to deliver their Internet portal productsand services to users in China through their mobile phones and to utilize thesebilling and collection systems to collect fees for these products and services.

 

According to Norson TelecomConsulting, the total number of short messages transmitted in China in 2003 wasapproximately 180 billion, compared to approximately 90 billion in 2002, andpoint-to-point SMS accounted for approximately 78.6% of the total number of SMSmessages sent through China Mobile’s telecommunications network, while theremaining approximately 21.4% was accounted for by other SMS-based wirelessdata services. In addition, we believe that with the continuous upgrading ofmobile telecommunications networks in China, the wireless value-added servicesmarket will further expand by allowing users to transmit larger amounts of dataat higher speeds and to access additional products and services through theirmobile phones.

 

Due to the rapid growth inInternet use, companies in China are spending an increasing amount onadvertising through Internet websites to promote their products and services.According to International Data Corporation, China’s online advertising marketis expected to increase to approximately US$344 million in 2007 fromapproximately US$63 million in 2002. The expected increase in Internet use inChina may also lead to an expansion in the market for other Internet services,such as online games and directory listings, which we believe will createadditional opportunities for growth in the Internet services market.

 

**Education in China**

 

Education inChina has been rapidly developed in order to keep pace with the ongoing economicdevelopment. The government in its 10th Five Year Plan stresses the importanceof education; its planned sector spending level is about US$50 billionannually. China’s population is aware of the need for life-long learning in acomplex world and demand for higher learning is rising quickly. With anestimated value of US$2.1 billion in 2002, China’s higher education market islarge and growing. With urban income increasing rapidly, we anticipate anincrease in higher education consumption in the next ten years and beyond.

 

**Growth Potential**

 

Currentlythere are over 14 million college students in China and this number is expectedto grow to 21 million in 3 years.  Ifnew graduates (defined as those who graduated from college less than 3 yearsbefore) are included, the number is expected to be 31 million in 2006. Webelieve more and more college students and young professionals have realizedthat they need job placement assistance and career development counseling. Atthe same time, corporations lack efficient and effective channels to reachqualified candidates. All these current changes are happening while mobilephones and Internet are becoming more pervasive than ever in Chinese dailylife.

 

**Competitive Advantage**

 

The strategiccompetitive advantage of Intac Purun is its close relationship with the ChineseMinistry of Education (MOE) and exclusive partnership with Education ManagementInformation Center (EMIC). As the exclusive representative and sole operator ofthe Career Service Centers, which represents MOE to handle all student careerservices, Intac Purun believes it is the de facto representative of MOE toprovide all career services to students. We believe that this relationship gives Intac Purun enormous competitiveadvantages over its competitors, including:

 

•                  Exclusive accessto MOE’s student databases;

 

•                  Exclusiveauthority to set up local Career Service Centers;

 

•                  Authority tocollect complete student information through local education authorities anduniversities;

 

•                  Guidance tolocal education authorities in providing career services to students;

 

17

----

 

•                  Representing MOEto provide career services to students;

 

•                  Great influenceover the types of career services students will use; and

 

•                  Representing MOEto work with companies and other government agencies.

 

We believethat these advantages will enable Intac Purun to build the largest careerservice portal for Chinese students.

 

**THE WIRELESS TELECOMMUNICATIONS INDUSTRY**

 

**The Chinese Market**

 

**General.**  China now has more mobile phones than it haslandlines, new figures show. According to the data from the Ministry ofInformation Industry, wireless subscriber numbers were up by more than 30% in2003 to 269 million. Over the same period, the number of fixed-line phones roseto 263 million in a population of 1.3 billion people. The rapid growth mirrorsthe explosive growth of wireless telephone use in Europe in the 1990’s,although their landlines were already much more common. Growth in China hasslowed sharply from the 60% annual subscriber expansion seen in 2002, butanalysts believe the size of the urban market still offers room for solidgrowth in years to come. Prices for both handsets and services offered by thetwo state companies controlling the market, China Mobile and China Unicom, havebeen falling steadily, as Chinese handset vendors challenge foreign giants suchas Nokia and Motorola.

 

**Growth Potential**.  Since the early 1990s, thetelecommunications market in China has grown approximately 20% per year. Thebreak-up of China Telecom into fixed-line, mobile, satellite and pagingentities and the transfer of the paging section to China Unicom introducedcompetition into the services market. The Chinese Central Government is also considering the entry of newtelecommunications operators. These competing companies will seek the bestquality products at the lowest price, possibly leading to increased equipmentsales opportunities for foreign and domestic firms.  Although China Mobile and Unicom have dominated the market,competition between them has already lowered the cost of services considerably.

 

The MII isexpected to digitize public and private networks; build a nationwide broadbandnetwork using fiber optic cable, microwave and satellite systems; expand thenationwide Global System for Mobile Communication (“GSM”) mobile network anddeploy Code Division Multiple Access (“CDMA”) systems; improve management andbilling systems; and promote Internet usage, especially electronic commerce.

 

Already one ofthe largest in the world, China’s telecommunications sector is expected tocontinue expanding in the coming decades. China’s level of economic development is still far behind the developedworld. Though we anticipate China’s telecommunications sector to be large inthe aggregate, it is still small on a per capita base, which implies growth potentialfor China’s telecommunications sector. We anticipate growth driven demand fortelecommunications services will increase. The Economic Analytical Unit of theAustralian Department of Foreign Affairs and Trade predicted that the number oftelephone lines in China will reach 370 million in 2010 and 1 billion in 2020and that the number of mobile phone subscribers will reach 250 million by 2004and 300 million by the end of 2005. At present, development in China’stelecommunications sector is uneven with both regional and urban-ruralimbalances. Reforms and China’s WTO membership will lead to furtherderegulation and hence increasing competition in the telecommunications sector.

 

In early 1999,the MII introduced a telecommunications product licensing system, whichrequires the issuance of a license for all telecommunications equipment beforebeing marketed in China. The MII encourages operators to purchase domesticallymanufactured products to support national telecommunications manufacturers.Greater flexibility is sometimes shown to foreign companies that have exclusivetechnology or are willing to invest in priority areas, such as rural inlandChina. In addition, China has committed to permitting foreign interests to ownup to 50% of Chinese telecom companies under its WTO obligations.  This has provided further impetus forgrowth.

 

**Growth in the Industry**

 

Growth in thenumber of wireless handset users in China and the Asia-Pacific Rim has beenfueled by several factors, including:

 

•                  expansion ofnetwork operators into previously unserved areas, particularly in portions ofChina and the Asia-Pacific Rim;

 

•                  the lack oflandline expansion plans;

 

18

----

 

•                  increasedderegulation of China and the Asia-Pacific Rim;

 

•                  availability ofappropriate additional wireless spectrum;

 

•                  convergence ofInternet, voice, data and other technologies;

 

•                  the increasingsize of the population;

 

•                  increasingconsumer demand for advances in wireless technologies and handset functionality;and

 

•                  decreasingconsumer prices for handsets and wireless service.

 

China Mobilelaunched a cell phone-based data communications service using the GeneralPacket Radio Service (“GPRS”) format on May 17, 2002. The new service enablesusers to download news, games, maps, weather forecasts and other information oncell phones. Third-generation (“3G”) mobile telecommunications promise a newline of broadband services such as real-time video transmission and fastInternet service.  The homegrown TimeDivision - Synchronous Code Division Multiple Access (“TD-SCDMA”), togetherwith the US-based CDMA 2000 and Europe-based WCDMA (wideband CDMA), are thethree major international standards for 3G mobile telecommunications.  The introduction of 3G technology hasfurther fueled the quantity of wireless handsets being sold.  We also expect this to lead to an increasein the number and quality of refurbished cell phones.

 

SeveralChinese manufacturers, such as Nongbo Bird and TCL, now replace some phonemodels after just six months. In comparison Motorola, Nokia and other industryveterans kept models on sale for two years. A major driver in the rapidly shifting market: the big providers ofcellphone service. Top players such as Sprint PCS Group and Verizon Wireless inthe U.S., Vodafone Group PLC in the U.K., and Hutchison Whampoa in Hong Kongdemand the best or hottest product available anywhere in the world. They standto gain because more sophisticated phones can be used to access the newservices that operators are heavily marketing to new consumers these days.

 

**Industry Challenges**

 

Despite theincreasing demand for wireless handsets, numerous factors have converged inrecent years to create new challenges for traditional wireless equipmentdistributors. These factors include the following:

 

IncreasingNumber of Equipment Manufacturers and Available Models. Originally, there wererelatively few manufacturers of mobile communications equipment. However,within the last several years, numerous other companies, including those thathave historically manufactured consumer electronics (such as Haier), have alsoentered the market. In addition, as technology has expanded and features havebeen added, the number of available models per manufacturer has also increased.We expect both of these trends to continue as the demand for wireless handsetscontinues to increase. We believe that because many traditional distributorsattempt to inventory a commercially adequate supply of handsets for eachmanufacturer by model, they are experiencing greater costs and higher inventoryrisk. Further, we believe that these distributors tend to turn their inventoryfewer times per month.

 

Lack of BrandLoyalty. Competition among handset manufacturers is intense, resulting inconstant changes in market share between manufacturers. Although the industryin China remains largely dominated by three vendors (specifically, Nokia,Motorola and Siemens), numerous smaller manufacturers have entered the market,further increasing the competition among manufacturers. We believe thatconsumer handset selection is based less on brand name loyalty and more onfeatures and functionality, size and appearance, pricing and incentives andperceived technological advancement, especially in the Asia-Pacific Rim. Wealso believe this trend will continue. Accordingly, we believe that thosedistributors having long-term distribution agreements with vendors andmanufacturers or agreements containing “minimum commitments” will find it moredifficult to react to consumer preference changes.

 

Unaffiliatedand Operator-Affiliated Retailer Base. Because of the strong growth inworldwide users of mobile communications, the number of retail locationsselling wireless handsets is also increasing. We believe that many of theselocations are unaffiliated with a network operator and are generally free topurchase inventory from any entity they desire. We expect that this trend hasbeen fueled somewhat by the number of repeat users desiring to purchase newequipment but who do not desire to switch their existing service provider. Manyof these retailers, or the distributors that serve them, generally desire topurchase in smaller quantities not readily available from traditionaldistributors. In addition, we recognize that the vast majority ofoperator-affiliated retailers must rely on secondary sources of supply. Ineither case, we believe that the purchasing agents in these situations aremotivated to buy from a distributor on the basis

 

19

----

 

of price andavailability and, to a lesser extent, on the basis of a prior businessrelationship. Consequently, we expect that those distributors that compete on abasis other than price, availability and relationship will find it increasinglydifficult to reach the unaffiliated retailer and operator-affiliated base.

 

PriceVolatility. Over the last several years, prices for wireless handsets havebecome increasingly volatile. This volatility is due, among other things, toincreased supply into the various sales channels, a larger number ofmanufacturers, and a slow-down in the economy generally. As a consequence ofthis volatility, a “spot market” has developed in which large quantities ofinventory can be purchased and sold at the then prevailing market price. Pricesfor 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.

 

**Traditional Response to Industry Challenges**

 

In response tothe industry 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. Many traditional distributors believe thatancillary products and services carry a higher gross margin than merely thedistribution of wireless handsets. At the same time, many large network operatorsand manufacturers are embracing the move to an outsourced solution for theirdistribution needs because of their ability to shift to the distributor:

 

•                  the significantinitial and continuing costs of maintaining warehouse facilities and providinglogistics services;

 

•                  the risksassociated with inventory management and storage; and

 

•                  the otherefficiency issues associated with maintaining an infrastructure that mustexpand and contract to meet consumer demand.

 

Similar toother distribution industries that have migrated to a “full service” approach,we believe that handset distributors are facing increasing costs for personnel,IT infrastructure, warehouse facilities and general overhead. We believe thatas wireless equipment manufacturers continue to migrate toward a mix ofproducts and services, traditional distributors will find it increasinglydifficult to efficiently integrate and manage these separate operations into acost-effective solution for their customers. Consequently, we expect that asrevenues for full service distributors increase, their expected efficiencies ofscale may not.

 

**AUTOMOBILE DISTRIBUTION INDUSTRY**

 

The number ofpassenger cars on Chinese roads is expected to grow by 10% a year in 2005 to2010, according to the China Automotive Technology & Research Center, whichsets the country’s automobile standards. The number of cars rose 50% in 2002and almost 70% in the first 10 months of 2003.

 

With China’sentry into the WTO we expect and have seen demand for foreign automobiles increase.  We are applying the same “efficientdistribution” strategy that we use for our wireless handset business to thisbusiness segment, and we expect to partner with existing Chinese car dealersand distributors to develop this business segment. As with our wireless handsetbusiness segment, we believe that our efficient distribution-premised businessmodel will allow us to operate with greater flexibility at modest risk in theAutomobile Distribution Segment.

 

Our vehiclesare placed on display and distributed through China’s free trade zones,initially Tianjin. This particular free trade zone was initially selected totest the business model because of its geographic location and advantages. In2002, we established a separate Chinese subsidiary for this region, Intac(Tianjin) International Trading Co., formerly “Intac Auto Mobile TradingCompany Limited”. This subsidiary operates in the Tianjin free trade zone,services the northern regions of China and distributes mainly European-madevehicles, such as Volvo and BMW. In addition, each subsidiary will be able tocross-sell the other’s products depending on the requests of the dealers withwhom the Company anticipates partnering.

 

Participatingcar dealers pick up the vehicles and obtain the necessary permits and quotasfrom the Chinese government.  They arealso responsible for paying any customs duties, value-added-taxes and othercharges prior to the vehicles being delivered to them by us. We utilizethird-party shipping companies for delivery logistics and warehousing ofproducts prior to delivery to the dealers. We incur only nominal warehouse orstorage charges as the shipping companies receive their revenues mainly forshipping and delivery of the product.

 

20

----

 

We realizehigher gross margins while under-pricing our competitors because we do notanticipate adding additional layers of distribution (i.e., middlemen).Currently, we believe our competitors, particularly our Hong Kong competitors,have two or more layers of distribution, each of which adds to the final costof delivery of the vehicle.

 

**BUSINESS RISK FACTORS**

 

Readers ofthis Report should consider carefully the following business risk factors inevaluating our Company and its prospects. Any of the following risks, as wellas other risks and uncertainties that are not yet identified or that wecurrently believe are immaterial, could harm our business, financial conditionand operating results, and could result in the complete loss of your investmentin our shares.

 

**Risks Related To Our Business**

 

*We need additional working capital, the lackof which would likely have a significant negative impact on our long-termbusiness plan and our ability to take advantage of our strategic alliances andto successfully execute our expansion plan.*

 

Our capital requirements are difficult to plan in our rapidly changingindustry and geographic region of operation. We currently expect that we willneed capital to fund additions to our Internet portal and computer infrastructure,including any acquisitions of complementary assets, technologies or businesseswe may pursue, as well as the expansion of our sales and marketingactivities.  We believe that wecurrently have adequate capital for the next twelve months; however, long-termplans would require us to obtain additional financing through the issuance ofdebt, equity, other securities or a combination thereof in order to takeadvantage of our strategic agreements and business alliances.  In addition, we may seek to obtain a workingcapital or other traditional loan facility from a bank or other lending sourcein addition to the existing short-term note. Unless we are able to continue to improve our operating performance, additionaloutside financing required to execute our long-term business plan would bedifficult to obtain on acceptable terms, if at all. As of the date of thisReport, other than a short-term note payable, we do not have any otherfinancing arrangements, nor do we have any commitments to obtain such anarrangement with any bank or other third party except for those currentlydisclosed. If we raise capital by issuing equity or convertible debtsecurities, the percentage ownership of our stockholders will be reduced. Anynew securities may have rights, preferences or privileges senior to those ofits common shareholders. There can be no assurances that we will be able toobtain additional financing on terms which are acceptable.

 

In addition to our current obligations, we continue to negotiate other strategicagreements and business alliances many of which will be dependent upon ourobtaining additional working capital, or whose value will be materially less tous if we do not have the financial resources to fully exploit suchopportunities.  that is subject to risksand uncertainties, and we may be required to raise additional capital prior tothat time and subsequently.

 

In addition, our wireless handset inventory purchases generally requirethe payment in full of the purchase price of the inventory prior to itsdelivery. Therefore, our ability to grow our wireless handset business andacquire additional inventory is dependent upon increasing our working capitalresources.

 

Our automobile distribution business will result in significantlyincreased working capital requirements dependent on the sales activity of thebusiness. We expect to make an initial deposit for all vehicles when ordered(which we expect will be offset by customer deposits), and to make full paymentfor all vehicles upon delivery to us from the manufacturer. After our paymentfor the vehicles, we expect that it will take an estimated four to six weeksbefore we sell the vehicles and receive payment for the order. Therefore, wewill need to finance the inventory during this period.

 

Also in some cases, we will give minimal credit terms to customers forthe balance outstanding, only if they have an established and good paymenthistory with us.  Generally ourcustomers will pay within a few days of receipt and inspection of the product.  Our business model generally requires adeposit by the customer. To the extent we are unable to increase our workingcapital assets, we will not be able to significantly increase our inventorypurchases or fund the increased customer balances outstanding and accordingly,the growth of our sales could be restricted.

 

Further, we may expand to other geographic markets, and the start-upcosts for distribution and other marketing channels in new geographic marketswill require additional capital.  Inaddition to our current obligations, we continue to negotiate other strategicagreements and business alliances many of which will be dependent upon ourobtaining additional working capital, or whose value will be materially less tothe Company if we do not have the financial resources to fully exploit suchopportunities.  Our forecast of theperiod of time through which our financial resources will be adequate tosupport our operations under our current plan of operation is a forward-lookingstatement.

 

21

----

 

*Our ability to obtain additional financing in the future issubject to a variety of uncertainties, including:*

 

•                  investors’perceptions of and appetite for Internet-related securities, especially in theChinese market;

 

•                  conditions inthe U.S. and other capital markets in which we may seek to raise financing; ourfuture results of operations, financial condition and cash flows;

 

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

 

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

 

•                  PRC governmentalregulation of foreign investment in Internet companies;

 

•                  economic,political and other conditions in the PRC;

 

•                  PRC governmentalpolicies relating to foreign currency borrowings; and

 

•                  any new laws andregulations that may require various PRC government approvals for securitiesofferings 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.

 

*We are an early stage company and thereforeour business and prospects are difficult to evaluate.*

 

Our distribution operatingcompanies commenced operations from 2000 through 2002.  New Tech commenced initial operations in2000, Holdings and FUTAC commenced initial operations in 2001, and GlobalCreative, Telecommunications, and Auto Mobile Trading commenced initialoperations in 2002.  Furthermore, ourInternet portal business, Intac Purun, commenced operations in 2003 and isexpected to generate revenues in the first half of 2004.  Consequently, we are an early stage company,with a very limited operating history upon which investors and others canevaluate our Company, our current business and our prospects. Our prospectsmust be considered in light of the many risks, uncertainties, expenses, delays,and difficulties frequently encountered by companies in their early stages ofdevelopment.  Some of the risks anddifficulties 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;

 

•                  manage theanticipated rise in operating expenses;

 

•                  manage andimplement successfully new business strategies;

 

•                  adapt andsuccessfully execute our evolving and unpredictable business model;

 

•                  continue to sellproducts 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 and adaptto rapidly changing and expanding operations;

 

22

----

 

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

 

•                  respondeffectively to competitive developments;

 

•                  attract, retainand motivate qualified personnel; and

 

•                  manage each ofthe other risks set forth below.

 

Because of ourlack of operating history and the early stage of our development, we havelimited insight into trends and conditions that may exist or might emerge andaffect our business, especially the Internet portal and wireless handsetrefurbished market where we have very minimal history. We cannot be certainthat our business strategy will be successful or that we will successfullyaddress these risks.

 

*Our experience or ability to capitalize onany agreement or letter of intent, and our ability to realize the potentialbenefits is not proven.*

 

We have noproven history of capitalizing on any strategic agreement such as the exclusiveagreement with T-Mobile.  There are alsono guarantees of the quantities that will become available or the capitalrequired to fulfill our contractual obligation to purchase the refurbishedhandsets from T-Mobile being made available. As a result, we may not be able to meet our obligation under the termsof the agreement which may result in the termination of this agreement.  We have no definitive agreement resultingfrom our non-binding letter of intent with Putian or China Unicom, nor do wehave any history with these companies or any assurance we could successfullymaintain such a relationship if we were to enter into such an agreement.  We have recently determined not to activelypursue these agreements with Putian and China Unicom due to our shift in ourbusiness model.

 

*The growth we seek is rare.*

 

Substantialfuture growth will be required in order for us to realize our businessobjectives. Growth of this magnitude is rare, especially in weakened economicperiods such as that currently experienced throughout the world. To the extentwe are capable of growing our business as necessary, we expect that such growthwill place a significant strain on our managerial, operational and financialresources. We must manage our growth, if any, through appropriate systems andcontrols in each of these areas. We must also establish, train and manage alarger work force. If we do not manage the growth of our business effectively,our revenues and profits could be materially and adversely affected.

 

*Mr. Zhou controls our management and theoutcome of any stockholder vote.*

 

As of the dateof this report, Mr. Zhou had voting power with respect to 11,950,000 shares, or59.2%, of our common stock. As a result, Mr. Zhou controls all mattersrequiring stockholder approval, including the election of directors andapproval of significant corporate transactions, such as mergers,consolidations, sales of substantially all of our assets or a transaction thatcould result in our Company ceasing to be publicly held. Mr. Zhou is also ourChief Executive Officer and a director of our Company.

 

*We depend, almost entirely, on the servicesof Mr. Zhou.*

 

Our success issubstantially dependent on the efforts of Wei Zhou, our Chief ExecutiveOfficer. Mr. Zhou is our founder and the key contact with all of our mostsignificant suppliers and customers. Therefore, we are almost entirelydependent on his services. The loss or interruption of the continued full-timeservice of Mr. Zhou would materially and adversely affect our business. We donot maintain key man insurance on the life of Mr. Zhou. To support ouranticipated growth, we will be required to effectively recruit, develop andretain additional qualified management. If we are unable to attract and retainsuch necessary personnel, it could have a materially adverse effect on ourgrowth.

 

*We depend on key personnel and ourbusiness may be severely disrupted if we lose the services of our keyexecutives and employees.*

 

Our future success is heavily dependent uponthe continued service of our key executives and employees.  If one or more of our key executives andemployees are unable or unwilling to continue in their present positions, wemay not be able to easily replace them and our business may be severelydisrupted. In addition, if any of these key executives or employees joins acompetitor or forms a competing company, we may lose customers and suppliersand incur additional expenses to recruit and train personnel. We do notmaintain key-man life insurance for any of our key executives.

 

23

----

 

We also rely on a number of key technologystaff for the operation of Intac Purun. Given the competitive nature of theindustry, the risk of key technology staff leaving Intac Purun is high andcould have a disruptive impact on our operations.

 

*Rapid growth and a rapidlychanging operating environment strain our limited resources.*

 

We have limited operational, administrativeand financial resources, which may be inadequate to sustain the growth we wantto achieve. As public use of the Internet increases, as the demands of thepublic and the needs of our customers change and as the volume of onlineservices increases, we will need to increase our investment in our networkinfrastructure, facilities and other areas of operations. If we are unable tomanage our growth and expansion effectively, the quality of our services coulddeteriorate and our business may suffer. Our future success will depend on,among other things, our ability to:

 

•                  adapt ourservices and maintain and improve the quality of our services;

 

•                  protect our Website from hackers and unauthorized access;

 

•                  continuetraining, motivating and retaining our existing employees and attract andintegrate new employees; and

 

•                  develop andimprove our operational, financial, accounting and other internal systems andcontrols.

 

**RisksRelated To The Chinese Internet Portal Industry, The Internet and OurTechnology Infrastructure**

 

*We rely on our relationship withthe Ministry of Education in China to ensure the success of the Internet portalbusiness and ensure that we remain the exclusive operator of the Career ServiceCenters.*

 

Intac Purun currently has an exclusivearrangement with the EMIC to utilize their database of Chinese students.  We are also the sole operator of the CareerService Centers.  These Career ServiceCenters will provide Chinese students exclusively with a full-range of careerdevelopment services, which will assist these students in finding jobs andmanaging their careers.  Our businessplan relies on this exclusive arrangement to achieve our goal of building thelargest career service portal for Chinese students through this exclusiveresources and innovative technologies. This exclusive arrangement alsorepresents a significant barrier to entry for other potential competitors.

 

*We expect**to rely upon e-subscription revenues for a significant portion of our increases in revenues.*

 

We expect to derive a significant portion ofour revenues from e-subscription services on our Intac Purun’s Internet portalwww.joyba.com, and will rely on e-subscription revenues as the primary sourcefor future revenue increases.  We havein the past relied entirely on revenues from our distribution businesses, andwe anticipate that the revenue from our distribution business will continue toconstitute the majority of our revenue for the foreseeable future.  There can be no assurance that our Internetportal revenues will develop.

 

E-subscription revenue is derived principallyfrom providing job information subscription services. This service will providesubscribers with daily job information and open positions on their mobile phonethrough text messaging. Intac Purun’s sophisticated database software will havethe capability to match open positions with eligible candidates, who willreceive an individual entry code to Intac Purun ́s website where they will findthe individually offered job. In the future, the Internet portal will alsoprovide various paid services, including online career assessments and careerdevelopment counseling, to Chinese students. In addition, the Internet portalwill enable hiring companies to perform comprehensive background checks ontheir prospective employment candidates.

 

Pursuant to contractual arrangements we willseek between Intac Purun and a number of mobile network operators in Chinawhich are subsidiaries of China Mobile Communication Corporation (“CMCC”), andChina Unicom Co., Ltd, Intac Purun will likely rely on the operators for bothbilling of, and collection from, mobile phone users of e-subscription fees.These services fees are to be based on contracted rates.

 

With respect to our e-subscription services,we intend to use CMCC and Unicom. We rely on CMCC and Unicom in the followingways:

 

•                  we provide shortmessaging services through CMCC’s and Unicom’s network and gateway;

 

24

----

 

•                  we utilize andrely on CMCC and Unicom’s billing systems to charge our subscribers through thesubscriber’s mobile phone bill;

 

•                  we rely on theircollection proxy services to collect payments from subscribers; and

 

•                  we rely on theirinfrastructure to further develop our subscription services.

 

We face significant risks in the area ofe-subscription services, such as the following, which could adversely affectour e-subscription services and revenues:

 

•                  E-subscriptionservices are provided through our Web site and recorded in our internalsystems. However, in order to recognize revenue and get paid for servicesprovided, we rely on billing confirmations from CMCC and Unicom as to theactual amount of services they have billed to their mobile customers. We do notcollect e-subscription fees from an operator in certain circumstances due totechnical issues with the operator’s billing system. We refer to these failuresas an operator’s “billing failure rate,” which can vary from operator tooperator. An operator’s billing failure rate can vary from month to month andmay change at any time without notice. If an operator encounters technicalproblems, increases in the billing failure rate for that operator could occur.Billing failure rates may result in a significant reduction in oure-subscription revenues.

 

•                  While servicefees for using an operator’s infrastructure are set based on negotiations withthe operator, our negotiating power is limited and if an operator increases itsservice fees, our gross margins and profitability could be reduced.

 

•                  We rely on theoperators to pay us the e-subscriptions fees which they have billed to theirmobile customers. If an operator refuses to pay us or limits the amount ofe-subscriptions fees which can be billed in a month, our revenues could beadversely affected.

 

•                  An operatorcould launch competing services at any time.

 

•                  The refusal ofan operator to allow us to supply certain products or its refusal to allow us tocharge our desired prices for our products could disrupt our e-subscriptionservices.

 

•                  If CMCC orUnicom is unwilling to cooperate with us, we would not be able to findsubstitute partners.

 

•                  Growth andsustainability of our e-subscription revenues is dependent upon user acceptanceof our existing and new products. Because these products are new and untested,we do not have a clear understanding of consumer behavior, making it difficultto predict future growth.

 

•                  We face intensecompetition from a number of companies who may launch competing or betterproducts than us at any time. In addition, there are limited barriers to entryin this area.

 

 We also face the risk that changes in government policy could restrictor curtail the services which we provide.

 

*We will not be able to attractvisitors to our Internet portal products and services if we do not maintain anddevelop the Intac Purun brand.*

 

Developing our brand is critical to ourability to expand our user base and our revenues. We believe that theimportance of brand recognition will increase as the number of Internet usersin China grows. In order to attract and retain Internet users, we may need toincrease substantially our expenditures for creating and maintaining brandloyalty. If our revenues do not increase proportionately, our results ofoperations and liquidity will suffer.

 

Our success in promoting and enhancing ourbrand, as well as our ability to remain competitive, will also depend on oursuccess in offering high quality content, features and functionality. If wefail to promote our brand successfully or if students or companies that visitour portal do not perceive our content and services to be of high quality, wemay not be able to continue growing our business and attracting e-commercecustomers and users.

 

25

----

 

*If we fail to establish andmaintain relationships with the EMIC, content and technology providers andmobile network operators, we may not be able to attract and retain users.*

 

We rely on a number of third partyrelationships to attract traffic and provide content in order to make ourportal more attractive to users and advertisers.  The loss of these third party relationships could negativelyimpact our business.

 

Intac Purun currently has an exclusivearrangement with the EMIC to their database of Chinese students and we are alsothe sole operator of the Career Service Centers.  Without this relationship with the EMIC, we would lose access tothe exclusive database and our competition may seek to establish the samerelationship we have.

 

Content providers may increase the fees theycharge us for their content. Our operating expenses could therefore beadversely affected by our ability to obtain content at an economically acceptablecost. Most of our arrangements with content providers are short-term and may beterminated at the convenience of the other party. In addition, much of thethird party content provided to our portal is also available from other sourcesor may be provided to other Internet companies. If other Internet companiespresent the same or similar content in a superior manner, it would adverselyaffect our visitor traffic.

 

Substantially all of our subscription revenueis generated from providing a job information subscription service through textmessaging where we depend on mobile network operators for message delivery andpayment collection. If we were unable to continue this arrangement, our shortmessaging services would be severely disrupted.

 

Our business also depends significantly onrelationships with leading technology and infrastructure providers and thelicenses that the technology providers have granted to us. Our competitors mayseek to establish the same relationships as we have, which may adversely affectus. We may not be able to maintain these relationships or replace them oncommercially attractive terms and may adversely affect on our business andfinancial condition.

 

*We expect to rely on subscription,short messaging and e-commerce for a significant portion of our futurerevenues, but the Internet has not been proven as a widely accepted medium foradvertising, subscription, short messaging or e-commerce.*

 

We expect to derive a significant portion ofour revenue for the foreseeable future from online subscription, shortmessaging and e-commerce. If the Internet is not accepted as a medium forsubscription, short messaging or e-commerce, our ability to generate revenueswill be adversely affected.

 

*Many of our current and potentiale-commerce customers have only limited experience using the Internet forcommerce purposes, and may not be willing to fully embrace the products andservices we offer, which would adversely affect our future revenues andbusiness expansion.*

 

The online e-commerce markets are new andrapidly evolving, particularly in China. As a result, many of our current andpotential e-commerce customers have limited experience using the Internet forcommerce purposes and historically have not devoted a significant portion oftheir sales budgets to Internet-based e-commerce. Moreover, customers that haveinvested substantial resources in other methods of conducting business may bereluctant to adopt a new strategy that may limit or compete with their existingefforts. In addition, companies may choose not to list their job placements onour portal if they do not perceive our online e-commerce platform to beeffective or our audience demographics to be desirable. The failure tosuccessfully address these risks or execute our business strategy wouldsignificantly reduce our profitability.

 

*We face intense competition whichcould reduce our market share and adversely affect our financial performance.*

 

The PRC Internet market is characterized byan increasing number of entrants because, among other reasons, the barriers toentry are relatively low. The market for Internet services and products isintensely competitive. In addition, the Internet industry is relatively new andconstantly evolving and, as a result, our competitors may better positionthemselves to compete in this market as it matures.

 

There are many companies that provide or mayprovide Web sites and online destinations targeted at Internet users in China.Some of our major competitors in China are major United States Internet companies,such as Yahoo! Inc and Nasdaq listed companies Sohu.com, Sina.com and Netease.In addition, we may face competition from existing or new domestic PRC Internetcompanies that are either affiliated with large corporations such as LegendComputer, America Online and Softbank Corporation, or controlled or sponsoredby PRC government entities. These competitors may have certain advantages overus, including:

 

•                  substantiallygreater financial and technical resources;

 

•                  more extensiveand well developed marketing and sales networks;

 

26

----

 

•                  better access tooriginal content;

 

•                  greater globalbrand recognition among consumers; and

 

•                  larger customerbases.

 

With these advantages, our competitors may bebetter able to:

 

•                  develop, marketand sell their products and services;

 

•                  adapt morequickly to new and changing technologies; and

 

•                  more easilyobtain new customers.

 

We may not be able to compete successfullyagainst our current or future competitors.

 

*The telecommunicationsinfrastructure in China, which is not as well developed as in the UnitedStates, may limit our growth.*

 

The telecommunications infrastructure inChina is not well developed. Our growth will depend on the PRC government andstate-owned enterprises establishing and maintaining a reliable Internet andtelecommunications infrastructure to reach a broader base of Internet users inChina. The Internet infrastructure, standards, protocols and complementaryproducts, services and facilities necessary to support the demands associatedwith continued growth may not be developed on a timely basis or at all by thePRC government and state-owned enterprises.

 

*We depend on the mobile networksof all major telecommunication companies in China for telecommunicationsservices, and any interruption in these services may result in severedisruptions to our business.*

 

Although private Internet service providersexist in China, almost all access to the Internet is maintained throughChinaNet, currently owned by China Netcom and China Telecom, under theadministrative control and regulatory supervision of the MII. In addition,local networks connect to the Internet through a government-owned internationalgateway. This international gateway is the only channel through which adomestic Chinese user can connect to the international Internet network. Werely on this infrastructure and China Netcom and China Telecom to provide datacommunications capacity primarily through local telecommunications lines.Although the government has announced aggressive plans to develop the nationalinformation infrastructure, this infrastructure may not be developed and theInternet infrastructure in China may not be able to support the continuedgrowth of Internet usage. In addition, we will have no access to alternativenetworks and services, on a timely basis if at all, in the event of anyinfrastructure disruption or failure.

 

*Our financial condition or resultsof operations may be materially affected by the changes in policies or guidelinesof the mobile telecommunications operators.*

 

The mobile telecommunications operators inChina may, from time to time, issue certain operating policies or guidelines,requesting or stating its preference for certain actions to be taken by all wirelessvalue-added service providers using their platforms. Due to our reliance on themobile telecommunications operators, a significant change in their policies orguidelines may have a material effect on us. For example, a mobiletelecommunications operator may revise its billing policies to request wirelessvalue-added service providers to confirm the subscription status of those userswho have not been active for three months. Such change in policies orguidelines may result in lower revenues or additional operating costs for us,and we cannot assure you that our financial condition and results of operationwill not be materially adversely affected by any policy or guideline change bythe mobile telecommunications operators in the future.

 

*We may be subject to adverse actions for anybreach or perceived breach by us of the policies or guidelines imposed by themobile telecommunications operator with respect to content provided on orlinked through our websites.*

 

The mobile telecommunications operators in Chinamay impose policies or guidelines to govern or restrict the content provided byall wireless value-added service providers, including content developed by usor content supplied by others to us. The mobile telecommunications operatorsfrom time to time have requested wireless value-added services providers toremove objectionable content or links to or from websites with certaincategories of content, including content they may deem to be sexually explicit.We aggregate and develop content that we consider attractive to our targeteduser base, and we cannot assure you that the mobile telecommunicationsoperators will not from time to time find certain portions of our content to beobjectionable. In the case of a breach or perceived breach of such policies or

 

27

----

 

guidelines, the mobile telecommunicationsoperators may require us to reduce or curtail the content on our Internetportal, which may reduce our portal traffic, and the mobile telecommunications operatorsmay have the right to impose monetary fines upon us, or terminate ourcooperation with them. In addition, we would be liable to the mobiletelecommunications operators for their economic losses pursuant to ouragreements with these operators if we were found to be in breach of thepolicies or guidelines promulgated by them. As a result of the occurrence ofany of the above, our financial condition and results of operations may bematerially adversely affected.

 

*The relatively high cost of Internet accessin China may limit the growth of the Internet industry in China and impede ourgrowth.*

 

While the cost of Internet access in Chinahas decreased dramatically in recent years due to the decrease in the cost ofpersonal computers and laptops and the introduction and expansion of broadbandaccess in China, it remains relatively high in comparison to the average incomein China, which may make it less attractive for users to access, and transactbusiness, over the Internet. Any fee or tariff increase could further decreaseour user traffic and our ability to derive revenues from transactions over theInternet, which could have a material adverse effect on our business, financialcondition and results of operations.

 

*The acceptance of the Internet asa commerce platform in China depends on the resolution of problems relating tofulfillment and electronic payment.*

 

Our future growth of revenues depends in parton the anticipated expansion of e-commerce activities in China. As Chinacurrently does not have a reliable nationwide product distribution network, thefulfillment of goods purchased over the Internet will continue to be a factorconstraining the growth of e-commerce. An additional barrier to the developmentof e-commerce in China is the lack of reliable payment systems. In particular,the use of credit cards or other viable means of electronic payment in salestransactions is not as well developed in China as in some other countries, suchas the United States. Various government entities and businesses are working toresolve these fulfillment and payment problems, but these problems are expectedto continue to hinder the acceptance and growth of the Internet as a commerceplatform in China, which could in turn hinder our growth.

 

*To the extent we are unable toscale our systems to meet the increasing PRC Internet population, we will beunable to expand our user base and increase our attractiveness to graduates andcompanies.*

 

As Web page volume and traffic increase inChina, we may not be able to scale our systems proportionately. To the extentwe do not successfully address our capacity constraints, our operations may beseverely disrupted, and we may not be able to expand our user base and increaseour attractiveness to graduates and companies.

 

*Unexpected network interruptionscaused by system failures may result in reduced visitor traffic, reducedrevenue and harm to our reputation.*

 

Our portal operations are dependent upon Webbrowsers, Internet service providers, content providers and other Web siteoperators in China, which have experienced significant system failures andsystem outages in the past. Any system failure or inadequacy that causesinterruptions in the availability of our services, or increases the responsetime of our services, as a result of increased traffic or otherwise, couldreduce our user satisfaction, future traffic and our attractiveness to usersand advertisers.

 

*Our operations are vulnerable tonatural disasters and other events, as we only have limited backup systems anddo not maintain any backup servers outside of China.*

 

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 and routers arecurrently hosted in a single location. We do not maintain any back up servers outside of Beijing. We do nothave a disaster recovery plan in the event of damage from fire, floods,typhoons, earthquakes, power loss, telecommunications failures, break-ins andsimilar events. If any of the foregoing occurs, we may experience a completesystem shutdown. We do not carry any business interruption insurance. Toimprove the performance and to prevent disruption of our services, we may haveto make substantial investments to deploy additional servers or one or morecopies of our Web sites to mirror our online resources. Although we carryproperty insurance with low coverage limits, our coverage may not be adequateto compensate us for all losses, particularly with respect to loss of businessand reputation that may occur.

 

28

----

 

*Concerns about security ofe-commerce transactions and confidentiality of information on the Internet mayincrease our costs, reduce the use of our portal and impede our growth.*

 

A significant barrier to e-commerce andconfidential communications over the Internet has been the need for security.Internet usage could decline if any well-publicized compromise of securityoccurred. We may incur significant costs to protect against the threat ofsecurity breaches or to alleviate problems caused by these breaches. Ifunauthorized persons are able to penetrate our network security, they couldmisappropriate proprietary information or cause interruptions in our services.As a result, we may be required to expend capital and resources to protectagainst or to alleviate these problems.

 

*Our network operations may bevulnerable to hacking, viruses and other disruptions, which may make ourproducts and services less attractive and reliable.*

 

Internet usage could decline if anywell-publicized compromise of security occurs. “Hacking” involves efforts togain 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 misappropriate proprietaryinformation or cause disruptions in our service. We may be required to expendcapital and other resources to protect our Web site against hackers. We cannotassure you that any measures we may take will be effective. In addition, theinadvertent transmission of computer viruses could expose us to a material riskof loss or litigation and possible liability, as well as materially damage ourreputation and decrease our user traffic.

 

*Unauthorized use of ourintellectual property by third parties, and the expenses incurred in protectingour 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 parties mayadversely affect our business and reputation. We rely on trademark andcopyright law, trade secret protection and confidentiality agreements with ouremployees, customers, business partners and others to protect our intellectualproperty rights. Despite our precautions, it may be possible for third partiesto obtain and use our intellectual property without authorization. Furthermore,the validity, enforceability and scope of protection of intellectual propertyin Internet-related industries is uncertain and still evolving. In particular,the laws of the PRC and certain other countries are uncertain or do not protectintellectual property rights to the same extent as do the laws of the UnitedStates. Moreover, litigation may be necessary in the future to enforce ourintellectual property rights, to protect our trade secrets or to determine thevalidity and scope of the proprietary rights of others. Future litigation couldresult in substantial costs and diversion of resources.

 

*We may be subject to intellectualproperty infringement claims, which may force us to incur substantial legalexpenses and, if determined adversely against us, materially disrupt ourbusiness.*

 

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 future besubject to legal proceedings and claims from time to time relating to theintellectual property of others in the ordinary course of our business. Inparticular, if we are found to have violated the intellectual property rightsof others, we may be enjoined from using such intellectual property, and we mayincur licensing 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 against us mayresult in substantial monetary liability or may materially disrupt the conductof our business.

 

*Regulation and censorship ofinformation distribution over the Internet in China may adversely affect ourbusiness, and we may be liable for information displayed on, retrieved from, orlinked to our Internet portal.*

 

In recent years, the PRC government hasadopted certain regulations governing Internet access and the distribution ofnews and other information over the Internet. Under those regulations, ICPs andInternet publishers are prohibited from posting or displaying over the Internetcontent that opposes the fundamental principles in PRC’s Constitution;compromises state security, divulges state secrets, subverts state power ordamages national unity; harms the dignity or interests of the state; incitesethnic hatred or racial discrimination or damages inter-ethnic unity; sabotagesPRC’s religious policy or propagates heretical teachings or feudalsuperstitions; disseminates rumors, disturbs social order or disrupts socialstability; propagates obscenity, pornography, gambling, violence, murder orfear or incites the commission of crimes; insults or slanders a third party orinfringes upon the lawful rights and interests of a third party; or includesother content prohibited by laws or administrative regulations. Failure tocomply with those requirements may result in the revocation of ICP licenses andthe closing down of the concerned websites. In the past, failure to comply withthose requirements have resulted in the closing down of certain concernedwebsites. The website operator may also be held liable for such censoredinformation displayed on, retrieved from or linked to such website.

 

29

----

 

In addition, the MII has publishedregulations that subject website operators to potential liability for contentincluded on their websites and the actions of users and others using theirsystems, including liability for violations of PRC laws prohibiting the distributionof content deemed to be socially destabilizing. PRC’s Ministry of PublicSecurity has the authority to order any local Internet service provider, orISP, to block any Internet website maintained outside China at its solediscretion. Periodically, the Ministry of Public Security has stopped thedistribution over the Internet of information which it believes to be sociallydestabilizing. PRC’s State Secrecy Bureau, which is directly responsible forthe protection of State secrets of the PRC government, is authorized to blockany website it deems to be leaking State secrets or failing to meet therelevant regulations relating to the protection of State secrets in thedistribution of online information.

 

As these regulations are relatively new andsubject to interpretation by the relevant authorities, it may not be possiblefor us to determine in all cases the type of content that could result inliability for us as a website operator. In addition, we may not be able tocontrol or restrict the content of other ICPs that are linked to or accessiblethrough our websites, or content generated or placed on our websites by ourusers, despite our attempt to monitor such content. To the extent thatregulatory authorities find any portion of our content to be objectionable,they may require us to limit or eliminate the distribution of such informationor otherwise curtail the nature of such content on our websites, which mayreduce our user traffic and have a material adverse effect on our financialcondition and results of operations. In addition, we may be subject tosignificant penalties for violations of those regulations arising frominformation displayed on, retrieved from or linked to, our websites, includinga suspension or shutdown of our operations.

 

*The laws and regulations governing the Internet industry inChina are developing and subject to future changes, and substantialuncertainties exist as to the interpretation and implementation of those lawsand regulations.*

 

In recent years the PRC government has begunto enact laws and regulations applicable to Internet-related services andactivities, many of which are relatively new and untested and subject to futurechanges. In addition, various regulatory authorities of the central PRCgovernment, such as the State Council, the MII, the State Administration ofIndustry and Commerce, or SAIC, the State News and Publication Administration,or SNPA, and the Ministry of Public Security, are empowered to issue andimplement regulations to regulate certain aspects of Internet-related servicesand activities. Furthermore, some local governments have also promulgated localrules applicable to Internet companies operating within their respectivejurisdictions. As the Internet industry itself is at an early stage of developmentin China, there will likely be new laws and regulations adopted in the futureto address issues that arise from time to time. As a result of the foregoing,substantial uncertainties exist regarding the interpretation and implementationof current and future PRC Internet laws and regulations. While we believe weare in compliance with all applicable PRC laws and regulations currently ineffect, we cannot assure you that we will not be found in violation of anycurrent or future PRC laws and regulations due to these substantialuncertainties.

 

*If we are not able to respond successfully totechnological or industry developments, our business may be materiallyadversely affected.*

 

Thetelecommunications market is characterized by rapid advancements in technology,evolving industry standards and changes in customer needs. New services ortechnologies may render our existing services or technologies less competitiveor obsolete. Responding and adapting to technological developments and standardchanges in our industry, the integration of new technologies or industrystandards or the upgrading of our networks may require substantial time, effortand capital investment. In the event that we are unable to respond successfullyto technological industry developments, this may materially adversely affectour business, results of operations and competitiveness.

 

**Risks Related To The Distribution Industry**

 

*Our efficient distribution business model maynot be successful which could result in the need to quickly change our growthstrategy or business plan.*

 

Our “efficientdistribution” business model is premised upon our ability to acquire inventoryin bulk at competitive prices and quickly resell the products into othergeographic markets. Our distribution segment is a pure distribution business,and we do not currently offer any additional services or product enhancementsto accompany the sale of our inventory. To the extent that customer preferencesdictate that additional services or product enhancements are required tosuccessfully compete in the wireless products industry, we may be forced toquickly change our distribution business plan. While we attempt to distinguishourselves based upon price and our ability to adapt to changes in markettrends, many of our competitors couple their distribution of wirelesscommunications products with product enhancements and services.

 

30

----

 

*We are a small player in a highly competitiveenvironment.*

 

We competewith numerous well-established companies, many, if not most, of which arelarger and have greater capital and management resources than we do. In certainmarkets, we face competition from manufacturers of products that we resell andfrom our own suppliers. We compete primarily on the basis of price, inventoryavailability, delivery time and our customer relationships. To the extent ourcompetitors market the same or similar products and have superior financialresources, those competitors will be better able to withstand substantial pricecompetition and to implement extensive promotional programs. We expect pricecompetition to increase in the future. Because of this intense competition,wholesale distributors, including our Company, generally operate with low grossmargins. Our ability to remain competitive will be largely dependent on ourability to control costs and protect profit margins, and to anticipate andrespond to various factors affecting the industry. These factors include newproduct introductions; changes in consumer preferences, demographic trends,international, national, regional and local economic conditions; and discountpricing strategies implemented by competitors. In addition, our business plancould be adversely affected if product manufacturers elect to market wirelessproducts directly to consumers rather than through distribution networks. Thetrend for direct sales by manufacturers to end-users has accelerated in theEuropean Union, therefore reducing the margins and business opportunities forcompanies like ours that resell a manufacturer’s products. In addition, we facecompetition from network operators that discount the price of wirelesscommunications products in connection with promotional efforts to sell wirelesscommunications services. No assurance can be given that we will competesuccessfully in the wholesale distribution market, particularly as we enterinto new international markets.

 

*We do not have any definitive customercontracts for the refurbished wireless handsets promised by the T-Mobile agreement,which renders our distribution channel particularly unstable.*

 

We do not haveany definitive agreements with our customers for delivery of refurbishedwireless handsets, and instead we will sell our inventory at sales prices thatfluctuate frequently.  Accordingly, ourcustomers are not contractually obligated to buy from us in the future, whichmight require us to sell such products at below market prices.

 

*We are dependent on a single supplier and donot maintain sufficient redundant sources of supply at this time.*

 

We havehistorically purchased substantially all of the handsets resold by us from onlya few wholesalers. In 2003, we purchased 83.8% of our wireless handset fromDeutsche Telekom.  Although we intend toseek out and obtain additional sources of supply in the near future, we do notcurrently have any commitments of supply for any new premium wireless handsets.Accordingly, we are currently dependent on our existing few suppliers, and inparticular Deutsche Telekom, to provide us with adequate inventories. To theextent that any manufacturers or distributors to 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. Any decrease in our number ofsuppliers, or in the terms available from them, could cause us to purchaseinventory at higher prices.  Anydetermination by Deutsche Telekom not to supply us with handsets in the futurecould have a adverse affect on our business.

 

*Our three largest customers represent amajority of our distribution business and our success depends, in significantpart, on our ability to retain them as customers.*

 

Our largestcustomers represent a majority of our distribution business. For the year endedDecember 31, 2003, our three largest customers represented 77.8% of ourbusiness, with our largest customer Mr. Lam representing 68.6% of our sales. Wedo not maintain contracts with these or any other of our customers. If any oneor more of these customers were to reduce or stop purchasing products from usprior to the time that we were able to obtain significant additional customers,our business, operating results and financial condition would be materiallyadversely affected. We cannot assure you that any of our principal customerswill be customers of ours in future periods.

 

*We are subject to risks of customersdefaulting on payments due.*

 

We generallyreceive payment from our customers within a few days of the customer receivingand inspecting the product.  Inaddition, we generally require a deposit by the customer; however, in somecases, we will give minimal credit terms to customers for the balanceoutstanding if they have an established and good payment history with us.  However, we remain susceptible to companiesthat do not pay their outstanding balances due, for reasons beyond our control.

 

31

----

 

*Our three largest suppliers represent a majorityof our purchases and our success depends, in significant part, on our abilityto maintain them as suppliers.*

 

Our largestsuppliers represent a majority of our purchases. For the year ended December31, 2003, our three largest suppliers of wireless handsets accounted forapproximately 89.2% of our product purchases. At present, we seek to concentrate purchases with selected suppliers toensure access to high-quality products on advantageous terms; although, webelieve we will need redundant sources of supply in the future. Because productavailability is unpredictable, a strong base of vendor relationships will beimportant to our success. We maintain ongoing contact through telephone callswith our vendors to learn when products will become available, at what pricesproduct is moving and which model numbers are the most sought after byconsumers. Loss of our ability to purchase product from these suppliers, or thefailure by these or other suppliers to supply competitive products on a timelybasis and on favorable terms, or at all, would have a material adverse effecton our business and operations.

 

*We do not have any vendor or customercontracts for new premium wireless handsets, which renders our supply anddistribution channels particularly unstable.*

 

We do not haveany long-term agreements with our suppliers of new premium handsets, andinstead we acquire our inventory pursuant to purchase orders at prices thatfluctuate frequently. In addition, we resell our inventory to various retailand wholesale distributors based upon purchase orders at varying prices, and wedo not have any long-term contracts with any of our customers. Accordingly, oursuppliers are not contractually obligated to sell to us in the future, and ourcustomers are not contractually obligated to buy from us in the future.

 

*Our distribution business operates on alow-margin basis, and our margins may be reduced in the future.*

 

Ourdistribution business operates on a high-volume, low-margin basis. Our abilityto generate sales is based upon our having an adequate supply of products. Thegross margins that we realize on sales of wireless handsets could be reduceddue to increased competition or a growing industry emphasis on costcontainment. In addition, we expect our operating expenses to increasesignificantly as we expand into new geographic markets and incur additionalpersonnel, legal, accounting and other costs associated with operating as apublic company. Therefore, our future profitability will depend on our abilityto increase sales to cover our additional expenses. We may not be able tosubstantially increase sales rates. Even if our sales rates do increase, thegross margins that we receive from our sales may not be sufficient to make ourfuture operations profitable.

 

*We are subject to risks of inventory pricedeclines and obsolescence.*

 

We purchaseinventory at prices that fluctuate regularly, sometimes daily, based uponmarket conditions. Although we typically locate a buyer for all or some portionof a supply order prior to effecting a purchase from our suppliers, wenecessarily assume inventory, price erosion and obsolescence risks for allunsold or unallocated products. These risks are especially significant withwireless telephone products because they generally are characterized by rapidtechnological change and obsolescence which affects customer demand. Oursuccess will depend on our ability to purchase inventory at attractive pricesrelative to its resale value and our ability to turn our inventory rapidly throughsales. Our initial operations have focused primarily on wholesale distributionnetworks, which generally have a shorter inventory cycle than retail sales. Ifwe pay too much or hold inventory too long, we may be forced to sell ourinventory at a discount or at a loss or write down its value.

 

*If we experience problems in our distributionoperations, we could lose customers.*

 

In addition toinventory suppliers, we depend on several other third parties over whom we havelimited control, including, in particular, freight forwarding companies andcommon carriers. We have no long-term relationships with any of these parties.We are, therefore, subject to risks, including risks of employee strikes andinclement weather, which could result in failures by such parties to provideservices to us in a timely manner, which could damage our reputation and have amaterial adverse effect on our financial condition and results of operations.

 

*New technologies may reduce the demand forour products.*

 

The technologyrelating to wireless handsets changes rapidly, and industry standards areconstantly evolving, resulting in product obsolescence and short product lifecycles. If other companies develop and commercialize new technologies orproducts in related market segments that compete with existing wirelesstechnologies, it could materially change the types of products that we may berequired to offer or result in significant price competition. Notwithstandingour efficient distribution strategy, product obsolescence could result insignificantly increased inventories of our unsold

 

32

----

 

products.Furthermore, if we elect to stock our inventories in the future with any ofthese technologies and products, we will run the risk that our existingcustomers and consumers may not be willing, for financial or other reasons, topurchase new equipment necessary to utilize these new technologies. There is noassurance that new technologies will not reduce the demand for our products.

 

*We may become subject to suits allegingmedical risks associated with our wireless handsets.*

 

Lawsuits orclaims have been filed or made against manufacturers of wireless handsets overthe past years alleging possible medical risks, including brain cancer, associatedwith the electromagnetic fields emitted by wireless communications handsets.There has been only limited relevant research in this area, and this researchhas not been conclusive as to what effects, if any, exposure to electromagneticfields emitted by wireless handsets has on human cells. Substantially all ofour revenues 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 find possiblehealth risks associated with the use of wireless handsets or if any damagesclaim against us is successful, it would likely have a material adverse effecton our business. Even an unsubstantiated perception that health risks existcould adversely affect our ability or the ability of our customers to marketwireless handsets.

 

**Risks Attributable To InternationalOperations**

 

*PRC Internet laws and regulationsare unclear and will likely change in the near future. If we are found to be inviolation of current or future PRC laws or regulations, we could be subject tosevere penalties.*

 

In order tomeet ownership requirements under PRC law which restrict or prohibit INTAC fromoperating in certain industries such as Internet content providers, INTAC madeloans to two China nationals, Miss Zhang Wanqin and Miss Li Min.  Miss Zhang and Miss Li are the equity ownersof Tianjin Weilian, a company incorporated in the PRC.  These loans were made to finance Miss Zhangand Miss Li, on behalf of the Company, for the purpose of establishing TianjinWeilian which initially directly owned the 45% interest in Intac Purun.  Tianjin Weilian pledged as collateral the45% ownership of Intac Purun against these loans from INTAC.  Furthermore Tianjin Weilian assigned alloperating rights, title and interest they had in Intac Purun to INTAC includingall interest held, all rights to capital accounts, distributions and/orallocations of cash property and income, and all rights to participate inmanagement and to vote with regard to affairs relating to the company.  We believe this indirect ownership conceptis common for public Internet portals in China.  In March 2004, Intac Purun obtained the necessary licenses whichallowed INTAC to own directly the 45% share currently held by Tianjin Weilianunder PRC law.  As a result, the 45%interest owned by Miss Zhang and Miss Li was transferred to INTAC in fullsettlement of the loan.

 

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. Thereare, however, substantial uncertainties regarding the interpretation of currentPRC Internet laws and regulations. Accordingly, it is possible that the PRCgovernment will ultimately take a view contrary to ours.

 

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

 

•                  The PRC enactedregulations applying to Internet-related services and telecom-related activities.While many aspects of these regulations remain unclear, they purport to limitand require licensing of various aspects of the provision of Internetinformation services. If these regulations are interpreted to be inconsistentwith our restructuring, our business will be severely impaired.

 

•                  Under theagreement reached in November 1999 between the PRC and the United Statesconcerning the United States’ support of China’s entry into the World TradeOrganization, or WTO, foreign investment in PRC Internet services will beliberalized to allow for 30% foreign ownership in key telecommunicationservices, including PRC Internet ventures, for the first year after China’sentry into the WTO, 49% in the second year and 50% thereafter. China officiallyentered the WTO on December 11, 2001. However, the implementation of China’sWTO accession agreements is still subject to various conditions.

 

•                  The MII has alsostated that the activities of Internet content providers are subject toregulation by various PRC government authorities, depending on the specificactivities conducted by the Internet content provider. Various governmentauthorities have stated publicly that they are in the process of preparing newlaws and regulations that will govern these activities. The areas of regulationcurrently include online advertising, online news

 

33

----

 

reporting,online publishing, online securities trading and the provision ofindustry-specific (e.g., drug-related) information over the Internet. Otheraspects of our online operations may be subject to regulation in the future.

 

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 the relevantPRC authorities could, at any time, assert that any portion or all of our orTianjin Weilian’s existing or future ownership structure and business violateexisting or future PRC laws, regulations or policies. It is also possible thatthe new laws or regulations governing the PRC Internet sector that have beenadopted or may be adopted in the future will prohibit or restrict foreigninvestment in, or other aspects of, any of our proposed businesses andoperations. In addition, these new laws and regulations may be retroactivelyapplied 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:

 

•                  levying fines;

 

•                  confiscating ourincome;

 

•                  revoking ourbusiness license;

 

•                  shutting downour servers and/or blocking our Web sites;

 

•                  requiring us torestructure our ownership structure or operations; and

 

•                  requiring us todiscontinue any portion or all of our Internet business.

 

Any of theseactions could have a material adverse effect on our financial condition andresults of operations.

 

*We have attempted to comply with restrictionson foreign investment in the PRC Internet sector imposed by the PRC governmentby entering into agreements with Tianjin Weilian, which was an investmentholding company holding 45% equity interest of Intac Purun. If the PRCgovernment finds that these agreements do not comply with the relevant foreigninvestment restrictions, our business in the PRC will be adversely affected.*

 

During theyear, the Company made loans of $1,233,000 and $123,000 to Miss Zhang and MissLi respectively.  Miss Zhang and Miss Liare the equity investors of Tianjin Weilian. These loans were made to finance Miss Zhang and Miss Li, on behalf ofthe Company, for the purpose to establish Tianjin Weilian.  When the procedures to establish TianjinWeilian and Intac Purun are completed in 2004, these receivable balances willbe converted to a long term investment of the Company.

 

The legaluncertainties associated with PRC government regulations and our restructuringmay be summarized as follows:

 

•                  whether the PRCgovernment may view our structure as being in compliance with its laws andregulations;

 

•                  whether the PRCgovernment may impose additional regulatory requirements with which we may notbe in compliance; and

 

•                  whether the PRCgovernment will permit INTAC or Intac Purun to obtain current license 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 incompliance with applicable PRC laws and regulations. Our business will bematerially adversely affected if our business license is revoked as a result ofnon-compliance. In addition, we cannot be sure that we will be able to obtainall of the licenses we may need in the future. Future changes in PRC governmentpolicies affecting the provision of information services, including the provisionof online services and Internet access, may impose additional regulatoryrequirements on us or our service providers or otherwise harm our business.

 

34

----

 

*The PRC government may prevent usfrom distributing, and we may be subject to liability for, content that itbelieves is inappropriate.*

 

The PRC has enacted regulations governingInternet access and the distribution of news and other information. In thepast, the PRC government has stopped the distribution of information over theInternet that it believes to violate PRC law, including content that isobscene, incites violence, endangers national security, is contrary to thenational interest or is defamatory. In addition, you may not publish certain newsitems, such as news relating to national security, without permission from thePRC government. Furthermore, the Ministry of Public Security has the authorityto cause any local Internet service provider to block any Web site maintainedoutside the PRC at its sole discretion. Even if we comply with PRC governmentalregulations relating to licensing and foreign investment prohibitions, if thePRC government were to take any action to limit or prohibit the distribution ofinformation through our network or to limit or regulate any current or futurecontent or services available to users on our network, our business would beharmed.

 

We are also subject to potential liabilityfor content on our Web sites that is deemed inappropriate and for any unlawfulactions of our subscribers and other users of our systems under regulationspromulgated by the MII.

 

Furthermore, we are required to deletecontent that clearly violates the laws of the PRC and report content that wesuspect may violate PRC law. It is difficult to determine the type of contentthat may result in liability for us, and if we are wrong, we may be preventedfrom operating our Web sites.

 

*Our international operations subject us toother significant risks.*

 

Ourinternational operations expose us to a wide variety of other risks includingincreased credit risks, customs duties, import quotas and other traderestrictions, potentially greater inflationary pressures, shipping delays, therisk of failure or material interruption of wireless systems and services,possible wireless product supply interruption and potentially significantincreases in wireless product prices. Changes may occur in foreign trade andinvestment laws in the territories and countries where we operate. U.S. lawsand regulations relating to investment and trade in foreign countries couldalso change to our detriment. Any of these factors could materially andadversely affect our revenues and profits. We are subject to risk of politicalinstability and trade sanctions within China.

 

China hastraditionally been a closed market with strict political controls. As Chinashifts to a market economy, growing economic and social freedoms may conflictwith the more restrictive political and governmental policies. In addition,democratic countries throughout the world have, from time to time, attempted touse economic and other sanctions to achieve political or social change in othercountries. In addition, the Chinese government has continuously failed torecognize the independence of Taiwan and, from time to time, has threatenedmilitary action in the region when Taiwanese independence has been asserted.Each of these factors could result in economic sanctions, economic instability,the disruption of trading and war within China and the Asia-Pacific Rim, any ofwhich could result in our inability to conduct business operations in China.Because a substantial majority of our business is currently within China, thedisruption of distribution channels into China would have a material andadverse consequence to us.

 

Further risksrelating to international operations include, but are not restricted to,unexpected changes in legal and regulatory requirements, changes in tariffs,exchange rates and other barriers, political and economic instability, possibleeffects of war and acts of terrorism, difficulties in account receivablecollection, difficulties in managing distributors or representatives,difficulties in staffing and managing international operations, difficulties inprotecting the Company’s intellectual property overseas, seasonality of salesand potentially adverse tax consequences. Any of these factors could materiallyand adversely affect our revenues and profits.

 

*Any future outbreak of SARS or any otherepidemic in China may have a material adverse effect on our businessoperations, financial condition and results of operations.*

 

During 2003,China and certain other countries experienced an outbreak of a new and highlycontagious form of atypical pneumonia now known as SARS. On July 5, 2003, theWorld Health Organization declared that SARS had been contained. However, inrecent months, a few new cases of SARS have been reported in Asia since theinitial outbreak of SARS was declared contained on July 5, 2003. While theoutbreak of SARS or any other epidemic may have increased the usage of theInternet, an outbreak in the future may disrupt our business operations andhave a material adverse effect on our financial condition and results ofoperations. For instance, a new outbreak of SARS or any other epidemic mayreduce the level of economic activity in affected areas, which may lead to areduction in the number of company employment opportunities. In addition,health or other government regulations may require temporary closure of ouroffices, or the offices of our advertisers, content providers or partners,which will severely disrupt our business operations and have a material adverseeffect on our financial condition and results of operations. Though we tooksome emergency measures during the SARS outbreak in 2003, we have not adoptedany written preventive measures or

 

35

----

 

contingencyplans to combat any future outbreak of SARS or any other epidemic.

 

**Political,Economic and Regulatory Risks**

 

*Restrictions on currency exchangemay limit our ability to utilize our revenues effectively.*

 

Some of our revenues and operating expensesare denominated in Renminbi.  Currently,we may purchase foreign exchange for settlement of “current account transactions,”including payment of dividends, without the approval of the StateAdministration for Foreign Exchange, or SAFE. We may also retain foreignexchange in our current account (subject to a ceiling approved by the SAFE) tosatisfy foreign exchange liabilities or to pay dividends. However, the relevantPRC governmental authorities may limit or eliminate our ability to purchase andretain foreign currencies in the future.

 

Since a significant amount of our futurerevenues will be in the form of Renminbi, the existing and any futurerestrictions on currency exchange may limit our ability to utilize revenuegenerated in Renminbi to fund our business activities outside China, if any, orexpenditures denominated in foreign currencies.

 

*We are subject to risks of currencyfluctuations and exchange restrictions.*

 

Currencyfluctuations, devaluations and exchange restrictions may adversely affect ourliquidity and results of operations. A substantial portion of our businesscurrently involves the purchase of wireless telephones in Europe for resale inthe Asia-Pacific Rim. We attempt to manage the risk of foreign currencydevaluation by holding wireless telephone products that are not allocated to aparticular customer in inventory for a short time (typically less than 30 days)and by requiring our customers to pay cash (in local currency) for the fullprice of an order upon delivery. However, our inventory cycle for ourautomobile distribution segment is expected to increase to 60 days. To theextent that our inventory cycle increases, the risks of currency fluctuationsdecreasing our gross margins on sales of our products will increase. Inaddition, in some countries, local currencies may not be readily converted intoEuros or U.S. dollars (or other “hard currencies”) or may only be converted atgovernment-controlled rates, and, in some countries, the transfer of hardcurrencies offshore has been restricted from time to time. Very limited hedgingtransactions are available in China to reduce our exposure to exchange ratefluctuations. To date, we have not entered into any hedging transactions in aneffort to reduce our exposure to foreign currency exchange risk. While we maydecide to enter into hedging transactions in the future, the availability andeffectiveness of these hedges may be limited and we may not be able tosuccessfully hedge our exposure, if at all. In addition, our currency exchangelosses may be magnified by PRC exchange control regulations that restrict ourability to convert Renminbi into U.S. Dollars.

 

*Regulation and censorship ofinformation distribution in China may adversely affect 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 has publishedimplementing regulations that subject online information providers to potentialliability for content included on their portals and the actions of subscribersand others using their systems, including liability for violation of PRC lawsprohibiting the distribution of content deemed to be socially destabilizing.Because many PRC laws, regulations and legal requirements with regard to theInternet are relatively new and untested, their interpretation and enforcementmay involve significant uncertainty. In addition, the PRC legal system is acivil law system in which decided legal cases have limited binding force aslegal precedents. As a result, in many cases it is difficult to determine thetype of content that may result in liability for a Web site operator.

 

Periodically, the Ministry of Public Securityhas stopped the distribution over the Internet of information which it believesto be socially destabilizing. The Ministry of Public Security has the authorityto cause any local Internet service provider to block any Web site maintainedoutside China at its sole discretion. If the PRC government were to take actionto limit or eliminate the distribution of information through our portal or tolimit or regulate current or future applications available to users of ourportal, our business would be affected.

 

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 Web site itdeems to 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 for anycontent transmitted on our portal. Furthermore, where the transmitted contentclearly violates the laws of the PRC, we will be required to delete it.Moreover, where the transmitted content is considered suspicious, we arerequired to report such content. We must also undergo computer securityinspections, and if we fail to implement the relevant safeguards againstsecurity breaches, we may be shut down.

 

36

----

 

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

 

A significant portion our business, assetsand operations are located in China and a significant portion of our currentand future revenues are derived from our operations in China. Accordingly, ourbusiness could be adversely affected by changes in political, economic orsocial conditions in China, adjustments in PRC government policies or changesin 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 of governmentinvolvement;

 

•                  level ofdevelopment;

 

•                  level of capitalreinvestment;

 

•                  growth rate;

 

•                  control offoreign exchange; and

 

•                  methods ofallocating resources.

 

Since 1949, China has been primarily aplanned economy subject to a system of macroeconomic management. Although theChinese government still owns a significant portion of the productive assets inChina, economic reform policies since the late 1970s have emphasizeddecentralization, autonomous enterprises and the utilization of market mechanisms.We cannot predict what effects the economic reform and macroeconomic measuresadopted by the Chinese government may have on our business or results ofoperations.

 

*The PRC legal system embodiesuncertainties which could limit the legal protections available to us and you.*

 

The PRC legal system is a civil law systembased on written statutes. Unlike common law systems, it is a system in whichdecided legal cases have little precedential value. In 1979, the PRC governmentbegan to promulgate a comprehensive system of laws and regulations governingeconomic matters in general. We are subject to laws and regulations applicableto foreign investment in mainland China. However, these laws, regulations andlegal requirements are relatively recent, and their interpretation andenforcement involve uncertainties. These uncertainties could limit the legalprotections available to us and other foreign investors. In addition, we cannotpredict the effect of future developments in the PRC legal system, particularlywith regard to the Internet, including the promulgation of new laws, changes toexisting laws or the interpretation or enforcement thereof, or the preemptionof local regulations by national laws.

 

*It may be difficult to enforce anycivil judgments against us or our board of directors or officers, because mostof our assets are located outside of the United States.*

 

Although we are incorporated in the State ofNevada, substantially all of our assets are located in the PRC. As a result, itmay be difficult for investors to enforce outside the United States any actionsbrought against us in the United States, including actions predicated upon thecivil liability provisions of the federal securities laws of the United Statesor of the securities laws of any state of the United States. In addition,certain of our directors and officers and all or a substantial portion of theirassets may be located outside the United States (principally in the PRC). As aresult, it may not be possible for investors to effect service of processwithin the United States upon those directors and officers, or to enforceagainst them or us judgments obtained in United States courts, includingjudgments predicated upon the civil liability provisions of the federalsecurities laws of the United States or of the securities laws of any state ofthe United States.  There is doubt as tothe enforceability in the PRC, in original actions or in actions forenforcement of judgments of United States courts, of civil liabilitiespredicated solely upon the federal securities laws of the United States or thesecurities laws of any state of the United States.

 

37

----

 

**RisksRelated to the Market for Our Common Stock**

 

*Because of factors unique to usand our forecast of anticipated financial performance, the market price of ourcommon stock is likely to be particularly volatile. The market price of ourcommon stock has been and will likely continue to be volatile.*

 

Because of themanner in which we became a public company, the relatively small number ofshares available for resale on the Nasdaq SmallCap Stock Market, the earlystage of our business and numerous other factors, the trading price of ourcommon stock has been volatile, and is likely to continue to be so.  In addition, the Nasdaq Stock Market hasfrom time to time experienced significant price and volume fluctuations thathave affected the market prices for the securities of technology companies,particularly Internet companies. In addition, actual or anticipated variationsin our quarterly operating results; the introduction of new services, productsor technologies by our suppliers or our competitors; changes in conditions ortrends in the wireless telecommunications industry; changes in governmental regulation;or changes in securities analysts’ estimates of our future performance or thatof our competitors or our industry in general, all could 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 shares may experience a decrease in thevalue of their shares regardless of our operating performance orprospects.  Investors should notconsider acquiring our common stock to the extent they are unable to absorb acomplete loss of their investment.

 

*We are controlled by**Wei Zhou, our Chief Executive Officer.*

 

Wei Zhou, our Chief Executive Officer,beneficially owns approximately 59.2% of the outstanding shares of our commonstock and is our largest stockholder. Accordingly, he may control the outcome of any corporate transaction orother matter submitted to the stockholders for approval, including mergers,consolidations and the sale of all or substantially all of our assets, electionof directors and other significant corporate actions. He can also exercisecontrol in preventing or causing a change in control. In addition, without hisconsent, we could be prevented from entering into transactions that could bebeneficial to us.

 

**OUR PRODUCTS AND SERVICES**

 

**Internet Portal Segment**

 

***Job information subscription service:***  In the first half of 2004, Intac Purun plansto launch its first paid career service to Chinese students, a job informationsubscription service.  Once a studentsubscribes to this service, we will send daily job information to thesubscriber via text messages on their mobile phone.  The information includes job opportunities tailored towards thesubscriber’s particular interests and background, interview tips, and careerdevelopment advice.  The subscriber ischarged a subscription fee for this service.

 

As the Chinesejob market becomes more competitive, many college students are ill prepared forthe market.  Not only do they lackaccess to information on job opportunities, but also they have little idea ofhow to compete in the job market.  Thisjob information service will fill both needs conveniently with one easysubscription.

 

Intac Purunhas exclusive access to the job opening database for college graduates compiledby the MOE.  The database has more than100,000 jobs currently and is kept up to date by the EMIC.  This database enables Intac Purun to offerstudents job information that is not available anywhere else.  Intac Purun also plans to gain access toother similar databases such as Ministry of Personnel’s internal jobopportunities (numbered over 10,000 jobs). By comparison, 51job.com, the biggest Chinese job portal, has about5,000 job opportunities posted at any given time.

 

***Assessments and Trainings:*** Intac Purun intends to provide assessmentsboth on the Internet portal and through local Career Service Centers anduniversities for a fee.  Theseassessments include personality assessments, capability assessments, andprofessional assessments.  They will notonly help students to discover the types of jobs suitable to theirpersonalities and/or capabilities, but also will allow hiring companies tobetter locate potential candidates.  Inaddition, working closely with MOE and universities, Intac Purun will offerfollow-up training to students to better prepare themselves for the job market.

 

***Other Products and Services:*** Under the guidance of local Career ServiceCenters, local education authorities and universities will be responsible forcollecting and authenticating comprehensive student biographical data.  We will be charging students appropriateprocessing fees for having their data available to hiring companies.  This service will not only generate dataprocessing revenue for Intac Purun, but also create an MOE certifiedcomprehensive student

 

38

----

 

biographydatabase.

 

We willprovide comprehensive student background reference check services to hiringcompanies.  Since China still lacks apersonal credit system, it is very difficult for companies to check thevalidity of a candidate’s claims such as grades at school, degrees obtained,and extracurricular activities.  WithMOE’s student database and the biographic data collected through local CareerService Centers, Intac Purun intends to fill this market need.

 

Intac Purunplans to run MOE sponsored online and offline job fairs that will facilitatecompanies to find needed talents.  Inaddition, Intac Purun will sell advertisement and job posting space on theInternet portal to interested companies.

 

**Distribution Segment**

 

We distributewireless handsets manufactured by major mobile communications equipmentmanufacturers including Siemens, Samsung, Nokia, Motorola and Ericsson. For theyears ended December 31, 2003 and 2002, a substantial majority of total handsetsales were products manufactured by Nokia, Motorola, Siemens and Samsung.

 

Our wirelesshandset products are compatible with most network operators, as well as analogand digital standards and other developing technologies. Most of our newhandsets come fully packaged in their original containers and carry themanufacturer’s original warranty. We have not previously experienced anyappreciable amount of warranty related issues.

 

We distributeautomobiles from time to time through free-trade zones from various Europeanand Asian manufacturers. The automobile products that we distribute aredetermined based upon available pricing, perceived demand, relative exchangerates, and production and quota limitations.

 

**OUR SUPPLY CHANNEL**

 

**Internet Portal Segment**

 

Intac Purunwas established under the project name Career Net to meet the growing need forexpanding the employment opportunities for graduates of higher level educationinstitutions in the PRC.  This Internetportal will also offer employers a platform to list open positions available tofinal year graduates contained within this unique and exclusive database.  This fee based premium service will be linkedto an Employment Service Website of The Ministry of Education, a non-profitwebsite used to communicate information to these university graduates.

 

Intac Purunwas selected by the Education Management Information Center (“EMIC”), adepartment under China’s Education Ministry, to establish and operate the“Career Service Centers” for Chinese students. These Career Service Centers will provide Chinese students exclusivelywith a full-range of career development services, which will assist thesestudents in finding jobs and managing their careers. As the exclusiverepresentative and sole operator of the Career Service Centers, whichrepresents the MOE in handling all student career services, Intac Purunbelieves it is the de facto representative of MOE to provide all careerservices to students.

 

These centers’tasks are three-fold.  First, they willprovide guidance to local education authorities in providing career services tolocal students.  Second, they willcollect complete and authenticated student information through local educationauthorities and universities.  Third,they will introduce Intac Purun’s services and products to students.  In addition, Intac Purun will liaise withother government agencies and corporations as the career service provider ofMOE.  This relationship gives IntacPurun competitive advantages over its competitors.

 

In order tocreate the most comprehensive database of job opportunities for collegegraduates and students, Intac Purun has also obtained the complete database ofgovernment job openings through the EMIC. This database is being kept up to date by this same departmental agency.

 

We do notcurrently have any established relationship with companies attempting toattract new employees other than those mentioned above.

 

**Distribution Segment**

 

Handsets areavailable to us at low prices for a variety of reasons, including our abilityto quickly move large quantities of wireless handsets, the inability of avendor to sell sufficient product through regular channels, the cancellation oforders placed by other distributors and the termination of business by amanufacturer or wholesaler. Currently, our

 

39

----

 

access tosources of equipment is based primarily on relationships which we and ourmanagement have established over approximately the last seven years. Othersources of product include other distributors, network operators andindependent brokers. We receive information about new sources of products fromprior contacts, online resources, advertising and industry publications. OurChief Executive Officer currently handles all inventory procurement and has themost significant industry contacts. As yet, we have not been able to purchaseinventory directly from a manufacturer. We currently do not have any supplyagreements or authorized distribution agreements with any manufacturers orother vendors and, therefore, all of our inventory is purchased on the “spotmarket,” mainly from other wholesalers. We expect that we will begin purchasinga larger portion of our inventory from network operators and manufacturers inthe future, although there can be no assurances in this regard. Our experiencehas indicated that network operators and other wholesalers look favorably upona distribution channel that enables them to dispose of significant quantitiesof merchandise quickly without affecting their traditional sales channels.However, this situation could change if manufacturers or our suppliers decideto discourage the use of our distribution channels.

 

During theyear ended December 31, 2003, we made purchases from more than ten suppliers,substantially all of which are other wholesalers. Our three largest suppliersof wireless handsets accounted for approximately 89.2% of our product purchasesfor the year ended December 31, 2003. At present, we seek to concentrate purchases with selected suppliers toensure access to high-quality products on advantageous terms; however, webelieve we will need redundant sources of supply in the future. Because productavailability is unpredictable, a strong base of vendor relationships will beimportant to our success. We maintain ongoing contact through telephone callswith our vendors to learn when products will become available, at what pricesproduct is moving and which model numbers are the most sought after byconsumers. Loss of our ability to purchase product from these suppliers, or thefailure by these or other suppliers to supply competitive products on a timelybasis and on favorable terms, or at all, would have a material adverse effecton our business and operations.

 

We believethat the relationships with our suppliers are generally good; however, we havefrom time to time experienced inadequate product supply. Any future failure ordelay by our suppliers in supplying us with products on favorable terms wouldseverely diminish our ability to obtain and deliver products to our customerson a timely and competitive 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 success depends in large part on our ability toanticipate and adapt our business to such technological changes. There can be noassurances 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 investment in product inventory and, therefore, weare subject to the risks of inventory obsolescence and excessive inventorylevels. We attempt to limit these risks by managing inventory turns. Because ofour international operations, our inventory is also exposed to certainpolitical and economic risks.

 

We do notcurrently have any established relationship with automobile manufacturers,although we are attempting to develop relationships in this industry segment.Demand for imported automobiles will be influenced by consumer preference,relative exchange rates between the exporting and importing countries,production limitations of certain manufacturers, the presence of other distributionchannels between the manufacturer and the importing country, and the pricingoffered to us by the manufacturer. We do not have any supply contracts with anyautomobile suppliers and, therefore, cannot determine whether we will be ableto obtain automobiles on a competitive basis, if at all. In addition, Chinaimposes import quotas on various manufacturers and countries for automobiles,and therefore our ability to deliver automobiles into China may be restrictedby the effect of quota restrictions.

 

**OUR DISTRIBUTION CHANNEL**

 

**Internet Portal Segment**

 

During theyear ended December 31, 2003, no revenues were generated from our InternetPortal business.  Products and serviceswill be accessed via the Internet on Intac Purun’s Internet portalwww.joyba.com.  Initially, we arelaunching a job information subscription service. This service will providesubscribers with daily job information and open positions on their mobile phonethrough text messaging. Intac Purun ́s sophisticated database software will havethe capability to match open positions with eligible candidates, who willreceive an individual entry code to Intac Purun ́s website where they will findthe individually offered job. In the future, the Internet portal will alsoprovide various paid services, including online career assessments and careerdevelopment counseling, to Chinese students. In addition, the Internet portalwill enable hiring companies to perform comprehensive background checks ontheir prospective employment candidates.

 

40

----

 

As discussedabove, Intac Purun was selected by the EMIC to establish and operate the“Career Service Centers” for Chinese students. These Career Service Centers are to provide guidance to local educationauthorities in providing career services to local students and introduce IntacPurun’s services and products to students. In addition, Intac Purun will liaise with other government agencies andcorporations as the career service provider of MOE.  This relationship gives Intac Purun competitive advantages overits competitors.

 

**Distribution Segment**

 

During theyear ended December 31, 2003, aggregate revenues generated from our threelargest customers accounted for approximately 77.8% of our total revenues.  These customers were Mr. Lam, 238 TelecomLimited, and Mr. Lau, and represented 68.6%, 5.6% and 3.6% of our totalrevenue, respectively.

 

Products aregenerally delivered by common carriers to our warehouse facilities in Hong Kongor Frankfurt or designated freight forwarders. Thereafter, we inspect, countand prepare the orders for shipment or pick up by the customers.

 

We do notgenerally maintain inventory for a long period of time. Instead, we generallyseek to have a buyer for our inventory prior to the time an order is placedwith a vendor. The time between a customer’s purchase order and the completionof the sale of that item is generally less than 10 days. Although we assumecertain inventory and price risk associated with selling these products, webelieve our ability to sell our inventory quickly through our distributionchannels and our system of efficient distribution minimizes the risk. To date,our expenses resulting from write-downs of excess inventory have not beenmaterial.

 

We generallysell our products pursuant to a customer purchase order and subject to ourconfirmation containing terms and conditions. Because orders are generally notaccepted unless they can be filled within a few days of receipt, backlog isgenerally not material to our business.

 

We distributeautomobiles through the free-trade zone in Tianjin, China through Chinese cardealers and distributors. These Chinese car dealers will be required to obtainthe necessary permits and quotas from the Chinese government and will beresponsible for paying any customs duties, value-added taxes and other chargesprior to the vehicles being delivered to them by us. We expect to usethird-party shipping companies for delivery logistics and warehousing ofproducts prior to delivery to the dealers.

 

**SALES AND MARKETING**

 

**Internet Portal Segment**

 

The Internetportal segment in which we operate is highly competitive.  Our marketing strategy is to focus ongenerating brand awareness for Intac Purun with undergraduate and postgraduatestudents, companies who are currently looking or will be looking to fill openpositions, Chinese Internet users and the Chinese public at large.  Advertising is an important element inestablishing Intac Purun as an Internet portal leader in the market place andto protect ourselves against the risk of new entrants and established industrycompetitors, many of which have greater financial resources than we do orcurrently enjoy a superior market position than we do.  Intac Purun is going to deploy an aggressivemarketing strategy, i.e. to push the assessments and trainings to studentsthrough local education authorities and universities.

 

**Distribution Segment**

 

Our sales andmarketing efforts for wireless handsets are coordinated in Hong Kong, Frankfurtand Beijing by a manager for each office. As with our automobile distributionsegment, our sales and marketing efforts are coordinated in Hong Kong andTianjin by a manager for each office. These managers, who report directly to our Chief Executive Officer,spend substantially all of their time developing and maintaining relationshipswith our customers and suppliers. Inside each office, our sales force (whichis, in the aggregate 7 full time personnel at the time of this Report) operateson a named account basis rather than by geography, which allows us to maintaina single point of contact for each customer. In addition to our inside salesforce, we also engage non-employee, commissioned sales agents to sell ourproducts. Our largest accounts are handled directly by Mr. Zhou, our ChiefExecutive Officer. Our outside sales agents are compensated on a CommissionProgram that is designed to reward account profitability and promote salesgrowth into new geographic regions.

 

As we attemptto expand our sales, marketing and procurement efforts into additionalworldwide markets, we face a

 

41

----

 

number ofchallenges, including the difficulties and costs associated with the following:

 

•                  creating newsupply and customer relationships;

 

•                  recruitingskilled sales personnel; and

 

•                  managing andstaffing a larger, more geographically diverse operation.

 

We cannot becertain that one or more of these factors will not harm our future efforts toexpand globally.

 

During thefirst quarter of 2002, we began selling our automobiles to dealers anddistributors through free-trade zones in China. Our sales and marketing effortsfor automobiles are coordinated in Beijing by sales persons who report directlyto our Chief Executive Officer. Our automobile sales force currently consistsof 4 full-time sales personnel. We expect our sales and procurement personnelserving the automotive distribution segment to increase as we expand thisbusiness segment.

 

42

----

 

**SEASONALITY**

 

**Internet Portal Segment**

 

We are notaware that there will be significant seasonality issues in the use of theInternet portal; however, some applications of the portal such as initialsubscriptions may coincide with new graduate enrollments or studentgraduations.  While we have noexperience regarding the seasonality of the Internet portal, we are aware thatsome aspects of our e-commerce may be influenced by a number of seasonalfactors including new graduate enrollments, student graduations, productpromotions, availability of open job positions and holidays, and as a result,we expect to adjust our marketing focus to reflect the anticipated level ofsales activity. In addition, we also expect that our sales will be influencedby cyclical economic conditions in the different regions in which we operate.An economic downturn in one of our principal markets could materially andadversely affect our revenues and profits.

 

**Distribution Segment**

 

We are awarethat handset sales are influenced by a number of seasonal factors includingcustomer buying patterns, product promotions, availability of distributionchannels, holidays and product supply and pricing, and as a result, we adjustbuying to reflect the anticipated level of sales activity. While we have noexperience regarding the seasonality of automobile buying patterns withinChina, automobile sales are typically seasonal, and fluctuate based upon therelease of new product lines, generally in the fall, and year-end tax and otherincentive programs offered by manufacturers. Annual WTO-imposed tariffreductions may also affect the seasonality of our sales, in that customers maydefer purchases at year end to receive the benefit of reduced tariffs in thefollowing year. In addition, we also expect that our sales will be influencedby cyclical economic conditions in the different countries in which we operate.An economic downturn in one of our principal markets could materially andadversely affect our revenues and profits.

 

**COMPETITION**

 

**Internet Portal Segment**

 

Themarket for web sites offering online content and services targeting the globalChinese community is competitive and we expect competition to increase in thefuture. Many of the companies are attempting to address this market by offeringportal, content and e-commerce services to distinct local markets withingreater China. In turn, these companies compete with Intac Purun for usertraffic, potential advertising revenue, e-commerce transactions, shortmessaging service and other fee-based services, and potential partners. TheInternet market is still developing and the competition is expected to beintense. We are just one of the growing number of website providers that haveentered into business arrangements with the leading China mobile serviceproviders to offer SMS content. Our primary competitors in greater Chinainclude Netease, Sohu.com, Sina, Tom.com and Yahoo! China. Competition isintense and is expected to increase significantly in the future.

 

Wealso face competition from providers of software and other Internet productsand services that incorporate search and retrieval features into theirofferings. In addition, entities that sponsor or maintain high-traffic websites or that provide an initial point of entry for Internet users, such asISPs, including large, well-capitalized entities such as Microsoft (“MSN”),Yahoo!, PCCW-HKT (Netvigator) and AOL, currently offer and could furtherdevelop or acquire content and services that compete with those that we offer.We expect that as Internet usage in greater China increases and the greaterChina market becomes more attractive to advertisers and for conductingelectronic commerce, large global competitors may increasingly focus theirresources on the greater China market. We also compete for advertisers withtraditional media companies, such as newspapers, television networks and radiostations that have a longer history of use and greater acceptance amongadvertisers. In addition, providers of Chinese language Internet tools andservices may be acquired by, receive investments from, or enter into othercommercial relationships with, large, well-established and well-financedInternet, media or other companies.

 

Ourability to compete successfully depends on many factors, including the qualityof our content, the breadth, depth and ease of use of our services, our salesand marketing efforts, our exclusive arrangements with government agencies, andthe performance of our technology. However, we believe we have competitiveadvantages over our competitors including our relationship with the EMIC; ourexclusive focus on China; and our ability to offer products and services thatare tailored to the specific interests, needs and online habits of graduates inthe PRC.

 

43

----

 

**Distribution Segment**

 

Competitionamong wireless handset distributors is intense and is expected to increasesignificantly in the future. Barriers to entry 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 contractual relationshipswith manufacturers and other highly desirable vendors, greater name recognitionand significantly greater financial, personnel and marketing resources than wedo. Such competitors can generally undertake more aggressive pricing policies,move more inventory, and make more attractive offers to customers, distributionpartners and suppliers than we can. Additionally, substantially all of ourexisting and prospective customers have established long-standing relationshipswith one or more of our competitors or potential competitors. Consequently, wecannot be certain that we will be able to expand our customer list or retainour current customers. We may not be able to compete successfully against ourcurrent or future competitors and competition could materially and adverselyaffect our revenues and profits.

 

Ourcompetitors include:

 

**In the Asia-Pacific Rim**

 

•                  Government-owneddistributors that have retail outlets;

 

•                  First Mobile;

 

•                  Global TechHoldings; and

 

•                  Numerous othersmaller distributors, resellers and agents.

 

**In Europe**

 

•                  Brightpoint;

 

•                  Cellstar;

 

•                  Wireless handsetmanufacturers that sell directly into our distribution channel; and

 

•                  Numerous othersmall distributors, resellers and agents.

 

Thecompetition in the automobile distribution industry is also intense and growingas the demand for foreign automobiles grows and the opportunities presented bythis emerging industry becomes more apparent. We compete primarily on the basisof:

 

•                  price;

 

•                  inventoryavailability;

 

•                  deliverytime;

 

•                  ourcustomer relationships; and

 

•                  ourmanufacturer relationships.

 

44

----

 

We expect tocontinue to encounter intense competition, including competitors who have inthe past entered into joint ventures with automobile manufacturers in order tobypass import quota restrictions. Companies such as Taikwoo Enterprises Ltd.will compete directly with us and have a longer operating history in the freetrade zones and existing relationships with Chinese dealers. We anticipatebeing able to compete with these more established competitors due mainly to ourmanufacturing relationships, our efficient distribution business model and ourability to deliver automobiles at a lower cost as a result of less distributionlayers. Many of our existing and potential competitors, including traditionaldistributors, have longer operating histories, larger customer bases, directcontractual relationships with manufacturers and other highly desirablevendors, greater name recognition and significantly greater financial,personnel and marketing resources than we do. These competitors can generallymove more inventory and make more attractive offers to customers, distributionpartners and suppliers than we can.

 

**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. The PRC Internet industry is regulated byvarious governmental authorities, such as the Ministry of Information Industryor MII, the State Administration of Industry and Commerce, or SAIC, the StatePress and Publications Administration, or SPPA, and the Ministry of PublicSecurity.  See “Business Risk Factors —Risks Related To the Chinese Internet Portal Industry, the Internet and OurTechnology Infrastructure” and “Risks Attributable To InternationalOperations.”

 

**INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS**

 

We regard ourcopyrights, service marks, trademarks, trade secrets and other intellectualproperty as critical to our success. We rely on trademark and copyright law,trade secret protection, non-competition and confidentiality and/or licenseagreements with our employees, customers, partners and others to protect ourintellectual property rights. Despite our precautions, it may be possible forthird parties to obtain and use our intellectual property withoutauthorization. Furthermore, the validity, enforceability and scope ofprotection of intellectual property rights in Internet-related industries areuncertain and still evolving. The laws of the PRC and certain other countriesdo not protect intellectual property to the same extent as do the laws of theUnited States.

 

We are in theprocess of registering a domain name with Network Solutions.  We plan to have full legal rights over thisdomain name.

 

Many partiesare actively developing chat, homepage, search and related Web technologies. Weexpect these parties to continue to take steps to protect these technologies,including seeking patent protection. There may be patents issued or pendingthat are held by others and that cover significant parts of our technology,business methods or services. For example, we are aware that a number ofpatents have been issued in the areas of e-commerce, Web-based informationindexing and retrieval and online direct marketing. Disputes over rights tothese technologies are likely to arise in the future. We cannot be certain thatour products do not or will not infringe valid patents, copyrights or otherintellectual property rights held by third parties. We may be subject to legalproceedings and claims from time to time relating to the intellectual propertyof others in the ordinary course of our business.

 

We may licensetechnology from third parties. The market is evolving and we may need tolicense technologies to remain competitive. We may not be able to license thesetechnologies on commercially reasonable terms or at all. In addition, we mayfail to successfully integrate any licensed technology into our services. Ourinability to obtain any of these licenses could delay product and servicedevelopment until alternative technologies can be identified, licensed andintegrated.  See “Business Risk Factors— Risks Related To the Chinese Internet Portal Industry, the Internet and OurTechnology Infrastructure.”

 

**TECHNOLOGY INFRASTRUCTURE**

 

We plan toinstall our servers at the facilities of China Education and Research Network(“CERNET”) and do not have any redundant hardware outside of Beijing. TheCERNET is the first nationwide education and research computer network inChina. It is constructed and operated by Tsinghua and other leading universities.CERNET has a four-layer hierarchy (the nation-wide backbone, regional networks,provincial networks and campus networks). The CERNET backbone has a capacity of2.5Gbps. CERNET has 12 global and regional channels connected with the UnitedStates, Canada, the U.K., Germany, Japan and Hong Kong, with the internationalgateway bandwidth totaling over 250Mbps. The transmission rate of the regionalnetworks is at 155Mbps. More than 900 education and research institutions, 1.2million PC’s and 8 million users connect to CERNET.

 

45

----

 

Our operationswill be dependent on how well CERNET protects their systems against damage fromfire, power loss, telecommunications failure, break-ins, or other events.CERNET also provides connectivity for our servers through multiple high-speedconnections. All facilities are protected by redundant power supplies.

 

We havein-house applications monitoring the health of our servers. Reporting andtracking systems generate daily traffic reports.

 

**EMPLOYEES**

 

At the time ofthis report, we had 47 full-time employees, including 23 in sales andmarketing, 1 in warehouse and distribution services, 6 in technology and 17 ingeneral and administrative functions. In addition, we routinely engage up to 10part-time employees to assist with peak demands in our distribution operations.

 

**ITEM 2****-DESCRIPTION OF PROPERTY**

 

As of March30, 2004, we leased approximately 11,406 square feet for our operations. Ourcurrent leased properties are:

 
| **Location**                                         |   | **Size**     |   | **Description** |   | **Expiration  of Lease** |
|------------------------------------------------------|--------|--------------|--------|-----------------|--------|--------------------------|
|                                                 |   |         |   |            |   |                     |
| Clifford  Centre Cheung Sha Wan, Kowloon, Hong Kong  |   | 1,833 sq.ft. |   | Headquarters    |   | Month  to month          |
| Sterling  Centre, Cheung Sha Wan, Kowloon, Hong Kong |   | 1,175 sq.ft. |   | Sales  office   |   | February  2005           |
| Beijing,  China                                      |   | 4,532 sq.ft. |   | Office          |   | December  2005           |
| Frankfurt,  Germany                                  |   | 3,000 sq.ft. |   | Office          |   | March  2006              |
| Tianjin,  China                                      |   | 596 sq.ft.   |   | Office          |   | June  2004               |
| Dallas,  Texas                                       |   | 270 sq.ft.   |   | Office          |   | Month  to month          |

 

Our currenttotal remaining lease obligations are U.S. $328,065.

 

In addition toour leased facilities, we also frequently utilize the storage capabilities ofour vendors and freight-forwarders. We believe that the terms we receive forstorage space from those parties is comparable to, or better than, the terms wecould obtain for additional leased facilities.

 

We believe wecould obtain suitable properties in the relevant areas without a materialadverse effect.

 

**ITEM 3****- LEGALPROCEEDINGS**

 

We are not aparty to any pending 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**

 

None

 

46

----

 

**PART II**

 

**ITEM 5****- MARKETFOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUERSPURCHASES OF EQUITY SECURITIES**

 

Our commonstock became eligible for trading on the NASD’s Over-the-Counter BulletinBoard, an inter-dealer quotation service (“OTCBB”) on June 20, 2001 under thesymbol “CERL.” Effective October 4, 2001, we changed our trading symbol on theOTCBB to “INTN”.  Effective October 18,2001, our common stock was approved for listing and began trading on theFrankfurt Stock Exchange under the symbol WKN 805768.  Effective June11, 2003 our common stock began trading on the Nasdaq SmallCap Market, underthe symbol “INTN.”  Prior to October 4,2001, there was no significant trading in, or market for, our common stock.

 

Marketfor Common Stock

 

Asof March 29, 2003, there were approximately 11 holders of record of our commonstock.

 

Thefollowing table sets forth the high and low sale prices of our common stock asreported by the Nasdaq SmallCap Market or OTCBB for the quarters indicated.Such prices reflect inter-dealer prices, without retail markup, markdown or commission,and may not necessarily represent actual transactions.

 
|               |   | **BID  PRICE** |   |
|--------------------|--------|----------------|--------|
| **QUARTER ENDING** |   | **LOW**        |   | **HIGH** |   |
|               |   |           |   |   |   |
| March 31, 2002     |   | $              | 5.00   |   | $ | 8.00 |   |
|               |   |           |   |   |   |
| June 30, 2002      |   | $              | 5.00   |   | $ | 8.70 |   |
|               |   |           |   |   |   |
| September 30, 2002 |   | $              | 3.50   |   | $ | 6.50 |   |
|               |   |           |   |   |   |
| December 31, 2002  |   | $              | 3.60   |   | $ | 5.45 |   |
|               |   |           |   |   |   |
| March 31, 2003     |   | $              | 4.70   |   | $ | 5.75 |   |
|               |   |           |   |   |   |
| June 30, 2003      |   | $              | 3.98   |   | $ | 6.05 |   |
|               |   |           |   |   |   |
| September 30, 2003 |   | $              | 4.84   |   | $ | 10.50 |   |
|               |   |           |   |   |   |
| December 31, 2003  |   | $              | 7.06   |   | $ | 13.90 |   |

 

Theclosing price of our common stock on March 29, 2004 on the Nasdaq Small CapMarket was $15.92.

 

Reportof Offering of Securities and Use of Proceeds Therefrom

 

InSeptember 2003, we raised $4.5 million in a private placement to one foreignaccredited investor.  We used netproceeds from the offering for operating activities, purchases of fixed assetsand funding for certain equity investments in Intac Purun. The remaining netproceeds from the offering have been invested in cash, cash equivalents, andmarketable debt securities.

 

Sinceinception, we have not paid any cash dividends on our common stock and we donot anticipate declaring dividends in the foreseeable future. We intend toretain future earnings for reinvestment in our business.

 

47

----

 

**EQUITY COMPENSATION PLAN INFORMATION**

 

The followingtable sets forth information with respect to the Company’s compensation planunder which equity securities of the Company are authorized for 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     |   | 350,000                                                                                               |   | $                                                                                   | 4.41   |                                                                                                                                                           | 2,150,000 |   |
| Equity compensation plans not approved by security  holders |   | —                                                                                                |   | —                                                                              |   | —                                                                                                                                                         |      |
| Total                                                       |   | 350,000                                                                                               |   | $                                                                                   | 4.41   |                                                                                                                                                           | 2,150,000 |   |

 

**RECENT SALES OF UNREGISTERED SECURITIES**

 

During theyears ended December 31, 2003 and 2002, we issued and sold unregisteredsecurities in the transactions described below:

 

•                  InAugust 2002, a private investor acquired 50,000 shares of the Company’s commonstock in a private placement effected pursuant to Section 4(2) of theSecurities Act of 1933, as amended. This transaction resulted in net proceedsto the Company of approximately $220,000 (or $4.40 per share).

 

•                  InDecember 2002, a private investor acquired 50,000 shares of the Company’scommon stock in a private placement effected pursuant to Section 4(2) of theSecurities Act of 1933, as amended. This transaction resulted in net proceedsto the Company of approximately $250,000 (or $5.00 per share).

 

•                  InSeptember 2003, an accredited investor acquired 1,000,000 shares of theCompany’s common stock in a private placement effected pursuant to Section 4(2)of the Securities Act of 1933, as amended. This transaction resulted in netproceeds to the Company of approximately $4,500,000 (or $4.50 per share).

 

48

----

 

**ITEM 6****-MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

This Reportcontains forward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated inforward-looking statements for many reasons, including the risks described in“Business Risk Factors” and elsewhere in this filing. See “Cautionary StatementRegarding Forward-Looking Statements.” You should read the following discussionwith our consolidated financial statements and related notes included elsewherein this Report.

 

**OVERVIEW**

 

On January 15,2004, we announced the redirection of our business plan from the traditionaldistribution of premium brand wireless handsets to our new Internet jointventure, Beijing Intac Purun Educational Development Ltd (“Intac Purun”).  Intac Purun was formed in October 2003 withChina Putian Corporation (“Putian”) and the Ministry of Education in The People’sRepublic of China (“PRC”).  The newlyfounded Internet joint venture is owned 45% by INTAC, 15% by Putian, 30% by aprivate investor group and 10% by the Ministry of Education.

 

Our initialobjective in 2002 was to focus on our wireless handset distribution businessand establish customer relationships and supply channels in China and theAsia-Pacific Rim.  Our objective in 2003was to continue to expand our distribution business and improve gross profitmargins.  Also in 2003, our strategy wasto establish relationships with Chinese telecommunications enterprises andChinese Government entities which might lead to opportunities in other fieldsof interest.

 

Our objectivein 2004 is to further enhance the business prospects and opportunities affordedby this unique database of graduate students. The Company is exploring an array of premium products and services whichwill be made available through our Internet portal business.  The portal is being tailored to meet theever-growing student demand for these types of products and services.

 

Intac Purunhas been exclusively selected by the Education Management Information Center(“EMIC”), a department under China’s Education Ministry, to establish andoperate the “Career Service Centers” for Chinese students.  These Career Service Centers will provideChinese students exclusively with a full-range of career development services,which will assist these students in finding jobs and managing their careers.

 

Although wewill de-emphasize the wireless handset and automobile distribution business, asignificant portion of short-term revenues will be generated by thisbusiness.  At the present time, we arecontinuing to assemble an experienced management team for Intac Purun in orderto execute an effective business plan while at the same time, insuring that thejoint venture has adequate capital to accomplish its goals.  Intac Purun is expected to generate revenuesin the first half of 2004.

 

We wereincorporated under the name “Commodore Minerals, Inc.” under the laws of theState of Nevada on September 20, 2000, as a developmental stage corporation.Our initial business operations concentrated on mineral exploration. Althoughwe never conducted any mineral exploration activities directly, we partneredwith others in mineral exploration activities.

 

On September28, 2001, Mr. Zhou acquired a controlling interest in us by purchasing7,000,000 shares of our stock in a private transaction with one of theorganizers of Commodore Minerals, Inc. (“Commodore”). On October 13, 2001, weentered into a Reorganization Agreement with INTAC International HoldingsLimited (“Holdings”) and the shareholders of Holdings, including Mr. Zhou,pursuant to which Mr. Zhou and the other shareholders of Holdings conveyedtheir stock in Holdings to us in exchange for the issuance of an aggregate of5,000,000 shares of our common stock (the “Reorganization”). Pursuant to thattransaction, Holdings became our wholly owned subsidiary and New Tech,previously a subsidiary of Holdings, became our indirect subsidiary. For moredetailed information on the Change of Control, please see our Current Report onForm 8-K, filed with the U.S. Securities and Exchange Commission (“SEC”) onOctober 15, 2001.  For accountingpurposes, the Reorganization was treated as a recapitalization of Holdings,with the effect that our historical financial statements reflect the businessoperations of Holdings.

 

Our revenuefor the years ended December 31, 2003 and 2002 were derived from thedistribution of premium brand wireless handset products to mobile communicationequipment wholesalers, agents, retailers and other distributors in Europe andAsia and, to a much lesser extent, automobile distribution from Europe intomainland China. Our percentage revenue by geographic sector was:

 

49

----

 
|   |   | **2003** |   | **2002** |   |
|--------|--------|----------|--------|----------|--------|
|   |   |     |   |     |   |
| Europe |   | 5.6      | %      | 24.6     | %      |
| Asia   |   | 94.4     | %      | 75.4     | %      |
| Total  |   | 100.0    | %      | 100.0    | %      |

 

Our cost ofgoods sold is comprised of the cost of the wireless handset products orautomobiles we distribute.

 

Distribution expenses are principallycomprised of costs attributable to the shipping and handling of our products,such as freight and insurance.

 

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.

 

The followingis a presentation of the results for the years ended December 31, 2003 and 2002and should be read in conjunction with the annual audited consolidatedfinancial statements and related notes contained herein.

 

We operate through seven****direct and indirect wholly-ownedsubsidiaries, including:

 

•                  INTACInternational Holdings Limited, a Hong Kong corporation formed on January 3,2001, which acts as our primary distributor of telecommunications products intothe Asia-Pacific Rim;

 

•                  New Tech HandelsGmbH, a German corporation formed on January 20, 2000 and acquired by Holdingsin October 2001, which acts as our primary purchasing agent and distributor ofproducts into Europe;

 

•                  INTAC HoldcoCorp., a Delaware corporation formed on October 10, 2001, which holds certainof the shares of INTAC International Holdings Limited;

 

•                  FUTAC GroupLimited, a British Virgin Islands corporation formed on January 2, 2002, whichimports automobiles for distribution into mainland China;

 

•                  Global CreativeInternational Limited, a Hong Kong corporation formed on March 15, 2002, whichacts as a distributor of refurbished telecommunications products into theAsia-Pacific Rim;

 

•                  INTACTelecommunications Limited, a Hong Kong corporation formed on March 8, 2002,which acts as a distributor of telecommunications products into theAsia-Pacific Rim; and

 

•                  Intac (Tianjin)International Trading Co., formerly “Intac Auto Mobile Trading CompanyLimited”, a China corporation formed on April 9, 2002, which imports automobilesfor distribution into mainland China.

 

We also operate through a 45% owned subsidiary:

 

•                  Beijing IntacPurun Educational Development Limited, a China corporation formed in October2003, which provides comprehensive employment information over its Internetportal to facilitate graduates’ employment search and future careerdevelopment.

 

**Our 12-Month Plan**

 

Our plan ofoperation for the upcoming 12 months calls for the following:

 

•                  Establish localCareer Service Centers to work closely with provincial education authorities.Under the direction of these local Career Service Centers and educationauthorities, universities and schools will be responsible for collecting andauthenticating their complete student information for Intac Purun and for encouragingstudents to subscribe to these services.

 

50

----

 

•                  Establish acomprehensive student background check service using the exclusive and MOEauthenticated information on college graduates and students.  We believe this will be an extremelyvaluable service to corporations that cannot validate candidates’ backgroundand credentials otherwise. Also, since Intac Purun is the exclusiverepresentative of the Career Service Centers, we expect that many companies willbe eager to cooperate with Intac Purun either to search for talent or to marketthemselves to college students.

 

•                  Assemble anexperienced management team for Intac Purun in order to execute an effectivebusiness plan while at the same time, seeking to ensure that the joint venturehas adequate capital to accomplish its goals.

 

•                  Supportcorporations in listing their jobs and helping them in locating employees withspecific skill-sets.

 

•                  Explore an arrayof premium products and services that can be made available through IntacPurun, tailoring this Internet portal to meet the growing student demand forthese types of products and services.

 

•                  Ensure thisdatabase is being maintained and continually updated in order to create themost comprehensive database of job opportunities for college graduates andstudents.

 

•                  Raise additionaldebt or equity financing, or a working capital or other traditional loanfacility from a bank or other lending source, as needed to fund current andfuture operations and expansion plans, and to provide additional workingcapital.

 

•                  Although theCompany will de-emphasize the wireless handset business, we will continue toimprove on our system of efficient distribution for wireless handsets. We donot currently intend to migrate toward a mix of product sales and accessorysales, nor do we expect to begin providing distribution services or otherancillary logistics services. We believe that our approach will provide us withgreater flexibility to meet the demands of our customers, while at the sametime providing us with the opportunity to grow a worldwide distribution networkwithout significant added infrastructure cost.

 

•                  Capitalize onour existing geographic footprint. We believe that the rapidly expanding growthin mobile telephone subscribers in China and the Asia-Pacific Rim has beencaused by:

 

•                                          thelack of available landline service in China;

 

•                                          thesheer size of the population of China, being the most populous nation in theworld; and

 

•                                          therecent dramatic, economic growth in the region.

 

•                  Capitalize onmanagement’s experience.  We believe ourCompany and management team has the expertise to take advantage of the growingeconomy and the business opportunities we perceive as existing in the rapidlyexpanding field of telecommunication services in China.  The Company and its management team intendto use its flexibility, agility, entrepreneurial expertise, quick decisionmaking ability and speed-to-market to further our goals and objectives.

 

•                  Expand ourglobal sales capabilities. We target our customers predominantly through directsales channels complemented by a range of external alliances and channels.  We believe that in addition to expanding ourpresence in the markets currently served, we must also expand into other worldmarkets.

 

•                  Complement ourexisting business with selective strategic acquisitions. In order to grow intoa leading Chinese Internet portal and a worldwide provider of wirelesshandsets, we believe that expansion through acquisitions, as well as internalgrowth will be necessary.  Accordingly,we expect to pursue the acquisition of companies that sell products andservices that either complement or expand our existing business. We may alsoexpand to other businesses or opportunities in areas or industries that webelieve present attractive opportunities for our stockholders but which areoutside of pure handset distribution. We believe that significant acquisitionopportunities exist and that our willingness to retain existing management willmake us an attractive acquiring party.

 

•                  Pursue strategicalliances with major players in the telecommunications industry in China andthe Asia-Pacific Rim.  For example, onFebruary 11, 2003, INTAC signed an exclusive agreement with T-Mobile, underwhich T-Mobile will sell to us the handsets it obtains through its trade-inprogram in Germany for distribution into the

 

51

----

 

Asia-Pacific Rim.  Thisagreement is valid through December 31, 2004. T-Mobile is currently testing their program within a small proportion oftheir stores, but initial indications suggest less than satisfactoryresults.  T-Mobile is expected toincrease their marketing campaign designed to inform and educate thepublic.  We will continue to monitortheir performance

 

We believethat we currently have adequate capital for the next twelve months; however,long-term plans will require us to obtain additional financing through theissuance of debt, equity, other securities or a combination thereof in order totake advantage of our strategic agreements and business alliances.  Growing our business requires additionalworking capital.  Our inventorypurchases, including purchases of wireless handsets and automobiles, generallyrequire full payment for the products prior to delivery.  Also in some cases, we will give minimalcredit terms to customers for the balance outstanding, if they have anestablished and good payment history with us. Our inability to obtain additional acceptable financing would likelyhave a significant negative impact on our growth plans.

 

In addition,we may seek to obtain a working capital or other traditional loan facility froma bank or other lending source in addition to the existing short-termnote.   Unless we are able to continueto improve our operating performance, 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, other than a short-term notepayable, we do not have any other financing arrangements, nor do we have anycommitments to obtain such an arrangement with any bank or other third partyexcept for those currently disclosed. 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 shareholders. There can be no assurances that wewill be able to obtain additional financing on terms which are acceptable tous.

 

In addition toour current obligations, we continue to negotiate other strategic agreementsand business alliances many of which will be dependent upon our obtainingadditional working capital, or whose value will be materially less to theCompany if we do not have the financial resources to fully exploit suchopportunities.

 

Our forecastof the period of time through which our financial resources will be adequate tosupport our operations under our current plan of operation is a forward-lookingstatement that is subject to risks and uncertainties, and we may be required toraise additional capital prior to that time and afterwards.

 

**CRITICAL ACCOUNTING POLICIES**

 

Theconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States, which require the Companyto make estimates and assumptions.  TheCompany’s significant accounting policies and methods used in the preparationof the consolidated financial statements are discussed in note 1 of the notesto the consolidated financial statements. The Company believes that of its significant accounting policies, thefollowing may involve a higher degree of judgment and complexity:

 

•                  Revenuerecognition;

 

•                  Concentrationof credit risk and accounts receivable;

 

•                  Inventory;

 

•                  Assetimpairment;

 

•                  Foreigncurrency exchange; and

 

•                  Intangibleassets and goodwill.

 

**Revenue Recognition:**We expect to generate future revenues primarily from subscription servicesthrough our Internet portal business and our distribution of wireless handsetsand automobiles into China. In addition to China, we plan to distribute ourwireless handsets and automobiles into Europe and other Asia-Pacific Rimcountries.

 

Subscriptionservices through our Internet portal business are 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. The Company will recognize the gross amount billedby the mobile operator as revenue, and the amount retained by the mobileoperator as cost of revenue.

 

52

----

 

Our wirelesshandset and automobile revenues will be generally generated from a quick turnof product. We recognize revenue upon delivery of product to our customers.They are sold “as is” and we do not provide the servicing of the wirelessaccounts or automobiles, nor do we receive any usage revenue from the wirelesshandsets distributed.

 

**Concentration of Credit Risk and AccountsReceivable:** Generally our customers will pay within afew days of receiving and inspecting the product.  Our business model generally requires a deposit by the customer;however, in some cases, we will give minimal credit terms to customers for thebalance outstanding if they have an established and good payment history withus.

 

We establishan allowance for doubtful accounts based upon factors surrounding the creditrisk of specific customers.

 

**Inventory:**Generally,we do not maintain any inventory of wireless handsets; however, due to thetiming of the inventory being received and then being shipped to customers, wemay hold inventory for a minimal time period, commonly a few days.  We purchase products only upon the receiptof an order. Once an order is received, we solicit additional orders to gaingreater discounts from manufacturers. Aggregate orders are then delivered inbulk to be allocated among customers. Our business model generally requires adeposit by the customer.

 

We do notmaintain an inventory of vehicles and model this vehicle sales process the sameas the wireless handsets.  However, wemay hold inventory for a minimal time period, commonly a few days.

 

Inventoriesfor wireless handsets are stated at the lower of cost and net realizable value,calculated on the first-in, first-out basis, and are comprised of finishedgoods.  Net realizable value isdetermined on the basis of anticipated sales proceeds less estimated costs forselling expenses.  Inventories forvehicles are stated at the actual amount paid to manufacturers or market, iflower.

 

**Asset Impairment:** Wereview long-lived assets for impairment when events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Ifimpairment indicators are present and the estimated future undiscounted cashflows are less than the carrying value of the long-lived assets, the carryingvalue is reduced to the estimated fair value as measured by the discounted cashflows. We have not experienced any events or changes that would indicate thatthe carrying amounts of any of our assets may not be recoverable.

 

**Foreign Currency Exchange:**We are subject to fluctuations in foreign currencies, as customer orders mayrequire multi-currency product and delivery transactions before the sale iscomplete. Additionally, a period of up to three months’ time may lapse betweenwhen an order is placed until revenue and costs are recognized. We do notengage in hedging activities nor in financial derivatives.

 

The functionalcurrency of the Company is the Hong Kong dollar (“HK$”). The accompanyingconsolidated financial statements have been expressed in United States dollars,the reporting currency of the Company.

 

Reportedassets and liabilities of INTAC’s foreign subsidiaries have been translated atthe rate of exchange at the end of each reporting period. Revenues and expenseshave been translated at the weighted average rate of exchange in effect duringthe respective reporting period. Gains and losses resulting from translationare accumulated in other comprehensive income (loss) in stockholders’ equity.

 

Realized and unrealized translation gain (loss) on currencytransactions between foreign entities is included in other income (expense) inthe statements of operations.  EffectiveJuly 1, 2002, the Company changed the recording of unrealized translation gainsand losses on an intercompany account to reflect the long-term nature of thisbalance.  Previously, unrealizedtranslation gains and losses were recorded to the statements ofoperations.  The effect of this changeduring the year ended December 31, 2003 was to exclude an unrealized gain onforeign currency translation of $328,919 from the statement of operations.  The effect of this change in the six monthsended December 31, 2002 was to exclude an unrealized loss on foreign currencytranslation of $130,631 from the statement of operations.  These amounts are included in othercomprehensive income in stockholders’ equity.

 

**Intangible Assets and Goodwill:**In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets” became effective, and as a result, we donot amortize goodwill. In lieu of amortization, we were required to perform aninitial impairment review of goodwill in 2002 and an annual impairment reviewthereafter. SFAS No. 142 requires us to test goodwill for impairment at a levelreferred to as a reporting unit. Goodwill is considered impaired and a loss isrecognized when its carrying value exceeds its implied fair value. We may use anumber of valuation methods including quoted market prices, discounted cashflows and revenue multiples to determine fair value. Net intangible assets andgoodwill amounted to $363,508 as of December 31, 2003. We completed our initial

 

53

----

 

impairmentreview during the first half of 2002 and annual reviews thereafter. Anytransitional impairment loss, which could be significant, must be recognized asthe cumulative effect of a change in accounting principle in our statements ofoperations.  No impairment charge hasbeen made in the years ended December 31, 2003 and 2002.

 

Factors thatwe consider important which could trigger an impairment review include thefollowing:

 

•                  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 wedetermine that the carrying value of identifiable intangibles and goodwill maynot be recoverable based upon the existence of one or more of the aboveindicators of impairment, we assess whether the carrying value of the asset isgreater than the undiscounted future operating cash flow of the acquiredoperations. Any impairment is measured based on a projected discounted cashflow method using a discount rate reflecting our average cost of funds.

 

**Software Development Costs:**  In accordance with SFAS No. 86, “Accounting forthe Costs of Computer Software, Lease or Otherwise Marketed,”internally-generated software development costs associated with new productsand significant enhancements to existing software products are expensed asincurred until technological feasibility has been established.  Software development costs that qualify forcapitalization include the salaries and benefits of the software engineersassigned to the products, internal and external quality assurance testingcosts, overhead allocations primarily associated with rent and facilities costsand the costs of outsourced development activity and independent producttesting and certification labs. Software development costs not qualifying for capitalization are recordedas selling, general and administrative expense.  Capitalized software development costs, including purchasedsoftware, if any, are amortized after being put into use using the greater ofthe revenue method or the straight-line method generally with useful lives ofthree years or less.  At each balancesheet date, the Company evaluates the estimated net realizable value of eachsoftware product and when required, records write-downs of net book value tonet realizable value of any product for which the net book value is in excessof net realizable value.  The netrealizable value is the estimated future gross revenue of each product reducedby the estimated future costs of completing and disposing of that product,including the costs of completing in process development and customer support.

 

**Research and Development Costs:**  We incur research and development costs thatrelate primarily to the development of new software and web development.  Research and development costs are comprisedprimarily of salaries and related benefits expenses, contract labor andprototype, and other related expenses and are charged to expense as incurred.

 

**RESULTS OF OPERATIONS FOR THE YEARS ENDEDDECEMBER 31, 2003 AND 2002**

 

**Revenue:**  Revenue increased by $6.6 million, or 7.7%,to $91.4 million for the year ended December 31, 2003, from $84.8 million forthe same period in 2002. This increase is due to substantially increased salesvolume and no material increased sales prices. This revenue for 2003 wascomprised of the distribution of wireless handsets ($88.4 million) and thedistribution of automobiles ($3.0 million) and in 2002 revenue was comprised ofthe distribution of wireless handsets ($83.5 million) and the distribution ofautomobiles ($1.3 million).  These increased sales were achieved despitethe negative impact of the SARS virus in the Asia-Pacific Rim experienced inthe first half of 2003 and the negative impact of the increasing strength ofthe Euro with which the majority of inventory purchases are made.

 

Technology and new business alliances have enabled the Company toachieve substantial growth during 2003. In addition, although currently only representing a small percentage oftotal revenues, we have continued to distribute vehicles into specifiedfree-trade zones in mainland China which is positively affected gross revenuesfor 2003.

 

Based upon the prior year and Company projections, we anticipaterevenues to continue to increase during 2004.

 

**Gross Profit:**Gross profit increased by $1.8 million to $3.5 million for the year endedDecember 31, 2003, from $1.7 million for the same period in 2002. The grossmargin increased by 1.8% to 3.8% for the year ended December 31, 2003 from 2.0%for the same period in 2002.  Thisincrease is due to the realization of a higher margin on the wireless handsetdistribution sales as a result of a higher end product mix, the increasedproportion of automobile distribution sales with

 

54

----

 

typically higher margins than the wireless handset distribution salesand a $753,398 premiumfrom a major customer in December 2003, partially offset by the negativeimpact of the increasing strength of the Euro with which the majority ofinventory purchases are made.  Also in2002, the Company was establishing a customer base at the cost of a reducedmargin.

 

**Operating Expenses:**  Distributionexpenses increased by $615,053, or 154%, to $1.0 million for the year endedDecember 31, 2003 from $399,620 for the same period in 2002, and as apercentage of revenue, increased to 1.1% in 2003 from 0.5% in 2002.  Distribution expenses relate to costsattributable to the distribution of our products. These costs increased due tooverall price increases from common carriers, special logistics arrangementsrequired for delivery of certain products and the impact of the increasingstrength of the Euro.

 

Selling, general and administrative expenses increased by $446,974, or19%, to $2.8 million for the year ended December 31, 2003 from $2.3 million forthe same period in 2002, and as a percentage of revenue, increased to 3.1% in2003 from 2.7% in 2002. This overall increase in total expense has beenprimarily due to the formation of our new Internet joint venture, Intac Purun,in October 2003.  The overall impact ofincreased costs from Intac Purun in 2003 was $132,000.  However, this increase in costs was also dueto the build up of staffing for future growth, the costs associated with ourNASDAQ listing and with being a publicly held company, and the opening of new officesneeded for growth. These costs are expected to increase as we build theinfrastructure of the Company to implement our business plan.  Specifically, for the year ended December31, 2003, of the increase in expenses, $232,000 relates to increased salary andstaff costs, $69,000 relates to promotion and business development costs,$59,000 relates to the Company’s recent NASDAQ listing fees, $82,000 relates tooccupancy costs and a decrease of $70,000 relates to professional and bankingservice costs.

 

We anticipatethat our operating expenses will increase in future periods, as we increasesales and marketing operations for our Internet portal business.  Furthermore, we expect an increase in 2004as we fulfill our obligations as a reporting company under the Exchange Act andin relation to the Sarbanes-Oxley Act.

 

**Loss from operations:**  Loss from operations was $282,797 for theyear ended December 31, 2003, as compared to a loss from operations of $1million for the same period in 2002. The improvement in operating results was primarily due to the increasein revenue and the improved gross margin without a proportionate increase inoperating expenses.   However, the mostsignificant reason for the operating loss in 2003 was the start-up costsassociated with our Internet portal business without accompanying revenues.

 

**Other income (expenses): **Foreign currencyexchange loss was $9,440 for the year ended December 31, 2003, as compared to again of $182,555 for the same period in 2002. The 2002 gain was due to theunrealized translation gains on an intercompany account between Holdings andNew Tech.  Effective July 1, 2002, theCompany changed the recording of unrealized translation gains and losses on theintercompany account between Holdings and New Tech by recording gains andlosses directly to stockholders’ equity to reflect the long-term nature of thisbalance.  Previously, unrealizedtranslation gains and losses related to the long term intercompany loan wererecorded in the statements of operations.

 

Interestexpense, net was $41,119 for the year ended December 31, 2003, as compared to$8,636 for the same period in 2002. This increase was due to charges associatedwith the short-term note payable to the bank.

 

Minorityinterest in the loss of the consolidated joint venture was $65,809, as comparedto $0 for the same period in 2002. This relates to Intac Purun and representsthe portion of the loss attributable to the other joint venture partners.

 

**Net loss:**  Net loss was $239,196 for year endedDecember 31, 2003, as compared to a net loss of $776,755 for 2002.  The improvement was primarily due to theincrease in revenue and the improved gross margin without a proportionateincrease in operating expenses. However, the most significant reason for the net loss in 2003 was thestart-up costs associated with our Internet portal business withoutaccompanying revenues.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**General**

 

We maintained unrestricted cash of $2,810,574 as of December 31, 2003,and working capital of $5,323,205 as of that date.

 

55

----

 

As of December 31, 2003, trade accounts receivable, inventories,foreign sales tax receivable and deposits paid were $4,000,286, $232,371,$335,993 and $250,133 respectively, compared to December 31, 2002, balances of$730,504, $1,140,506, $534,116 and $1,197,428, respectively.  As of December 31, 2003, trade accountspayable was $1,577,408, compared to December 31, 2002 balance of$1,964,035.  Each of these movements wasdue to the timing of product sales and the receipt of the related deposits fromcustomers, inventory and making of the payments to suppliers in relation to theyear end.  These balances are likely tovary at any point in time due to the short term sales cycle.

 

Working capital (measured by current assets less current liabilities)at December 31, 2003, was $5,323,205, and at December 31, 2002, was$1,368,659.  The increase in workingcapital is primarily due to the equity financing of $4,500,000 raised inSeptember 2003, partially offset by the operating loss for the year endedDecember 31, 2003.

 

For the year ended December 31, 2003, cash used in operating activitiestotaled $1,156,349. The use of funds was primarily due to a net loss of theCompany, an increase in trade accounts receivable, and a decrease in tradeaccounts payable and accrued expenses, partially offset by non-cash items, adecrease in inventories, foreign sales tax receivable and deposits paid.  For the year ended December 31, 2002, cashused in operating activities totaled $922,572. The use of funds was primarilydue to a net loss plus an increase in trade accounts receivable, inventories,and deposits paid, partially offset by a decrease in foreign sales taxreceivable, as well as an increase in deposits received and trade accountspayable and accrued expenses.

 

For the year ended December 31, 2003, cash used in investing activitiesamounted to $4,125,386 and was due to the restricted cash deposit, the purchaseof equipment and other assets, and advances to employees. For the year endedDecember 31, 2002, cash used in investing activities amounted to $443,817. Theuse of funds was for the purchases of equipment and other assets.

 

For the year ended December 31, 2003, cash provided by financingactivities amounted to $7,502,737 and was due to the proceeds from the issuanceof common stock in a private placement, borrowings from a bank and theinvestment into Intac Purun by the other joint venture partners, partiallyoffset by repayments to a shareholder. For the year ended December 31, 2002, cashprovided by financing activities amounted to $696,988 and was due to anincrease in the advance from a shareholder and the proceeds from the issuanceof 100,000 common stock shares in two private placement transactions.

 

We believethat we currently have adequate capital for the next twelve months; however,long-term plans will require us to obtain additional financing through theissuance of debt, equity, other securities or a combination thereof in order totake advantage of our strategic agreements and business alliances.  Growing our business requires additionalworking capital.  Intac Purun willrequire additional capital to hire staff and implement its business plans.  Our inventory purchases, including purchasesof wireless handsets and automobiles, generally require full payment for theproducts prior to delivery.  Also insome cases, we will give minimal credit terms to customers for the balanceoutstanding, if they have an established and good payment history with us.  Our inability to obtain additionalacceptable financing would likely have a significant negative impact on ourgrowth plans.

 

In addition,we may seek to obtain a working capital or other traditional loan facility froma bank or other lending source in addition to the existing short-termnote.   Unless we are able to continueto improve our operating performance, 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, other than a short-term notepayable, we do not have any other financing arrangements, nor do we have anycommitments to obtain such an arrangement with any bank or other third partyexcept for those currently disclosed. 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 shareholders. There can be no assurances that wewill be able to obtain additional financing on terms which are acceptable tous.

 

In addition to our current obligations, we continue to negotiate otherstrategic agreements and business alliances many of which will be dependentupon our obtaining additional working capital, or whose value will bematerially less to the Company if we do not have the financial resources tofully exploit such opportunities.

 

Our forecastof the period of time through which our financial resources will be adequate tosupport our operations under our current plan of operation is a forward-lookingstatement that is subject to risks and uncertainties, and we may be required toraise additional capital prior to that time and afterwards.

 

56

----

 

**Internet Portal Segment**

 

We believethat Intac Purun currently has adequate working capital for the short term;however, long-term plans will require that we obtain additional financing.  Under the Joint Venture Agreement for theestablishment of Intac Purun, we are responsible for taking advantage of ourstatus as a listed company to obtain further funding for the long term benefitof the business.

 

We arecurrently developing our Internet portal and as such have made advance paymentsfor the development of sophisticated database software which will have thecapability to allow us to match open positions with eligible candidates.  We will also require further funding toestablish the local Career Service Centers to work closely with provincialeducation authorities, attract an experienced management team for Intac Purunin order to execute an effective business plan while at the same time, seekingto ensure that the joint venture has adequate capital to accomplish itsgoals.  We must also ensure thisdatabase is being maintained and continually updated in order to create themost comprehensive database of job opportunities for college graduates andstudents.

 

**Wireless Handset Distribution Segment**

 

We may require financing to grow our wireless handset distributionbusiness, with growth in this area restricted mainly by available workingcapital. We have an established customer base, which at this time hasincreasing volume demands which we are preparing to meet.  We have a strong and trusted relationshipwith our customers. With our reputation for reliability, low cost, experienceand trust, the Company’s established customer base prefers to do as muchsourcing as possible through us.  Salescould increase significantly if the Company is able to secure substantialadditional funding as we would be able to potentially fully exploit strategicagreements and business alliances, and finance additional inventory purchases.

 

Generally, wedo not maintain any inventory of wireless handsets; however, due to the timingof the inventory being received and then being shipped to customers, we mayhold inventory for a minimal time period, commonly a few days.  We purchase products only upon the receiptof an order.  Once an order is received,we are typically required to pay for the inventory by the wire transfer offunds. Therefore, to the extent that our working capital resources areinsufficient to prepay for an inventory order, our ability to procure inventorywill be adversely impacted.

 

Generally, ourcustomers will pay within a few days of receiving and inspecting theproduct.  Our business model generallyrequires a deposit by the customer, however in some cases we will give minimalcredit terms to customers for the balance outstanding if they have anestablished and good payment history with us. However, we usually receive payment from our customer within ten (10)days of the date of our payment for the inventory. We believe that because ofthe arrangement that we prepay for inventory orders for wireless handsets, ourfuture growth in this area is limited primarily by the available capital tofinance the sales.

 

**Automobile Distribution Segment**

 

We may alsorequire financing to grow our automobile distribution business. Because of thehigher cost of automobiles relative to wireless handsets, we will needsignificant additional capital to expand this business segment. Typically, thedelivery cycle for an order of automobiles is approximately four months.  Upon the placement of an order, we expect toplace a 30% deposit with the manufacturer, which is offset by a non-refundabledeposit of 15% from our customer. We are required to make full payment upondelivery from the manufacturer, after which it takes us approximately fourweeks to ship the automobiles to the China free-trade port for resale. Ourcustomers are responsible for payment at the time of delivery, although we areresponsible for the automobile during transit and in the event that a customerdeclines to accept delivery. If a customer were to decline delivery, thecustomer would forfeit their deposit and we would then attempt to re-sell theautomobile inventory through the China free-trade port. Thus far we have notexperienced any significant amount of declined deliveries.

 

**Additional Business Opportunities**

 

We believethat we currently have adequate capital for the next twelve months; however,long-term plans would require that we obtain additional financing through theissuance of debt, equity, other securities or a combination thereof in order totake advantage of our other strategic agreements and business alliances.  In addition, we may seek to obtain a workingcapital or other traditional loan facility from a bank or other lending sourcein addition to the existing short-term note. Furthermore, we expect to partner with existing Chinese companies andentrepreneurs to minimize our capital requirements and investment risks. Thereis no assurance that we will be able to continue to fund our capital needs ormaintain adequate liquidity to implement our business plan and take advantageof investment opportunities.

 

Unless we areable to continue to improve our operating performance, additional outsidefinancing required to execute

 

57

----

 

our long-termbusiness plan would be difficult to obtain on acceptable terms, if at all. Asof the date of this Report, other than a short-term note payable, we do nothave any other financing arrangements, nor do we have any commitments to obtainsuch an arrangement with any bank or other third party except for thosecurrently disclosed. If we raise capital by issuing equity or convertible debtsecurities, the percentage ownership of our stockholders will be reduced. Anynew securities may have rights, preferences or privileges senior to those ofour common shareholders. There can be no assurances that we will be able toobtain additional financing on terms which are acceptable to us.

 

In addition toour current obligations, we continue to negotiate other strategic agreementsand business alliances many of which will be dependent upon our obtainingadditional working capital, or whose value will be materially less to us if wedo not have the financial resources to fully exploit such opportunities.

 

Our forecastof the period of time through which our financial resources will be adequate tosupport our operations under our current plan of operation is a forward-lookingstatement that is subject to risks and uncertainties, and we may be required toraise additional capital prior to that time and afterwards.

 

58

----

 

**Contractual Obligations**

 

The Company’scontractual obligations as of December 31, 2003, are summarized below andrelate to lease commitments under non-cancelable operating leases of theCompany’s office facilities:

 
| **Year ending December 31,** |   |    |    |
|------------------------------|--------|---------|---------|
| 2004                         |   | $       | 168,093 |   |
| 2005                         |   | 102,804 |    |
| 2006                         |   | 45,735  |    |
| 2007                         |   | 11,433  |    |
| Thereafter                   |   | —  |    |
|                         |   | $       | 328,065 |   |

 

For the yearended December 31, 2003 and 2002, rental expense which is included in selling,general and administrative expense amounted to $147,972 and $101,291,respectively.

 

At December 31, 2003 the Company had a short-term note payable to abank that consisted of a loan from a financial institution in China of$2,728,202 bearing interest at a rate of 5.06% per annum.  The loan is due on April 22, 2004.  The loan is secured by a $2.8 milliondeposit which is reflected as restricted cash in the consolidated balancesheet.

 

**Off – Balance Sheet Arrangements**

 

The Companyhas no off-balance sheet arrangements that have, had or are reasonably likelyto have, a current or future effect on the Company’s financial condition,changes in financial condition, revenues or expenses, results of operations,liquidity, capital expenditures or capital resources that is material to investors.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In January2003, the FASB issued Interpretation (“FIN”) No. 46, “Consolidation of VariableInterest Entities” (“FIN 46”) and, in December 2003, issued a revision to thatinterpretation (“FIN 46R”). FIN 46R replaces FIN 46 and addresses consolidationby business enterprises of variable interest entities that possess certaincharacteristics. A variable interest entity (“VIE”) is defined as (a) anownership, contractual or monetary interest in an entity where the ability toinfluence financial decisions is not proportional to the investment interest,or (b) an entity lacking the invested capital sufficient to fund futureactivities without the support of a third party. FIN 46R establishes standardsfor determining under what circumstances VIEs should be consolidated with theirprimary beneficiary, including those to which the usual condition forconsolidation does not apply. The adoption of this Statement in January 2003had no effect on the Company’s financial statements.

 

**QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We may beaffected by fluctuations in the translation of foreign currency. Currently, ourprimary currency 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 otherthan a short-term note and therefore we are not subject to any risks associatedwith interest rate changes.

 

59

----

 

**ITEM 7****- FINANCIALSTATEMENTS**

 

Theinformation required by this item is set forth in the Company’s ConsolidatedFinancial Statements and Notes thereto beginning at page F-1 of this report.

 

**ITEM 8****- CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

On April 25,2002, the Registrant filed a report on Form 8-K advising that KPMG LLP, itsprincipal accountants, had resigned effective April 18, 2002.  The Registrant’s Board of Directors beganinterviewing potential replacements immediately.

 

On May 15,2002, after considering numerous potential replacement candidates, theRegistrant’s Board of Directors approved King Griffin & Adamson P.C.(“KGA”) as the Registrant’s certifying accountants.

 

Prior to theappointment of KGA, the Registrant never consulted KGA regarding any matterconcerning (i) the application of accounting principles to any specifictransaction, either completed or proposed, or the type of audit opinion thatmight be rendered on the Registrant’s financial statements, nor was any writtenor oral advice provided that KGA concluded was an important factor consideredby the Registrant in reaching a decision as to an accounting, auditing orfinancial reporting issue, or (ii) any matter which was the subject of adisagreement with KPMG LLP, the prior certifying accountant or any matterrequiring disclosure under the rules pertaining to the use of Form 8-K(“Reportable Events”).  Other than asreported in its Form 8-K filed on April 25, 2002, there were no disagreementswith KPMG LLP on any matter affecting the Registrant’s consolidated financialstatements or any other Reportable Events.

 

On March 1,2003, the Registrant filed a report on Form 8-K advising that, King Griffin& Adamson P.C., its principal accountants, had resigned to allow itssuccessor entity, KBA Group LLP, to be engaged as the Registrant’s independentaccountants.

 

**ITEM 8A****- CONTROLSAND PROCEDURES**

 

Under the supervision and with the participation of our Management,including our chief executive officer and chief financial officer, we conductedan evaluation of the effectiveness of the design and operations of ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of December 31, 2003. Basedon this evaluation, our chief executive officer and chief financial officerconcluded that our disclosure controls and procedures were effective such thatthe material information required to be included in our Securities and ExchangeCommission (“SEC”) reports is recorded, processed, summarized and reportedwithin the time periods specified in SEC rules and forms relating to theCompany, including our consolidated subsidiaries, and was made known to them byothers within those entities, particularly during the period when this reportwas being prepared.  In addition, therewere no significant changes in our internal control over financial reportingthat could significantly affect these controls during the quarter or from thedate of our review.  We have notidentified any significant deficiency or material weaknesses in our internalcontrols, and therefore there were no corrective actions taken.

 

60

----

 

**PART III**

 

**ITEM 9****-DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITHSECTION 16(a) OF THE EXCHANGE ACT**

 

Theinformation regarding directors and executive officers is incorporated hereinby reference from the section entitled “Directors and Executive Officers” ofour Definitive Proxy Statement (the “Proxy Statement”) to be filed pursuant toRegulation 14A of the Securities and Exchange Act of 1934, as amended. TheProxy Statement is anticipated to be filed within 120 days after the end of ourfiscal year ended December 31, 2003, or on or before April 29, 2004.

 

**ITEM 10****- EXECUTIVECOMPENSATION**

 

Informationregarding executive compensation is incorporated herein by reference from thesection entitled “Executive Compensation” of the Proxy Statement.

 

Our Board ofDirectors adopted a Code of Business Conduct for all of our directors, officersand employees and a Code of Ethics for our CEO and Senior Financial Executivesin March 2004.  Stockholders may requesta free copy of our Code of Business Conduct and Code of Ethics from:

 

INTAC International,Inc.

Attention:  Chief Financial Officer

12221 MeritDrive, Suite 1350,

Dallas, TX75251-2248, U.S.A.

(1) 469 9169891

 

To date, therehave been no waivers under our conduct of Business Conduct and Ethics.  We will post any waivers, if and when granted,of our Code of Ethics on our website at www.intac-asia.com.

 

**ITEM 11****- SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

Informationregarding security ownership of certain beneficial owners and management isincorporated herein by reference from the section entitled “BeneficialOwnership of Shares” of the Proxy Statement.

 

**ITEM 12****- CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Informationregarding certain relationships and related transactions is incorporated hereinby reference from the section entitled “Certain Relationships and RelatedTransactions” of the Proxy Statement.

 

**ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                   Exhibits.

 

2.1                                 Agreementand Plan of Reorganization, dated October 13, 2001, by and between CommodoreMinerals, Inc., INTAC Holdco Corp., Wei Zhou and Yip Yin Kwan. (filed asExhibit 2.1 to Current Report on Form 8-K dated October 13, 2001, filed withthe Commission on October 30, 2001 (the “Reorganization Form 8-K”) and incorporatedherein by reference).

 

2.2                                 StockPurchase Agreement, dated September 28, 2001, by and between Wei Zhou andGrayson Hand (filed as Exhibit 2.2 to Reorganization Form 8-K and incorporatedherein by reference).

 

3.1                                 Amendedand Restated Articles of Incorporation (filed as Exhibit 3.1 to Current Reporton Form 8-K/A dated October 13, 2001, filed with the Commission on December 26,2001 and incorporated herein by reference).

 

3.2                                 Amendedand Restated Bylaws (filed as Exhibit 3.2 to Current Report on Form 8-K datedOctober 1, 2001, filed with the Commission on October 15, 2001 and incorporatedherein by reference).

 

10.1                         Leaseagreement by and between INTAC International Holdings, Ltd. and Realty StarDevelopment Limited dated March 13, 2002 (filed as Exhibit 10.7 to Form 10-QSBfor the quarter ended March 31, 2003 filed with the Commission on May 20, 2002and incorporated herein by reference).

 

61

----

 

10.2                         EmploymentAgreement by and between the Registrant and J. David Darnell dated as ofJune 11, 2002 (Filed as Exhibit 10.1 to Form 10-QSB for the quarter June30, 2002 filed with the Commission on August 20, 2002 and incorporated hereinby reference).

 

10.3                           T-Mobileagreement (a translation of which was also filed) (Filed as Exhibit 10.3 toForm 10-KSB for the fiscal year ended December 31, 2002 filed with theCommission on March 28, 2003 and incorporated herein by reference).

 

10.4                           JointVenture Agreement for the establishment of Beijing INTAC Purun Educational DevelopmentLtd by and among EMIC of the Ministry of Education P.R.C., China PutianCorporation and INTAC International Inc. (Filed as Exhibit 10.4 to Form 10-QSBfor the quarter ended September 30, 2003 filed with the Commission on November14, 2003 and incorporated herein by reference).

 

10.5                           Subscriptionand Investment Representation Agreement, dated as of September 15, 2003,between INTAC International, Inc. and an accredited investor (Filed as Exhibit10.4 to Form 10-Q for the quarter ended September 30, 2003 filed with theCommission on November 14, 2003 and incorporated herein by reference).

 

10.6                           Assignmentof Joint Venture Interest and Release of Debt agreement (filed herewith).

 

10.7                           Loanand Interest Pledge Agreement (filed herewith).

 

21.1                           Listof Subsidiaries (filed herewith).

 

31.1                         Certificationof Wei Zhou, President and Chief Executive Officer (filed herewith).

 

31.2                         Certificationof J. David Darnell, Senior Vice President and Chief Financial Officer (filedherewith).

 

32.1                           Certificationof Wei Zhou, President and Chief Executive Officer and J. David Darnell, SeniorVice President and Chief Financial Officer (filed herewith).

 

(b)                  Reports on Form8-K

 

None.

 

**ITEM 14****- PRINCIPALACCOUNTANT FEES AND SERVICES**

 

 (1)                               **Audit Fees:**  Fees for audit services provided by KBAGroup LLP and its predecessor for 2003 and 2002 were approximately $103,850 and$97,258, respectively, including fees associated with the annual audit and thereviews of the Company’s quarterly reports on Form 10-QSB.  Fees for audit services provided by KPMG LLPfor 2002 were $25,000, for the inclusion of their December 31, 2001 auditopinion within the 2002 Form 10-KSB.  Noaudits services were provided during 2003 by KPMG LLP.

 

(2)                                  **AuditRelated Fees:** KBA Group LLPdid not bill the Company any audit related fees during 2003 or 2002.

 

(3)                                  **TaxFees: **Fees for tax servicesprovided by KBA Group LLP for 2003 and 2002 were approximately $7,500 and$6,100, respectively.

 

(4)                                **All OtherFees:** Fees for all otherfees provided by KBA Group LLP for 2002 were approximately $5,800. No otherfees were provided during 2003.

 

(5)                                  **AuditCommittee’s Pre-Approval Policies and Procedures:**

 

(i)                                     TheAudit Committee of the Board of Directors approves the scope of services andfees of the outside accountants on an annual basis, generally prior to thebeginning of the services.

 

(ii)                                  TheAudit Committee of the Board of Directors reviews approved 100% of the fees forthe services above.

 

62

----

 

In accordance withSection 13 or 15(d) of the Exchange Act, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| Date:  | March 30,  2004 | INTAC  INTERNATIONAL, INC.                                                                 |
|--------|-----------------|--------------------------------------------------------------------------------------------|
|   |            |                                                                                       |
|   |            | By: /s/ Wei  Zhou                                                                          |   |
|   |            |                                                                                       |
|   |            | Wei Zhou,  President, Chief Executive  Officer and Director (Principal  Executive Officer) |

 

In accordancewith the requirements of the Securities Exchange Act, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Name**                 |   | **Title** |                                                                                             | **Date** |
|--------------------------|--------|-----------|--------------------------------------------------------------------------------------------------|----------|
|                     |   |      |                                                                                             |     |
| /s/ Wei Zhou             |   |      | President,  Chief Executive Officer and  Director (Principal Executive Officer)                  |     | March 30,  2004 |
| Wei Zhou                 |   |      |                                                                                             |
|                     |   |      |                                                                                             |     |
| /s/ J. David  Darnell    |   |      | Senior Vice  President & Chief Financial Officer  and Director (Principal Financial Officer) |     | March 30,  2004 |
| J. David  Darnell        |   |      |                                                                                             |
|                     |   |      |                                                                                             |     |
| /s/ Theodore  P. Botts   |   |      | Director                                                                                         |     | March 30,  2004 |
| Theodore P.  Botts       |   |      |                                                                                             |     |
|                     |   |      |                                                                                             |     |
| /s/ Qi Feng              |   |      | Director                                                                                         |     | March 30,  2004 |
| Qi Feng                  |   |      |                                                                                             |     |
|                     |   |      |                                                                                             |     |
| /s/ Kevin K.  Jones      |   |      | Director                                                                                         |     | March 30,  2004 |
| Kevin K.  Jones          |   |      |                                                                                             |     |
|                     |   |      |                                                                                             |     |
| /s/ Oliver  Samwer       |   |      | Director                                                                                         |     | March 30,  2004 |
| Oliver  Samwer           |   |      |                                                                                             |     |
|                     |   |      |                                                                                             |     |
| /s/ Hans  Schuld         |   |      | Director                                                                                         |     | March 30, 2004 |
| Hans Schuld              |   |      |                                                                                             |     |
|                     |   |      |                                                                                             |     |
| /s/ Dr. Heinz-Gerd Stein |   |      | Director                                                                                         |     | March 30,  2004 |
| Dr.  Heinz-Gerd Stein    |   |      |                                                                                             |     |
|                     |   |      |                                                                                             |     |
| /s/ Larrie  A. Weil      |   |      | Director                                                                                         |     | March 30,  2004 |
| Larrie A.  Weil          |   |      |                                                                                             |     |
|                          |        |           |                                                                                                  |          |  |  |  |  |  |  |  |  |  |

 

63

----

 

**INDEX TO EXHIBITS**

 
| **Exhibits** |   |
|--------------|--------|
|         |   |   |
| 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). |
|         |   |   |
| 3.1          |   | 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          |   | Amended and  Restated Bylaws (filed as Exhibit 3.2 to Current Report on Form 8-K dated  October 1, 2001, filed with the Commission on October 15, 2001 and  incorporated herein by reference). |
|         |   |   |
| 10.1         |   | 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). |
|         |   |   |
| 10.2         |   | 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). |
|         |   |   |
| 10.3         |   | 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). |
|         |   |   |
| 10.4         |   | 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). |
|         |   |   |
| 10.5         |   | 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). |
|         |   |   |
| 10.6         |   | Assignment  of Joint Venture Interest and Release of Debt agreement (filed herewith). |
|         |   |   |
| 10.7         |   | Loan and  Interest Pledge Agreement (filed herewith). |
|         |   |   |
| 21.1         |   | List of  Subsidiaries (filed 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 and J. David Darnell,  Senior Vice President and Chief Financial Officer (filed herewith). |
|              |        |  |  |

 

64

----

 

**INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

 
| INDEPENDENT  AUDITORS’ REPORT OF KBA GROUP LLP                                   |   |
|---------------------------------------------------------------------------------------|--------|
|                                                                                  |   |
| CONSOLIDATED BALANCE SHEETS                                                           |   |
|                                                                                  |   |
| CONSOLIDATED STATEMENTS OF OPERATIONS                                                 |   |
|                                                                                  |   |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’  EQUITY AND COMPREHENSIVE INCOME (LOSS) |   |
|                                                                                  |   |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                                                 |   |
|                                                                                  |   |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            |   |

 

F-1

----

 

 

**INDEPENDENT****AUDITORS’REPORT**

 

The Board ofDirectors and Stockholders

 

INTACInternational, Inc.:

 

We haveaudited the accompanying consolidated balance sheets of INTAC International,Inc. and subsidiaries as of December 31, 2003 and 2002, and the relatedconsolidated statements of operations, stockholders’ equity and comprehensiveincome (loss), and cash flows for the years then ended. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above present fairly,in all material respects, the financial position of INTAC International, Inc.and subsidiaries as of December 31, 2003 and 2002, and the results of theiroperations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

 

 
| /s/ KBA  Group LLP |   |
|--------------------|--------|
| Dallas,  Texas     |
| January 31,  2004  |

 

F-2

----

 

**INTAC INTERNATIONAL,INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 (expressed in U.S. dollars)

 
|                                                                                                                                   |   | **December  31,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                                                   |   | **2003**          |       | **2002** |   |
| Assets                                                                                                                                 |   |              |       |   |   |
| Current assets                                                                                                                         |   |              |       |   |   |
| Cash and cash equivalents                                                                                                              |   | $                 | 2,810,574  |   | $ | 589,572 |   |
| Restricted cash                                                                                                                        |   | 2,800,000         |       | — |   |
| Trade accounts receivable (net of allowance for  doubtful accounts of $0 in 2003 and $2,521 in 2002)                                   |   | 4,000,286         |       | 730,504 |   |
| Inventories                                                                                                                            |   | 232,371           |       | 1,140,506 |   |
| Foreign sales tax receivable                                                                                                           |   | 335,993           |       | 534,116 |   |
| Deposits paid                                                                                                                          |   | 250,133           |       | 1,197,428 |   |
|                                                                                                                                   |   |              |       |   |   |
| Total current assets                                                                                                                   |   | 10,429,357        |       | 4,192,126 |   |
|                                                                                                                                   |   |              |       |   |   |
| Equipment, net                                                                                                                         |   | 883,061           |       | 348,649 |   |
| Other assets                                                                                                                           |   | 499,682           |       | 107,410 |   |
| Advances to officers of subsidiaries and employees                                                                                     |   | 346,090           |       | 13,343 |   |
| Internet portal database gateway                                                                                                       |   | 304,487           |       | — |   |
| Goodwill                                                                                                                               |   | 59,021            |       | 59,021 |   |
|                                                                                                                                   |   |              |       |   |   |
| Total assets                                                                                                                           |   | $                 | 12,521,698 |   | $ | 4,720,549 |   |
|                                                                                                                                   |   |              |       |   |   |
| Liabilities and Stockholders’ Equity                                                                                              |   |              |       |   |   |
| Current liabilities                                                                                                                    |   |              |       |   |   |
| Trade accounts payable                                                                                                                 |   | $                 | 1,577,408  |   | $ | 1,964,035 |   |
| Short-term note payable to bank                                                                                                        |   | 2,728,202         |       | — |   |
| Accrued expenses                                                                                                                       |   | 480,069           |       | 335,716 |   |
| Due to shareholder                                                                                                                     |   | 99,084            |       | 281,279 |   |
| Income taxes payable                                                                                                                   |   | —            |       | 39,598 |   |
| Deposits received                                                                                                                      |   | 221,389           |       | 202,839 |   |
|                                                                                                                                   |   |              |       |   |   |
| Total current liabilities                                                                                                              |   | 5,106,152         |       | 2,823,467 |   |
|                                                                                                                                   |   |              |       |   |   |
| Minority interest in consolidated joint venture                                                                                        |   | 695,408           |       | — |   |
|                                                                                                                                   |   |              |       |   |   |
| 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; 20,189,455 and 19,189,455 shares issued and outstanding,  respectively |   | 20,189            |       | 19,189 |   |
| Additional paid-in capital                                                                                                             |   | 8,062,801         |       | 3,330,468 |   |
| Accumulated deficit                                                                                                                    |   | (1,563,505        | )          | (1,324,309 | ) |
| Accumulated other comprehensive income (loss)                                                                                          |   | 200,653           |       | (128,266 | ) |
|                                                                                                                                   |   |              |       |   |   |
| Total stockholders’ equity                                                                                                        |   | 6,720,138         |       | 1,897,082 |   |
|                                                                                                                                   |   |              |       |   |   |
| Total liabilities and stockholders’ equity                                                                                        |   | $                 | 12,521,698 |   | $ | 4,720,549 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-3

----

 

**INTAC INTERNATIONAL,INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 (expressed in U.S. dollars)

 
|                                                     |   | **For the year ended December 31,** |       |
|----------------------------------------------------------|--------|-------------------------------------|------------|
|                                                     |   | **2003**                            |       | **2002** |   |
|                                                     |   |                                |       |   |   |
| Revenues                                                 |   | $                                   | 91,353,172 |   | $ | 84,835,480 |   |
|                                                     |   |                                |       |   |   |
| Cost of goods sold                                       |   | 87,852,546                          |       | 82,180,018 |   |
| Cost of goods sold - related parties                     |   | —                              |       | 935,922 |   |
|                                                     |   |                                |       |   |   |
| Total cost of goods sold                                 |   | 87,852,546                          |       | 83,115,940 |   |
|                                                     |   |                                |       |   |   |
| Gross profit                                             |   | 3,500,626                           |       | 1,719,540 |   |
|                                                     |   |                                |       |   |   |
| Operating expenses                                       |   |                                |       |   |   |
| Distribution expenses                                    |   | 1,014,673                           |       | 399,620 |   |
| Selling, general and administrative expenses             |   | 2,768,750                           |       | 2,321,776 |   |
|                                                     |   |                                |       |   |   |
| Total operating expenses                                 |   | 3,783,423                           |       | 2,721,396 |   |
|                                                     |   |                                |       |   |   |
| Loss from operations                                     |   | (282,797                            | )          | (1,001,856 | ) |
|                                                     |   |                                |       |   |   |
| Other income (expenses)                                  |   |                                |       |   |   |
| Foreign currency exchange gain (loss)                    |   | (9,440                              | )          | 182,555 |   |
| Interest expense, net                                    |   | (41,119                             | )          | (8,636 | ) |
| Minority interest in loss of consolidated joint  venture |   | 65,809                              |       | — |   |
| Other income, net                                        |   | 28,351                              |       | 51,182 |   |
|                                                     |   |                                |       |   |   |
| Total other income (expenses)                            |   | 43,601                              |       | 225,101 |   |
|                                                     |   |                                |       |   |   |
| Loss before income taxes                                 |   | (239,196                            | )          | (776,755 | ) |
|                                                     |   |                                |       |   |   |
| Income taxes                                             |   | —                              |       | — |   |
|                                                     |   |                                |       |   |   |
| Net loss                                                 |   | $                                   | (239,196   | ) | (776,755 | ) |
|                                                     |   |                                |       |   |   |
| Net loss per share – basic and diluted              |   | $                                   | (0.01      | ) | (0.04 | ) |
|                                                     |   |                                |       |   |   |
| Weighted average shares outstanding - basic and  diluted |   | 19,481,122                          |       | 19,109,455 |   |
|                                                          |        |                                     |            |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-4

----

 

**INTAC INTERNATIONAL,INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY AND COMPREHENSIVE INCOME (LOSS)**

(expressed in U.S. Dollars)

 
|                                                    |   | **Common  Stock** |   | **Additional  Paid-in** |   | **Notes  Receivable** |   |
|---------------------------------------------------------|--------|-------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                    |   | **Shares**        |   | **$**                   |   | **Capital**           |   | **Shareholder** |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Balance at January 1, 2002                              |   | 19,089,455        |   | $                       | 19,089 |                  | $      | 2,763,346 |   | $ | (1,282 | ) |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Issuance of common stock                                |   | 100,000           |   | 100                     |   | 469,900               |   | — |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Proceeds from shareholder receivable                    |   | —            |   | —                  |   | —                |   | 1,282 |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Compensation in connection with restricted stock  award |   | —            |   | —                  |   | 97,222                |   | — |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Comprehensive loss                                      |   |              |   |                    |   |                  |   |   |   |
| Net loss                                                |   | —            |   | —                  |   | —                |   | — |   |
| Foreign currency translation                            |   | —            |   | —                  |   | —                |   | — |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Total comprehensive loss                                |   |              |   |                    |   |                  |   |   |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Balance at December 31, 2002                            |   | 19,189,455        |   | 19,189                  |   | 3,330,468             |   | — |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Issuance of common stock                                |   | 1,000,000         |   | 1,000                   |   | 4,499,000             |   | — |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Compensation in connection with restricted stock  award |   | —            |   | —                  |   | 233,333               |   | — |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Comprehensive loss                                      |   |              |   |                    |   |                  |   |   |   |
| Net loss                                                |   | —            |   | —                  |   | —                |   | — |   |
| Foreign currency translation                            |   | —            |   | —                  |   | —                |   | — |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Total comprehensive income                              |   |              |   |                    |   |                  |   |   |   |
|                                                    |   |              |   |                    |   |                  |   |   |   |
| Balance at December 31, 2003                            |   | 20,189,455        |   | $                       | 20,189 |                  | $      | 8,062,801 |   | $ | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-5

----

 

**INTAC INTERNATIONAL,INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVEINCOME (LOSS)**

(expressed in U.S. Dollars)

 
|                                                    |   | **Accumulated  Deficit** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total  Stockholders’  Equity** |   |
|---------------------------------------------------------|--------|--------------------------|------------|------------------------------------------------------|--------|---------------------------------------|--------|
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Balance at January 1, 2002                              |   | $                        | (547,554   | )                                                    | $      | 1,399                                 |   | $ | 2,234,998 |   |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Issuance of common stock                                |   | —                   |       | —                                               |   | 470,000                               |   |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Proceeds from shareholder receivable                    |   | —                   |       | —                                               |   | 1,282                                 |   |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Compensation in connection with restricted stock  award |   | —                   |       | —                                               |   | 97,222                                |   |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Comprehensive loss                                      |   |                     |       |                                                 |   |                                  |   |
| Net loss                                                |   | (776,755                 | )          | —                                               |   | (776,755                              | )      |
| Foreign currency translation                            |   | —                   |       | (129,665                                             | )      | (129,665                              | )      |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Total comprehensive loss                                |   |                     |       |                                                 |   | (906,420                              | )      |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Balance at December 31, 2002                            |   | (1,324,309               | )          | (128,266                                             | )      | 1,897,082                             |   |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Issuance of common stock                                |   | —                   |       | —                                               |   | 4,500,000                             |   |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Compensation in connection with restricted stock  award |   | —                   |       | —                                               |   | 233,333                               |   |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Comprehensive income                                    |   |                     |       |                                                 |   |                                  |   |
| Net loss                                                |   | (239,196                 | )          | —                                               |   | (239,196                              | )      |
| Foreign currency translation                            |   | —                   |       | 328,919                                              |   | 328,919                               |   |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Total comprehensive income                              |   |                     |       |                                                 |   | 89,723                                |   |
|                                                    |   |                     |       |                                                 |   |                                  |   |
| Balance at December 31, 2003                            |   | $                        | (1,563,505 | )                                                    | $      | 200,653                               |   | $ | 6,720,138 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-6

----

 

**INTAC INTERNATIONAL,INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(expressed in U.S. dollars)

 
|                                                                         |   | **For the year ended December 31** |      |
|------------------------------------------------------------------------------|--------|------------------------------------|-----------|
|                                                                         |   | **2003**                           |      | **2002** |   |
| CASH FLOW FROM OPERATING ACTIVITIES:                                         |   |                               |      |   |   |
| Net loss                                                                     |   | $                                  | (239,196  | ) | $ | (776,755 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                               |      |   |   |
| Depreciation of equipment                                                    |   | 68,793                             |      | 70,371 |   |
| Minority interest                                                            |   | (65,809                            | )         | — |   |
| Compensation in connection with restricted stock  award                      |   | 233,333                            |      | 97,222 |   |
| Other comprehensive income (loss)                                            |   | 328,919                            |      | (129,665 | ) |
| Gain on sale of equipment                                                    |   | (2,838                             | )         | — |   |
| Changes in operating assets and liabilities                                  |   |                               |      |   |   |
| Trade accounts receivable                                                    |   | (3,269,782                         | )         | (506,355 | ) |
| Inventories                                                                  |   | 908,135                            |      | (1,139,686 | ) |
| Foreign sales tax receivable                                                 |   | 198,123                            |      | 194,390 |   |
| Deposits paid                                                                |   | 947,295                            |      | (942,331 | ) |
| Trade accounts payable and accrued expenses                                  |   | (242,274                           | )         | 2,007,398 |   |
| Income taxes payable                                                         |   | (39,598                            | )         | — |   |
| Deposits received                                                            |   | 18,550                             |      | 202,839 |   |
|                                                                         |   |                               |      |   |   |
| Net cash used in operating activities                                        |   | (1,156,349                         | )         | (922,572 | ) |
|                                                                         |   |                               |      |   |   |
| CASH FLOW FROM INVESTING ACTIVITIES:                                         |   |                               |      |   |   |
| Restricted cash deposit                                                      |   | (2,800,000                         | )         | — |   |
| Purchase of equipment                                                        |   | (637,523                           | )         | (374,914 | ) |
| Purchase of other assets                                                     |   | (392,272                           | )         | (55,560 | ) |
| Advances to officers of subsidiaries and employees                           |   | (332,747                           | )         | (13,343 | ) |
| Proceeds from sale of equipment                                              |   | 37,156                             |      | — |   |
|                                                                         |   |                               |      |   |   |
| Net cash used in investing activities                                        |   | (4,125,386                         | )         | (443,817 | ) |
|                                                                         |   |                               |      |   |   |
| CASH FLOW FROM FINANCING ACTIVITIES:                                         |   |                               |      |   |   |
| Proceeds from issuance of common stock                                       |   | 4,500,000                          |      | 470,000 |   |
| Borrowings from bank                                                         |   | 2,728,202                          |      | — |   |
| Investment into Intac Purun from joint venture  partners                     |   | 456,730                            |      | — |   |
| Borrowings (repayments) from shareholder, net                                |   | (182,195                           | )         | 226,988 |   |
|                                                                         |   |                               |      |   |   |
| Net cash provided by financing activities                                    |   | 7,502,737                          |      | 696,988 |   |
|                                                                         |   |                               |      |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                        |   | 2,221,002                          |      | (669,401 | ) |
|                                                                         |   |                               |      |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                             |   | 589,572                            |      | 1,258,973 |   |
|                                                                         |   |                               |      |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   |   | $                                  | 2,810,574 |   | $ | 589,572 |   |
|                                                                         |   |                               |      |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                            |   |                               |      |   |   |
|                                                                         |   |                               |      |   |   |
| Cash paid for interest                                                       |   | $                                  | 43,400    |   | $ | 8,636 |   |
|                                                                         |   |                               |      |   |   |
| Cash paid for taxes                                                          |   | $                                  | 39,598    |   | $ | — |   |
|                                                                         |   |                               |      |   |   |
| NON-CASH INVESTING AND FINANCING ACTIVITY:                                   |   |                               |      |   |   |
|                                                                         |   |                               |      |   |   |
| Issuance of Intac Purun stock for the Internet  portal database gateway      |   | $                                  | 304,487   |   | $ | — |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-7

----

 

**INTAC INTERNATIONAL,INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

(a)                                  Descriptionof Business and Basis of Presentation

 

INTACInternational, Inc. (“INTAC” or the “Company”) is a U.S. holding companyfocused on the exploitation of strategic business opportunities available inChina and the Asia-Pacific Rim.  TheCompany currently maintains offices in China (Hong Kong, Beijing and Tianjin),Germany (Frankfurt) and the United States (Dallas, Texas).  During the periods reported, the Company’sprincipal operations involved the distribution of premium brand wirelesshandsets from wholesalers, manufacturers and other distributors to network operators,agents, resellers, dealers and retailers and, to a much lesser extent,automobile distribution from Europe into mainland China.   The Company has announced the redirectionof its business plan from the traditional distribution of wireless handsets tothe Internet portal business in China.

 

In October2003, INTAC formed a new Internet joint venture, Beijing Intac PurunEducational Development Ltd (“Intac Purun”), with China Putian Corporation(“Putian”) and the Ministry of Education in The People’s Republic of China(“PRC”).  Intac Purun is beingestablished to meet the growing need for expanding the employment opportunitiesfor graduates of higher level education institutions in the PRC. The Ministryof Education has already established a database of graduates which will be madeexclusively available to Intac Purun. Intac Purun intends to providecomprehensive employment information over its Internet portal to facilitatethese graduates’ employment search and future career development. This Internetportal will also offer employers a platform to list open positions available tofinal year graduates contained within this database. This fee-based servicewill be primarily made available to final year graduates; however, it isanticipated that in the future, the portal will be developed further to offer avariety of premium products and services to subscribers.  The newly formed Internet joint venture isowned 45% by INTAC, 15% by Putian, 30% by a private investor group and 10% bythe Ministry of Education.

 

Theconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles in the United States of America(“USGAAP”). In the opinion of management, all adjustments necessary for a fairpresentation have been included.

 

(b)                                 Principlesof Consolidation

 

Theaccompanying consolidated financial statements include the financial statementsof the Company and its wholly owned subsidiaries, INTAC International HoldingsLimited, New Tech Handels GmbH, INTAC Holdco Corp., FUTAC Group Limited, GlobalCreative International Limited, INTAC Telecommunications Limited and Intac(Tianjin) International Trading Co., formerly “Intac Auto Mobile TradingCompany Limited”.  The Company has alsoconsolidated the financial statements of Intac Purun, which is owned 45% by theCompany.  All intercompany balances andtransactions have been eliminated in consolidation.

 

Inconsolidating Intac Purun, the Company applied the guidance in Statement ofFinancial Accounting Standards (“SFAS”) No. 94 “Consolidation of AllMajority-Owned Subsidiaries”, and by analogy the guidance in EITF 96-16“Investor’s Accounting for an Investee When the Investor Has a Majority of theVoting Interest but the Minority Shareholder or Shareholders have Certain Approvalor Veto Rights”, INTAC being designated as the operating partner for the jointventure and effective control that INTAC has through control of the Board ofDirectors.  INTAC appoints the majorityof the Board of Directors which hires management and controls the day to dayactivities of Intac Purun making it the primary controlling shareholder.  Accordingly, management has concluded thatit is necessary to consolidate Intac Purun in order to properly reflect the substanceof the Company’s control position.

 

(c)                                  Liquidity

 

As of December31, 2003 and 2002, INTAC had an accumulated deficit of $1,563,505 and$1,324,309, respectively, primarily due to accumulated net losses fromoperations and a distribution to its principal shareholder made in 2001. TheCompany raised equity financing of $220,000 in August 2002, $250,000 inDecember 2002 and $4.5 million in September 2003.  Proceeds of the $4.5 million private placement are being used tofund the Company’s participation in Intac Purun, as well as for working capital.

 

F-8

----

 

As of December31, 2003 and 2002, INTAC maintained unrestricted cash of $2,810,574 and$589,572, respectively.   The Companymeasures liquidity through working capital (measured by current assets lesscurrent liabilities).  As of December31, 2003 and 2002, INTAC maintained working capital of $5,323,205 and$1,368,659, respectively.  The increasein working capital is primarily due to the equity financing of $4.5 millionraised in September 2003, partially offset by the operating loss for the yearended December 31, 2003.

 

The Companybelieves that it currently has adequate capital for the next twelve months;however, long-term plans will require the Company to obtain additionalfinancing through the issuance of debt, equity, other securities or acombination thereof in order to take advantage of the Company's other strategicagreements and business alliances.  Inaddition, the Company may seek to obtain a working capital or other traditionalloan facility from a bank or other lending source in addition to the existingshort-term note.   Unless the Company isable to continue to improve its operating performance, additional outsidefinancing required to execute its long-term business plan would be difficult toobtain on acceptable terms, if at all. As of the date of this Report, otherthan a short-term note payable, the Company does not have any other financingarrangements, nor does the Company have any commitments to obtain such anarrangement with any bank or other third party except for those currentlydisclosed. If the Company raises capital by issuing equity or convertible debtsecurities, the percentage ownership of its stockholders will be reduced. Anynew securities may have rights, preferences or privileges senior to those ofits common shareholders. There can be no assurances that the Company will beable to obtain additional financing on terms which are acceptable to it.

 

(d)                                 Cashand Cash Equivalents

 

For purposesof the balance sheet and statement of cash flows, the Company considers allhighly liquid investments with original maturities of three months or less tobe cash equivalents. The Company has a restricted cash balance of $2.8 millionwhich has not been included in cash and cash equivalents as it is the securityon a short-term loan balance.

 

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 thecash balances is maintained at one financial institution.

 

(e)                                  Concentrationof Credit Risk and Accounts Receivable

 

Trade accountsreceivable are stated at the amount the Company expects to collect.  The Company maintains allowances fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. Management considers the following factors when determining thecollectibility of specific customer accounts: customer credit-worthiness, pasttransaction history with the customer, current economic industry trends, andchanges in customer payment terms.  Ifthe financial condition of the Company’s customers were to deteriorate,adversely affecting their ability to make payments, additional allowances wouldbe required.  Based on management’sassessment, the Company provides for estimated uncollectible amounts through acharge to earnings and a credit to a valuation allowance.  Balances that remain outstanding after theCompany has used reasonable collection efforts are written off through a chargeto the valuation allowance and a credit to accounts receivable.

 

(f)                                    Inventories

 

Inventoriesfor wireless handsets are stated at the lower of cost and net realizable value,calculated on the first-in, first-out basis, and are comprised of finishedgoods.  Net realizable value isdetermined on the basis of anticipated sales proceeds less estimated costs forselling expenses.  Inventories forvehicles are stated at the actual amount paid to manufacturers or market, iflower.

 

(g)                                 DepositsPaid

 

Deposits paidare payments made to suppliers for down payments for wireless handsets andvehicles.

 

F-9

----

 

(h)                                 Equipment

 

Equipment isstated at cost less accumulated depreciation and any provisions for impairmentlosses required to reflect recoverable amounts.  Cost represents the purchase price and any directly attributablecosts of bringing the asset to working condition for its intended use.  Repairs and maintenance are expensed asincurred.  Betterments and capitalimprovements are capitalized and depreciated over the remaining useful life ofthe related asset.

 

Depreciationis calculated to write off the cost of the fixed asset over the shorter of theuseful life or remaining lease term of the asset, on a straight line basis, atthe following annual rates:

 
| Furniture and fixtures |   | 20 | % |
|------------------------|--------|----|---|
| Leasehold improvements |   | 20 | % |
| Motor vehicles         |   | 30 | % |

 

(i)                                     IntangibleAssets

 

Intangible assets include the legal right for exclusive access to astudent database which is owned by the PRC Ministry of Education.  The access right to this student databasehas been recorded at an assigned value of $304,487.  This value represents the proportional value of the common sharesissued for the access rights as relative to the cash received for all othershares issued.  Management hasdetermined that this intangible asset has a finite life as contemplated by SFASNo. 142 “Goodwill and Intangible Assets” (“SFAS 142”), and accordingly, thisasset will be amortized over a five year life on a straight line basis.

 

Intangible assets also include recorded goodwill of $59,021 related tothe New Tech acquisition in 2001.  Thisgoodwill is attributable to the wireless handset segment.

 

In accordance with the accounting rules contained in SFAS 142, theCompany reviews each indefinite lived intangible asset for impairment annuallyand when events or circumstances indicate that the asset might beimpaired.  Impairment is measured as theamount by which the Company’s carrying value exceeds the fair value.  Should impairment be indicated, the impairedamount will be charged to expense.

 

(j)                                     DepositsReceived

 

Depositsreceived are payments received from customers for down payments for wirelesshandsets and vehicles.

 

(k)                                  RevenueRecognition

 

Revenue isrecognized when customers take delivery of the goods, which is taken to be thepoint in time where the customer has accepted the goods and the related risksand rewards of ownership. Certain sales arrangements provide the Company theright to receive a contingent payment based on sales made by the customers.Contingent payment revenue for these arrangements is recognized on a cashbasis.

 

Receipts ofcash in advance of shipment or delivery are recorded as deposits received.

 

(l)                                     DistributionExpenses

 

Distribution expenses are principallycomprised of costs attributable to the shipping and handling of our products,such as freight and insurance.

 

F-10

----

 

(m)                               IncomeTaxes

 

Income taxesare accounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities, and their respective tax bases and operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the period in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enactment date.

 

(n)                                 ForeignCurrency Translation

 

The functionalcurrency of the Company is the Hong Kong dollar (“HK$”). The accompanyingconsolidated financial statements have been expressed in United States dollars,the reporting currency of the Company.

 

Reportedassets and liabilities of INTAC’s foreign subsidiaries have been translated atthe rate 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 translation gain (loss) on currency transactions between foreignentities is included in other income (expense) in the accompanying statementsof operations.  Effective July 1, 2002,the Company changed the recording of unrealized translation gains and losses onan intercompany account between Holdings and New Tech by recording gains andlosses directly to stockholders’ equity to reflect the long-term nature of thisbalance.  Previously, unrealizedtranslation gains and losses were recorded in the statements ofoperations.  The effect of this changeduring the six months ended December 31, 2002 and during the year endedDecember 31, 2003 was to exclude an unrealized gain (loss) on foreign currencytranslation of $(130,631) and $328,919 from the respective statements ofoperations.  These amounts are includedin other comprehensive income (loss) in stockholders’ equity.

 

(o)                                 NetLoss Per Share – Basic and Diluted

 

Basic loss pershare is calculated by dividing net loss by the weighted-average number ofcommon shares outstanding during the period. The diluted earnings per share iscalculated by dividing net loss by the weighted-average number of common sharesand dilutive potential common shares, if any, outstanding during the period.  Stock options granted under the terms of the“2001 Long Term Incentive Plan” and the restricted stock award (to the extentnot vested) were not included in the computation of diluted loss per sharebecause their effects are anti-dilutive at December 31, 2003 and 2002.

 

(p)                                 SegmentReporting

 

SFAS No. 131“Disclosures about Segments of an Enterprise and Related Information”,established standards for reporting information about operating segments infinancial statements. Operating segments are defined as components of anenterprise about which separate financial information is available that isevaluated regularly by the chief operating decision maker, or decision makinggroup, in deciding how to allocate resources and assessing performance.

 

The Company is currently considered to be comprised of three reportablesegments:  (i) career developmentservices through the Company’s Internet portal (ii) distribution ofwireless handsets and (iii) distribution of automobiles.  The Company measures segment profit (loss)as operating profit (loss) before depreciation.  As used herein, the measure of segment profit (loss) is notintended as either a substitute or replacement for operating income (asreported according to USGAAP), as a measure of the financial results of operationsor cash flows from operations (as presented according to USGAAP).

 

F-11

----

 

(q)                                 Impairmentof Long-Lived Assets and Long-Lived Assets to be Disposed of

 

The Companyaccounts for long-lived assets in accordance with the provisions of SFAS No.144, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of”. This Statement requires that long-lived assets andcertain identifiable intangibles be reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net cash flow expectedto be generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets. Assets to bedisposed of are reported at the lower of the carrying amount or fair value lesscosts to sell.

 

(r)                                    Useof Estimates

 

Management ofthe Company 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.Actual results could differ from those estimates.

 

(s)                                  SoftwareDevelopment Costs

 

In accordancewith SFAS No. 86, “Accounting for the Costs of Computer Software, Lease orOtherwise Marketed,” internally-generated software development costs associatedwith new products and significant enhancements to existing software productsare expensed as incurred until technological feasibility has beenestablished.  Software development coststhat qualify for capitalization include the salaries and benefits of thesoftware engineers assigned to the products, internal and external qualityassurance testing costs, overhead allocations primarily associated with rentand facilities costs and the costs of outsourced development activity andindependent product testing and certification labs.  Software development costs not qualifying for capitalization arerecorded as selling, general and administrative expense.  Capitalized software development costs,including purchased software, if any, are amortized after being put into useusing the greater of the revenue method or the straight-line method generallywith useful lives of three years or less. At each balance sheet date, the Company evaluates the estimated netrealizable value of each software product and when required, recordswrite-downs of net book value to net realizable value of any product for whichthe net book value is in excess of net realizable value.  The net realizable value is the estimatedfuture gross revenue of each product reduced by the estimated future costs ofcompleting and disposing of that product, including the costs of completing inprocess development and customer support. No software development costs have been incurred through December 31,2003.

 

(t)                                    Researchand Development Costs

 

The Companyincurs research and development costs that relate primarily to the developmentof new software and web development. Research and development costs are comprised primarily of salaries andrelated benefits expenses, contract labor and prototype, and other relatedexpenses and are charged to expense as incurred.

 

F-12

----

 

(u)                                 StockOption Plans and Stock-Based Compensation

 

The Companyapplies the intrinsic value-based method of accounting prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations, in accounting for its fixed plan stockoptions. As such, compensation expense would be recorded on the date of grantonly if the current market price of the underlying stock exceeded the exerciseprice. SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended bySFAS No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure-an amendment of FASB Statement No. 123,” established accountingand disclosure requirements using a fair value-based method of accounting forstock-based employee compensation plans. As allowed by SFAS No. 123 (asamended), the Company has elected to continue to apply the intrinsicvalue-based method of accounting described above, and has adopted thedisclosure requirements of SFAS No. 123 (as amended).

 

For purposesof proforma disclosure, the estimated fair value of the option is amortized toexpense over the option’s vesting period. Had the Company determined compensation based on the fair value at thedate of grant for its options under SFAS No. 123 (as amended), net loss and netloss per share for the years ended December 31, 2003 and 2002 would have beenincreased as follows:

 
|                                                                                                    |   | **For  the Year Ended December 31,** |     |
|---------------------------------------------------------------------------------------------------------|--------|--------------------------------------|----------|
|                                                                                                    |   | **2003**                             |     | **2002** |   |
|                                                                                                    |   |                                 |     |   |   |
| Net loss, as reported                                                                                   |   | $                                    | (239,196 | ) | $ | (776,755 | ) |
| Add:  Total stock-based employee  compensation expense included in reported net loss               |   | 233,333                              |     | 97,222 |   |
| Deduct:  Total stock-based employee  compensation expense determined under fair value based method |   | (447,092                             | )        | (181,136 | ) |
| Pro forma net loss                                                                                      |   | $                                    | (452,955 | ) | $ | (860,669 | ) |
|                                                                                                    |   |                                 |     |   |   |
| Net loss per share:                                                                                     |   |                                 |     |   |   |
| Basic and diluted —                                                                                |   |                                 |     |   |   |
| As reported                                                                                             |   | $                                    | (0.01    | ) | $ | (0.04 | ) |
|                                                                                                    |   |                                 |     |   |   |
| Proforma                                                                                                |   | $                                    | (0.02    | ) | $ | (0.05 | ) |

 

(v)                                 Commitmentsand Contingencies

 

Liabilitiesfor loss contingencies arising from claims, assessments and litigation andother sources are recorded when it is probable that a liability has beenincurred and the amount of the assessment can be reasonably estimated. In theopinion of management, after consultation with legal counsel, there are noclaims, assessments and litigation against the Company.

 

(w)                               FairValue of Financial Instruments

 

The carryingamounts of trade accounts receivable, foreign sales tax receivable, depositspaid and received, trade accounts payable and accrued expenses at December 31,2003 and 2002 approximate their fair values because of the short maturity ofthese instruments.

 

F-13

----

 

**2. INVESTMENT IN INTAC PURUN**

 

On January 15,2004, INTAC announced the redirection of its business plan from the traditionaldistribution of premium brand wireless handsets to its new Internet jointventure, Intac Purun.  Intac Purun wasformed in October 2003 with China Putian Corporation (“Putian”) and theMinistry of Education in The People’s Republic of China (“PRC”).  The Company invested $2.3 million incash in the newly founded Internet joint venture as of December 31, 2003, owned45% by INTAC, 15% by Putian, 30% by a private investor group and 10% by theMinistry of Education.

 

The Companyconducts its Internet business solely in the PRC through Intac Purun, a 45%foreign owned enterprise.  In order tomeet ownership requirements under PRC law which restrict or prohibit foreigninvestors from operating in certain industries such as Internet contentprovider, online stock trading and Internet access, in 2003, the Company madeloans to Miss Zhang Wanqin and Miss Li Min. Miss Zhang and Miss Li are the equity investors of Tianjin WeilianInvestment Company Limited (“Tianjin Weilian”), a company incorporated in thePRC.  These loans were made to financeMiss Zhang and Miss Li, on behalf of the Company, for the purpose ofestablishing Tianjin Weilian which formed Intac Purun in October 2003 withPutian and the Ministry of Education in the PRC.  A total of 45% of the outstanding shares of Intac Purun,representing the 45% ownership, were pledged as collateral for these loans fromINTAC and all operating, economic, voting and other rights were assigned toINTAC by Tianjin Weilian.  In March2004, Intac Purun obtained the necessary licenses which allow INTAC to owndirectly, under PRC law, the shares totaling 45% of the shares of Intac Puruncurrently held by Tianjin Weilian.  As aresult, the 45% owned by Miss Zhang and Miss Li have now been transferred toINTAC in full settlement of the loan.

 

As furtherdescribed in the accounting policies, the results of Intac Purun operationshave been included in the consolidated financial statements since incorporationof Intac Purun.  Intac Purun isincorporated and domiciled in China.

 

**3. INVENTORIES**

 

As of December31, 2003 and 2002, inventories consisted of the following:

 
|              |   | **2003** |    | **2002** |   |
|-------------------|--------|----------|---------|----------|--------|
|              |   |     |    |     |   |
| Wireless Handsets |   | $        | 28,260  |     | $      | 638,541 |   |
| Vehicles          |   | 204,111  |    | 501,965  |   |
|              |   | $        | 232,371 |     | $      | 1,140,506 |   |

 

**4. EQUIPMENT, NET**

 

As of December31, 2003 and 2002, equipment consisted of the following:

 
|                                                  |   | **2003** |    | **2002** |   |
|-------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                  |   |     |    |     |   |
| Furniture and fixtures                                |   | $        | 307,519 |     | $      | 92,761 |   |
| Leasehold improvements                                |   | 91,779   |    | 20,513   |   |
| Motor vehicles                                        |   | 664,272  |    | 312,773  |   |
| Less:  Accumulated depreciation and amortization |   | (180,509 | )       | (77,397  | )      |
|                                                  |   | $        | 883,061 |     | $      | 348,649 |   |

 

F-14

----

 

**5. OTHER ASSETS**

 

As of December31, 2003 and 2002, other assets consisted of the following:

 
|                                   |   | **2003** |    | **2002** |   |
|----------------------------------------|--------|----------|---------|----------|--------|
|                                   |   |     |    |     |   |
| Deposit for software development costs |   | $        | 218,926 |     | $      | — |   |
| Deposits and memberships               |   | 167,988  |    | 99,438   |   |
| Miscellaneous                          |   | 112,768  |    | 7,972    |   |
|                                   |   | $        | 499,682 |     | $      | 107,410 |   |

 

**6.  SHORT-TERM NOTE PAYABLE TO BANK**

 

Short-term note payable to bank at December 31, 2003 consisted of aloan from a financial institution in China of $2,728,202 bearing interest at arate of 5.06% per annum.  The loan isdue on April 22, 2004.  The loan issecured by a $2.8 million deposit which is reflected as restricted cash in theDecember 31, 2003 consolidated balance sheet.

 

**7. CONCENTRATION OF RISKS**

 

One customeraccounted for more that 10% of the Company’s sales for the year ended December31, 2003, as follows:

 
| **Company** |   | **Sales  percentage** |   |
|-------------|--------|-----------------------|--------|
|        |   |                  |   |
| Mr. Lam     |   | 68.6                  | %      |

 

The Company’sproduct suppliers were concentrated in one vendor for the year ended December31, 2003, as follows:

 
| **Company**      |   | **Purchase  percentage** |   |
|------------------|--------|--------------------------|--------|
|             |   |                     |   |
| Deutsche Telekom |   | 83.8                     | %      |

 

Two customerseach accounted for more that 10% of the Company’s sales for the year endedDecember 31, 2002, as follows:

 
| **Company**         |   | **Sales  percentage** |   |
|---------------------|--------|-----------------------|--------|
|                |   |                  |   |
| Mr. Lam             |   | 13                    | %      |
| 238 Telecom Limited |   | 12                    | %      |

 

The Company’sproduct suppliers were concentrated in three vendors for the year endedDecember 31, 2002, as follows:

 
| **Company**                            |   | **Purchase  percentage** |   |
|----------------------------------------|--------|--------------------------|--------|
|                                   |   |                     |   |
| Deutsche Telekom                       |   | 29                       | %      |
| Wai Luen International Trading Company |   | 14                       | %      |
| Michel Communication GmbH              |   | 11                       | %      |

 

F-15

----

 

**8. INCOME TAXES**

 

Deferred tax assets at December 31, 2003 and2002 of $228,068 and $401,304 consist principally of the income tax benefitfrom net operating losses generated for U.S., Hong Kong, China and Germanincome tax reporting purposes.  The taxbenefit from each tax jurisdiction has been fully reserved through a valuationallowance as the ability of the Company to generate taxable income to utilizethese losses is uncertain.

 

The net operating losses available atDecember 31, 2003, to offset future taxable income in the U.S., Hong Kong,China, and Germany are $0, $605,000, $168,000 and $328,485, respectively.  The tax rates for Hong Kong, China andGermany are 17.5%, 33% and 26.375% respectively. The net operating lossesgenerated in Hong Kong expire beginning in 2007 if not utilized.  The net operating losses generated inGermany and China have no expiration date and carry forward indefinitely.

 

The Company is subject to income taxes onincome arising in or derived from the tax jurisdiction in which it is domiciledand operates.  During the year endedDecember 31, 2003, the Company did not generate any taxable income in anyjurisdiction.  The Company's U.S. losseshave been allocated to the operating subsidiaries based upon each subsidiary'sgross profit margin to the gross margin of the Hong Kong and China subsidiariesin total.

 

Income tax expense attributable to loss fromoperations for the year ended December 31, 2003 and 2002, differed from theamounts computed by applying the U.S. income tax rate of 34% to the tax lossfrom operations as indicated in the table below:

 
|                                                                                                                |   | **2003** |    | **2002** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                                                                                |   |     |    |     |   |
| Computed “expected” tax expense                                                                           |   | $        | (81,327 | )        | $      | (264,097 | ) |
| Rate differences, including  allocation of U.S. losses to subsidiaries and change in estimates from the  prior year |   | 244,309  |    | 46,051   |   |
| Change in valuation allowance                                                                                       |   | (173,325 | )       | 220,646  |   |
| Other                                                                                                               |   | 10,343   |    | (2,600   | )      |
|                                                                                                                |   | $        | —  |     | $      | — |   |

 

The tax effects of temporarydifferences that give rise to significant portions of the deferred tax assetsat December 31, 2003, are presented below:

 
|                              |   | **2003** |    | **2002** |   |
|-----------------------------------|--------|----------|---------|----------|--------|
| Deferred tax assets:              |   |     |    |     |   |
| Net operating loss  carryforwards |   | $        | 247,866 |     | $      | 373,342 |   |
| Depreciation of fixed assets      |   | —   |    | 27,962   |   |
| Total deferred tax assets         |   | 247,866  |    | 401,304  |   |
| Deferred tax liabilities:         |   |     |    |     |   |
| Depreciation of fixed assets      |   | (19,797  | )       | —   |   |
| Less valuation allowance          |   | (228,069 | )       | (401,304 | )      |
| Net deferred tax assets           |   | $        | —  |     | $      | — |   |

 

F-16

----

 

**9. RELATED PARTY TRANSACTIONS**

 

(a)                                  Asof December 31, 2003 and 2002, the Company’s majority shareholder, Mr. Wei Zhouwas the beneficial owner of 59.2% and 62.3% respectively, of the Company’sissued outstanding common stock.

 

(b)                                 Mr.Zhou is the CEO, President, Treasurer and Director of the Company. As ofDecember 31, 2003 and 2002, Mr. Zhou had made net advances to the Companyamounting to $99,084 and $281,279, respectively.

 

(c)                                  Priorto August 31, 2001, Mr. Zhou held a 50% equity interest in Tai Pan, a principalsupplier of the Company. On August 31, 2001, Mr. Zhou sold his 50% equityinterest in Tai Pan to his wife, Ms Yiling Huang. During the year endedDecember 31, 2003 and 2002, total cost of goods sold relating to productssupplied by Tai Pan was $0 and $935,922.

 

(d)                                 TheCompany issued 10,000 HK$1 ordinary shares to a shareholder for $1,282, whichwas paid during the year ended December 31, 2002. At December 31, 2002, $1,282of notes receivable from the shareholder is accounted for as a reduction ofstockholders’ equity in the accompanying consolidated financial statements.

 

**10. STOCKHOLDERS’ EQUITY**

 

(a) COMMONSTOCK

 

On August 12,2002, a private investor acquired 50,000 shares of the Company’s common stockin a private placement effected pursuant to Section 4(2) of the Securities Actof 1933, as amended. This transaction resulted in net proceeds to the Companyof approximately $220,000 (or $4.40 per share).

 

On December21, 2002, a private investor acquired 50,000 shares of the Company’s commonstock in a private placement effected pursuant to Section 4(2) of theSecurities Act of 1933, as amended. This transaction resulted in net proceedsto the Company of approximately $250,000 (or $5.00 per share).

 

In September 2003, the Company issued 1,000,000 shares of itsunregistered, restricted common stock to an accredited investor in a privateplacement transaction for proceeds of $4,500,000. This transaction was exemptfrom the registration requirements of the Securities Act under Rule 506 ofRegulation D promulgated thereunder.

 

(b) STOCKOPTIONS AND STOCK AWARDS

 

On November28, 2001, INTAC adopted a stock purchase plan entitled the “2001 Long TermIncentive Plan” to attract, retain and motivate its management and otherpersons, to encourage and reward their contributions to the performance of theCompany and to align their interests with the interests of the Company’sshareholders. The Company has authorized 2,500,000 shares to be available forgrant as part of the long term incentive plan. Options are generally granted at fair value on the date of issuance.

 

On November 3, 2003, the Company made a stock option grant to one ofits Directors to purchase 50,000 shares of the Company’s common stock at anexercise price of $9.89 per share representing the market value on the date ofgrant.  This stock option vests in threeequal annual installments on the first three anniversary dates of the date ofgrant.  The per share fair value of thestock options granted in 2003, estimated on the date of grant using theBlack-Scholes options pricing model, was $3.85.  The fair value of the option grant was estimated on the date ofgrant using the following assumptions: no dividend yield; expected volatilityof 66%; risk-free interest rate of 2.1%; and expected life of three years.  For purposes of proforma disclosure, theestimated fair value of the option is amortized to expense over the option’svesting period.

 

F-17

----

 

**10. STOCKHOLDERS’ EQUITY (CONTINUED)**

 

(b) STOCKOPTIONS AND STOCK AWARDS (CONTINUED)

 

On July 29,2002, the Company made the following stock option grant and restricted stockaward to its Senior Vice President and Chief Financial Officer:  (i) a stock option to purchase 300,000shares of the Company’s common stock at an exercise price of $3.50 per sharerepresenting the market value on the date of grant under the Company’s “2001Long Term Incentive Plan” and (ii) a restricted stock award of 200,000 sharesof the Company’s common stock.  Thisstock option and restricted stock award vest in three equal annual installmentson the first three anniversary dates of the date of grant.  The total market value of the stock awardtotaled $700,000 at the date of grant. This amount is being amortized and expensed over the three year vestingperiod.  The Company’s amortization inconnection with the stock award resulted in a non-cash compensation charge of$233,333 and $97,222 during the years ended December 31, 2003 and 2002,respectively.  At December 31, 2003,100,000 options and 66,667 shares of restricted stock are exercisable and alloptions expire, if unexercised, on July 29, 2009.  The per share fair value of the stock options granted in 2002,estimated on the date of grant using the Black-Scholes options pricing model,was $2.01.  The fair value of the optiongrant is estimated on the date of grant using the following assumptions: nodividend yield; expected volatility of 86%; risk-free interest rate of 4.7%;and expected life of three years.  Forpurposes of proforma disclosure, the estimated fair value of the option isamortized to expense over the option’s vesting period.

 

A summary ofstock option activity and related information for the years ended December 31,2003 and 2002 is as follows:

 
|                               |   | **2003**               |   | **2002**                              |   |
|------------------------------------|--------|------------------------|--------|---------------------------------------|--------|
| **Plan  Category**                 |   | **Number of  options** |   | **Weighted-average  exercise  price** |   | **Number of  options** |   | **Weighted-average  exercise  price** |   |
|                               |   |                   |   |                                  |   |   |   |   |   |
| Outstanding at beginning of year   |   | 300,000                |   | $                                     | 3.50   |   | — |   |   |   |
| Grant                              |   | 50,000                 |   | $                                     | 9.89   |   | 300,000 |   | $ | 3.50 |   |
| Exercise                           |   | —                 |   | —                                |   | — |   | — |   |
| Total                              |   | 350,000                |   | $                                     | 4.41   |   | 300,000 |   | $ | 3.50 |   |
| Options exercisable at end of year |   | 100,000                |   | $                                     | 3.50   |   | — |   | — |   |

 

Informationrelated to stock options outstanding at December 31, 2003, is summarized below:

 
|                           |   | **Options Outstanding**      |    | **Options Exercisable**                            |       |
|--------------------------------|--------|------------------------------|---------|----------------------------------------------------|------------|
| **Range of  Exercise  Prices** |   | **Outstanding  at 12/31/03** |    | **Weighted  Average  Remaining  Contractual Life** |       | **Weighted  Average  Exercise Price** |   | **Exercisable  at 12/31/03** |   | **Weighted  Average  Exercise Price** |   |
| $                              | 3.50   |                         | 300,000 |                                               | 5.6  years |   | $ | 3.50 |   | 100,000 |   | $ | 3.50 |   |
| $                              | 9.89   |                         | 50,000  |                                               | 6.8 years  |   | $ | 9.89 |   | — |   | — |   |
|                           |   | 350,000                      |    | 5.77 years                                         |       | $ | 4.41 |   | 100,000 |   | $ | 3.50 |   |

 

Total stockoptions outstanding at December 31, 2003 and 2002, respectively are notincluded in the diluted earnings per share computation because they areantidilutive.

 

F-18

----

 

**11. SEGMENT REPORTING**

 

The Company is currently considered to be comprised of three reportablesegments:  (i) career development servicesthrough the Company’s Internet portal (ii) distribution of wirelesshandsets and (iii) distribution of automobiles.  The Company measures segment profit (loss) as operating profit(loss) before depreciation.  Thereportable segments are components of the Company which offer differentproducts or services and are separately managed, with separate financialinformation available that is evaluated regularly by the chief financialofficer in determining the performance of the business.  Information regarding operating segments asof and for the years ended December 31, 2003 and 2002 is presented in thefollowing tables:

 
|                                  |   | **Revenues** |       | **Segment  profit (loss)** |   |
|---------------------------------------|--------|--------------|------------|----------------------------|--------|
| Year Ended December 31, 2003          |   |         |       |                       |   |
| Wireless handset distribution segment |   | $            | 88,331,563 |                       | $      | (177,884 | ) |
| Automobile distribution segment       |   | 3,021,609    |       | 90,617                     |   |
| Internet portal segment               |   | —       |       | (126,737                   | )      |
| Total                                 |   | $            | 91,353,172 |                       | $      | (214,004 | ) |
|                                  |   |         |       |                       |   |
| Year Ended December 31, 2002          |   |         |       |                       |   |
| Wireless handset distribution segment |   | $            | 83,535,285 |                       | $      | (957,120 | ) |
| Automobile distribution segment       |   | 1,300,195    |       | 25,635                     |   |
| Internet portal segment               |   | —       |       | —                     |   |
| Total                                 |   | $            | 84,835,480 |                       | $      | (931,485 | ) |

 

Areconciliation from the segment information to the net loss for the years endedDecember 31, 2002 and 2003, is as follows:

 
|                   |   | **2003** |     | **2002**   |   |
|------------------------|--------|----------|----------|------------|--------|
|                   |   |     |     |       |   |
| Segment loss           |   | $        | (214,004 | )          | $      | (931,485 | ) |
| Depreciation           |   | (68,793  | )        | (70,371    | )      |
|                   |   | (282,797 | )        | (1,001,856 | )      |
| Other income           |   | 18,911   |     | 233,737    |   |
| Minority interest      |   | 65,809   |     | —     |   |
| Interest expense (net) |   | (41,119  | )        | (8,636     | )      |
| Income taxes           |   | —   |     | —     |   |
| Net loss               |   | $        | (239,196 | )          | $      | (776,755 | ) |

 

Total assetsfor the operating segments at December 31, 2003 and 2002, are as follows:

 
|                                  |   | **2003**  |       | **2002** |   |
|---------------------------------------|--------|-----------|------------|----------|--------|
|                                  |   |      |       |     |   |
| Wireless handset distribution segment |   | $         | 5,880,004  |     | $      | 3,845,175 |   |
| Automobile distribution segment       |   | 852,243   |       | 875,374  |   |
| Internet portal segment               |   | 5,789,451 |       | —   |   |
| Total                                 |   | $         | 12,521,698 |     | $      | 4,720,549 |   |

 

Total assetsbased on their geographic location at December 31, 2003 and 2002, are asfollows:

 
|          |   | **2003**   |       | **2002**  |   |
|---------------|--------|------------|------------|-----------|--------|
|          |   |       |       |      |   |
| Europe        |   | $          | 537,660    |      | $      | 1,279,900 |   |
| Asia          |   | 11,933,000 |       | 3,433,197 |   |
| United States |   | 51,038     |       | 7,452     |   |
| Total         |   | $          | 12,521,698 |      | $      | 4,720,549 |   |

 

F-19

----

 

The percentageof total revenue based upon the destination of the sale by geographic sector:

 
|   |   | **2002** |   | **2002** |   |
|--------|--------|----------|--------|----------|--------|
|   |   |     |   |     |   |
| Europe |   | 5.6      | %      | 24.6     | %      |
| Asia   |   | 94.4     | %      | 75.4     | %      |
| Total  |   | 100.0    | %      | 100.0    | %      |

 

The percentageof total revenue based upon the origin of the sale by geographic sector:

 
|   |   | **2003** |   | **2002** |   |
|--------|--------|----------|--------|----------|--------|
|   |   |     |   |     |   |
| Europe |   | 7.1      | %      | 43.5     | %      |
| Asia   |   | 92.9     | %      | 56.5     | %      |
| Total  |   | 100.0    | %      | 100.0    | %      |

 

**12. COMMITMENTS AND CONTINGENCIES**

 

At December31, 2003, the total future minimum lease payments under non-cancelableoperating leases of the Company’s office facilities are as follows:

 
| 2004       |   | $       | 168,093 |   |
|------------|--------|---------|---------|--------|
| 2005       |   | 102,804 |    |
| 2006       |   | 45,735  |    |
| 2007       |   | 11,433  |    |
| thereafter |   | —  |    |
|       |   | $       | 328,065 |   |

 

For the yearended December 31, 2003 and 2002, rental expense which is included in selling,general and administrative expense amounted to $147,972 and $101,291,respectively.

 

There areuncertainties regarding the legal basis of the Company’s ability to operate anInternet portal business in China. Although the country has implemented a widerange of market-oriented economic reforms, the telecommunication, informationand media industries remain highly regulated. Not only are restrictionscurrently in place, but regulations are unclear regarding in what specificsegments of these industries companies with foreign investors, including theCompany, may operate better. Therefore, the Company might be required to limitthe scope of its operations in China, and this could have a material adverseeffect on the Company’s financial position, results of operations and cashflows.

 

**13. FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

At December31, 2003, the Company has a short-term deposit of $2.8 million reflected asrestricted cash.  This is security for ashort-term note payable to bank consisting of a loan from a financialinstitution in China of $2,728,202 bearing interest at a rate of 5.06% per annum.The carrying value of this short-term deposit and note payable approximate fairvalue since the term of the underlying deposit and note payable is short-termat the reporting date.

 

The fair valueof advances to employees approximates the carrying value of this asset becauseof the short term nature of the balance.

 

F-20

----

 

**14. IMPACT OF NEW ACCOUNTING STANDARDS**

 

In January2003, the FASB issued Interpretation (“FIN”) No. 46, “Consolidation of VariableInterest Entities” (“FIN 46”) and, in December 2003, issued a revision to thatinterpretation (“FIN 46R”). FIN 46R replaces FIN 46 and addresses consolidationby business enterprises of variable interest entities that possess certaincharacteristics. A variable interest entity (“VIE”) is defined as (a) anownership, contractual or monetary interest in an entity where the ability toinfluence financial decisions is not proportional to the investment interest,or (b) an entity lacking the invested capital sufficient to fund futureactivities without the support of a third party. FIN 46R establishes standardsfor determining under what circumstances VIEs should be consolidated with theirprimary beneficiary, including those to which the usual condition forconsolidation does not apply. The adoption of this Statement in January 2003had no effect on the Company’s financial statements.

 

**15. SIGNIFICANT FOURTH QUARTER ADJUSTMENT**

 

In December 2003, the Company entered into an agreement with a majorcustomer whereby the customer would pay an additional premium of $753,398 tothe Company.  The premium was recordedas an increase in revenue in the fourth quarter of 2003.

 

F-21

----