**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-K**

 
| **o****ANNUAL REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**    |
|------------------------------------------------------------------------------------------------------------------|
|                                                                                                             |
| **For the year  ended             **            |
| ** **                                                                                                       |
| **OR**                                                                                                           |
| ** **                                                                                                       |
| **ý****TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period fromJanuary 1, 2005 to September 30, 2005**

 

**Commission File Number: 000-32621**

 

**INTAC INTERNATIONAL, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

 

Securities registered pursuant to Section 12(b) of theExchange Act: **None**

 

Securities registered under Section 12(g) of the ExchangeAct: **Common Stock, par value $.001**

 

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

 

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

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. ý   Yes   o  No

 

Indicate bycheck mark if disclosure of delinquent filers in response to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K ý.

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).   ý  Yes  o  No

 

Indicate by check mark whether the registrantis a Shell Company (as defined in Rule 12b-2 of the Exchange Act).   o  Yes   ý  No

 

The aggregatemarket value of the voting and non-voting common equity held by non-affiliatesof the registrant on June 30, 2005 (the last business day of theregistrant’s most recently completed second fiscal quarter), was $132,728,730, based on the closingprice of the registrant’s common stock on The Nasdaq SmallCap Market of $6.00per share.

 

The number ofshares of the registrant’s common stock, $0.001 par value per share,outstanding as of December 13, 2005 was 22,101,181.

 

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

 

Theinformation required by Part III of this Report, to the extent not setforth herein, is incorporated by reference from the registrant’s definitiveproxy statement for its 2006 annual meeting to be filed with the Commission.

 

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| PART I                        |                                                                                                                            |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                            |   |
|                               | ITEM 1 - BUSINESS                                                                                                               |   |
|                               |                                                                                                                            |   |
|                               | ITEM  2 - PROPERTIES                                                                                                            |   |
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|                               | ITEM 3 - LEGAL  PROCEEDINGS                                                                                                     |   |
|                               |                                                                                                                            |   |
|                               | ITEM 4 -  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                   |   |
|                               |                                                                                                                            |   |
| PART II                       |                                                                                                                            |
|                               |                                                                                                                            |   |
|                               | ITEM 5 -  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND  ISSUER PURCHASES OF EQUITY SECURITIES |   |
|                               |                                                                                                                            |   |
|                               | ITEM 6 – SELECTED  FINANCIAL DATA                                                                                          |   |
|                               |                                                                                                                            |   |
|                               | ITEM 7 –  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS                      |   |
|                               |                                                                                                                            |   |
|                               | ITEM 7A –  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                      |   |
|                               |                                                                                                                            |   |
|                               | ITEM 8 –  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                      |   |
|                               |                                                                                                                            |   |
|                               | ITEM 9 –  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE                            |   |
|                               |                                                                                                                            |   |
|                               | ITEM 9A –  CONTROLS AND PROCEDURES                                                                                         |   |
|                               |                                                                                                                            |   |
|                               | ITEM 9B – OTHER  INFORMATION                                                                                               |   |
|                               |                                                                                                                            |   |
| PART III                      |                                                                                                                            |
|                               |                                                                                                                            |   |
|                               | ITEM 10 –  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                              |   |
|                               |                                                                                                                            |   |
|                               | ITEM 11 -  EXECUTIVE COMPENSATION                                                                                               |   |
|                               |                                                                                                                            |   |
|                               | ITEM 12 -  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                       |   |
|                               |                                                                                                                            |   |
|                               | ITEM 13 -  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                       |   |
|                               |                                                                                                                            |   |
|                               | ITEM 14 -  PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                               |   |
|                               |                                                                                                                            |   |
| PART IV                       |                                                                                                                            |
|                               |                                                                                                                            |   |
|                               | ITEM 15 –  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                      |   |
|                               |                                                                                                                            |   |
| SIGNATURES                         |                                                                                                                            |
|                               |                                                                                                                            |   |
| INDEX  TO EXHIBITS                 |                                                                                                                            |
|                               |                                                                                                                            |
| CONSOLIDATED  FINANCIAL STATEMENTS |                                                                                                                            |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

“Forward-lookingstatements” have been included throughout this Annual Report on Form 10-K.  These statements describe our attempt topredict future events, such as our plans for future expansion, our ability toachieve satisfactory operating performance, the viability of our businessmodel, our expansion into other businesses and pursuit of other businessopportunities, and our intent to focus our business operations in specificgeographic markets. The words “may,” “will,” “expect,” “believe,” “plan,”“intend,” “anticipate,” “estimate,” “continue,” and similar expressions, aswell as discussions of our strategy and pending transactions, are intended toidentify forward-looking statements. Although we believe that theseforward-looking statements are based on reasonable assumptions, we can give noassurance that our expectations will in fact occur and caution that actualresults may differ materially from those in the forward-looking statements. Thecautionary language in this report provides examples of risks, uncertaintiesand events that may cause our actual results to differ materially from theexpectations described in any forward-looking statements. You should be awarethat the occurrence of one or more of the events described in any cautionarylanguage in this report could have an adverse effect on our business, resultsof operations or financial condition. You also should be aware that theforward-looking statements are subject to a number of risks, assumptions anduncertainties, such as:

 

•                  our ability toeffectively execute our business plan;

 

•                  the early-stagestatus of our career development and training business segment and itsevolving, unproven and unpredictable business model;

 

•                  our ability tocollect our accounts receivable;

 

•                  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 business plan;

 

•                  statements madeconcerning the revenues or operating performance expected beyond the ninemonths ended September 30, 2005;

 

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

 

•                  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 ofhealth risks on the economic environment;

 

•                  the governmentof The People’s Republic of China, or the PRC, may prevent us from conductingbusiness 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;

 

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•                  the advent ofnew technology;

 

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

 

•                  our ability tosuccessfully remediate our internal control weaknesses; and

 

•                  changes in interestrates, foreign currency fluctuations and capital market conditions,particularly those that may affect the availability of credit for our productsand services.

 

You should also be aware that those “forward-looking” statements inregards to our career development and training services business are subject toa number of further risks, assumptions and uncertainties, such as:

 

•                  our ability tocapitalize on our career development services joint venture, Beijing IntacPurun Educational Development Ltd.;

 

•                  our ability totimely complete courseware and facilities for the INTAC MobileTelecommunications Institute;

 

•                  our ability toattract trainees for our INTAC Mobile Telecommunications Institute;

 

•                  our lack ofprior experience with the career development and training services and Internetportal business, and our ability to develop and execute an effective businessplan;

 

•                  our ability todevelop the fee-based services of the career development and training servicesand Internet portal business including assembling an experienced managementteam;

 

•                  our ability tomaintain the use for commercial purposes of the database of student informationcompiled by the Ministry of Education in the PRC as well as our otherdatabases;

 

•                  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 Internet portal andimpede our 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;

 

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

 

•                  a significantdelay by the PRC government in issuing 3G telecommunications licenses totelecommunications service providers, which may materially and adversely affectthe implementation of our business strategy in the mobile telecommunicationstraining area.

 

You should also be aware that those “forward-looking” statements inregards to our distribution/telecommunications business are subject to a numberof further risks, assumptions and uncertainties, such as:

 

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•                  the low-marginnature of our distribution business;

 

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

 

•                  the impact ofcompetition in the wireless handset distribution industry, as well as inindustries 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;

 

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

 

•                  the highlycompetitive and constantly changing nature of the international wirelessdistribution industry; and

 

•                  our ability tocompete in the prepaid calling card market, in which we have not previouslyparticipated.

 

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.

 

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**PART I**

 

**ITEM 1 - BUSINESS**

 

**OVERVIEW**

 

INTACInternational, Inc., is a United States holding company focused on theexploitation of strategic business opportunities available in China and theAsia-Pacific Rim.  Throughout thisReport, references to “INTAC,” “Company,” “we,” “us,” and “our” refer to INTACInternational, Inc., and its operating subsidiaries.  INTAC currently maintains offices in China (HongKong and Beijing ), Germany (Frankfurt) and the United States (Dallas, Texas).

 

We operate intwo segments, our Career Development and Training Services Segment and ourDistribution/Telecommunications Segment. While our distribution segment historically has been our primarybusiness segment and generated substantially all of our operating revenue, weshifted our focus in 2004 to the expansion and maturation of our careerdevelopment services segment in China.  Initially,our efforts centered on recruiting and training services to be offered onlinethrough our internet portals phrbank.com and joyba.com.  These efforts did not achieve the results weanticipated in 2005, due in part to the strength of established competitors inthe market and to the breadth of our efforts. As a result, we determined to establish a foothold in the marketplace byfocusing on a specific niche from which we can later expand.  To this end, recognizing the growing opportunities within both theeducation industry and the mobile telecommunications/internet industry inChina, and in order to better utilize our strategic resources and enhance ourstrengths in both industries, we have further refined our businessstrategy, as we announced on November 23,2005.  Under the refocused businessstrategy, we will continue to operate in two (2) business segments – theCareer Development and Training Services Segment and theDistribution/Telecommunications Segment, each as further described below.

 

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

 

OnJanuary 15, 2004, we announced that we were shifting the emphasis of ourbusiness from the traditional distribution of premium brand wireless handsetsto various career development services. On November 23, 2005, we announced the further refinement of thisshift in focus.  Under the refined focusof this business segment, we will operate primarily in three business units:

 

•                  INTAC MobileTelecommunications Institute,

 

•                  EducationManagement Software Business Unit, and

 

•                  DatabaseManagement Business Unit.

 

***INTAC Mobile Telecommunications Institute(“IMTI”)***

 

Through IMTI,we seek to become a leading provider of mobile telecommunications technologytraining in China.  IMTI will offertraining to information technology professionals, with a primary focus in the area ofthird generation digital mobile systems, or “3G”, mobile telecommunicationstechnology.  New courses will be developed in the future to reflect technologicaladvancement.  This training willconsist of IMTI’s Mobile Telecommunications Software Engineering trainingprogram, which will initially be offered through company-owned institutes andlater offered through franchises, university courses and corporatetraining.  We expect to open the firstinstitute in Beijing in our second fiscal quarter, early 2006.

 

***Education Management Software Business Unit***

 

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

 

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***Database Management Business Unit***

 

We have, andare continuing to develop, databases containing information on individualswhich we will utilize to offer a one-stop marketing solution to a wide range ofbusinesses with products and services tailored to the specific needs of theeducation market.  Beijing Intac PurunEducational Development Ltd. (“Intac Purun”), an indirect 60% owned subsidiaryof INTAC, develops the databases utilizing information from severalsources.  Intac Purun is exclusivelyauthorized by the MOE to collect resumes and profiles for all graduatingcollege and graduate school students in China and has recently begun collectingthis information.  The EMIC has chosenIntac Purun as its exclusive partner in developing and maintaining the MyJobdatabase, compiled through EMIC’s website www.myjob.edu.cn, which helps graduatesof higher education institutions obtain employment.  Intac Purun has also been granted exclusive accessto the database on university graduates maintained by the EMIC for use by IntacPurun in providing job training and placement services.  Initially, Intac Purunwill collect list rental fees and direct marketing service fees utilizing thesedatabases.  Ultimately, integrateddatabase marketing solutions and consulting services will be offered.

 

**Distribution/TelecommunicationsSegment**

 

OurDistribution/Telecommunications Segment includes our wireless handsetdistribution business, which we operate through INTAC International HoldingsLimited, a Hong Kong corporation and wholly-owned subsidiary of INTAC(“Holdings”) and its wholly-owned subsidiaries, Global Creative InternationalLimited, a Hong Kong corporation (“Global Creative”), and INTACTelecommunications Limited, a Hong Kong corporation (“INTAC Telecom”).  Through these subsidiaries, we distributewireless handset products to mobile communications equipment wholesalers,agents, retailers and other distributors mainly in Hong Kong.  These products are then sold primarily tolocal customers in Hong Kong or customers in China. Additionally, we areworking with Primus Telecommunications Ltd, a global telecommunicationsservices provider (Nasdaq: PRTL), to develop products which involve originatinginternational voice and data traffic from within China throughout SoutheastAsia for termination around the world. The first product to be offered under this relationship will be a globalprepaid calling card, an Internet Protocol (“IP”)calling card that provides access to over fifty countries.

 

Wehistorically have derived substantially all of our revenue from ourDistribution Segment.  Although we intendto emphasize our Career Development and Training Services Segment goingforward, we anticipate that a significant portion of short-term revenues willcontinue to be generated by our wireless handset distribution business.

 

***Other Business Opportunities****.* We continually evaluate investment opportunities in other businesssegments within China, the Asia-Pacific Rim and, to a lesser extent,Europe.  Our entry into these newbusiness segments is contingent upon our identifying both favorable investmentopportunities and strategic partners with expertise in such business segmentsas well as available capital. Many of these opportunities will be dependentupon our obtaining additional capital, or their value will be materially lessto us if we do not have the financial resources to fully exploit suchopportunities.

 

Our commonstock currently trades in the United States on The Nasdaq SmallCap Market underthe symbol “INTN” and in Europe on the Frankfurt Stock Exchange under thesymbol “WKN 805768”.

 

**CORPORATEHISTORY**

 

INTAC International, Inc., was incorporated under the nameCommodore Minerals, Inc., under the laws of the State of Nevada onSeptember 20, 2000, as a developmental stage corporation.  On September 28, 2001, Mr. Wei Zhouacquired a controlling interest in Commodore in a private transaction with oneof the organizers of Commodore.  OnOctober 13, 2001, Commodore entered into a reorganization agreement withHoldings and the shareholders of Holdings, including Mr. Zhou, pursuant towhich transaction Holdings became a wholly owned subsidiary of Commodore, New Tech Handels GmbH, previously asubsidiary of Holdings, became an indirect subsidiary of Commodore andCommodore changed its name to INTAC International, Inc.  For more detailed information on the changeof control of Commodore resulting in the establishment of our corporatestructure, please see our Current Report on Form 8-K, filed with the SECon October 15, 2001.

 

Mr. Zhou, our Chief Executive Officer, has significant experiencein supply channel and distribution channel development in Asia.  He has successfully developed strategicalliances in the Asia-Pacific region and has the ability to managemulti-national business relationships and assemble highly efficient distributionnetworks that will serve INTAC well as it expands into the Chinese andAsia-Pacific marketplace.

 

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Intac Purunwas formed in October 2003 with China Putian Corporation and the EMIC.  In order to meet ownership requirements underPRC law which impose restrictions on foreign investment in the PRC Internetsector, INTAC entered into agreements with Tianjin Weilian, which was aninvestment holding company holding 45% equity interest of Intac Purun, and withTianjin Chengtai International Trading Limited, which was an investment holdingcompany holding 15% equity interest of Intac Purun.  Under these agreements, in 2003 INTAC madeloans of $1,233,000 and $123,000 to two China nationals, Miss Zhang Wanqinand Miss Li Min, respectively. Miss Zhang and Miss Li are the equity owners of TianjinWeilian, a company incorporated in the PRC. These loans were made to finance Miss Zhang and Miss Li, onbehalf of INTAC, for the purpose of establishing Tianjin Weilian.  Tianjin Weilian pledged as collateral the 45%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 concept iscommon for public Internet portals in China. When the procedures necessary totransfer ownership to INTAC are completed, these receivable balances will beconverted to a long term investment of INTAC.

 

InMarch 2004, Intac Purun obtained the necessary licenses which allowedINTAC to own directly the 45% share currently held by Tianjin Weilian under PRClaw.  During the course of the transfer,INTAC added human resource services to its offering and as a result, thetransfer of the 45% interest owned by Miss Zhang and Miss Li wasdelayed and could not be transferred to INTAC in full settlement of the loan aspreviously reported.

 

In June 2004, also under the aforementioned agreements, INTAC madeloans of $1.5 million to two Chinese nationals, Mr. Zou Jingchen andMs. Tian Jinmei.  Mr. Zou andMs. Tian are the equity investors of Chengtai, a company incorporated inthe PRC.  These loans were made tofinance Mr. Zou and Ms. Tian, on behalf of INTAC, for the purpose ofestablishing Chengtai which purchased the 15% interest in Intac Purun inJune 2004 from China Putian Corporation. A total of 15% of the outstanding securities of Intac Purun,representing the 15% ownership, were pledged as collateral for these loans fromINTAC and all operating, economic, voting and other rights were assigned toINTAC by Chengtai.  This additional 15%interest increases INTAC’s total indirect ownership in Intac Purun to 60%.  We cannot be sure that our restructuredoperations and activities will be viewed by PRC regulatory authorities as incompliance with applicable PRC laws and regulations.

 

InJune 2004, we began phasing out our business of distributing luxuryautomobiles from Europe to purchasers in the Tianjin Port Free Trade Zone,which was operated through our wholly-owned subsidiary FUTAC Group Limited, aBritish Virgin Islands corporation, and our indirect subsidiary****Intac (Tianjin) International Trading Co.,a Chinese corporation.  The phase-out wassubstantially complete as of December 31, 2004, and did not have amaterial adverse impact on our results of operations, and the assets of thisbusiness were redeployed to our other businesses.

 

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

 

In December 2004, HoldingsacquiredHuana Xinlong, a leading Chinese developer of management software foreducational institution administration. Huana Xinlong is located in Beijing, China.

 

**OURPRODUCTS AND SERVICES**

 

The following is a brief description of the industries in which weoperate, and the products and services we offer, or plan to offer, under themain categories of Career Development and Training Services andDistribution/Telecommunications.  Weintend to continue to evaluate opportunities to add new products and services,to provide products and services that can be monetized, and to better integrateour products and services.  Many of ourproducts and services are in the early stage of development, and there can beno assurance that we will successfully implement them on a profitable basis orat all.

 

**CAREER DEVELOPMENT AND****TRAINING SERVICES SEGMENT**

 

**GeneralIndustry Background**

 

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

 

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According to China’s Ministry of Information Industry, or the MII,China is the largest mobile telecommunications market in the world withapproximately 383million mobile phone users at the end of October 2005.  Inaddition, China has experienced a significant increase in the use of wirelessvalue-added services, the most popular form of which is Short Messaging Services (“SMS”).  In 2000, China Mobilelaunched its Monternet wireless value-added services platform, and in 2001China Unicom launched its UNI-Info wireless value-added services platform.These platforms enabled the development of an additional type of SMS, whichallow users to access products and services provided by third parties.  China Mobile and China Unicom also began toallow these third-party providers to use their billing and collection systemsto charge fees for products and services that are delivered through theMonternet and UNI-Info platforms.  Thiscreated an opportunity for Internet companies to deliver their Internet portalproducts and services to users in China through their mobile phones and toutilize these billing and collection systems to collect fees for these productsand services.

 

According to the MII, the total number of short messages transmitted inChina in 2002 was approximately 90 billion, rising to approximately 220 billionin 2003.  From January toAugust 2004, approximately 135 billion were transmitted with the total for2004 estimated at approximately 550 billion. Point-to-point SMS accounted for approximately 75% of the total numberof SMS messages sent through China Mobile’s telecommunications network, whilethe remaining approximately 25% was accounted for by other SMS-based wirelessdata services.  In addition, we believethat with the continuous upgrading of mobile telecommunications networks inChina, the wireless value-added services market will further expand by allowingusers to transmit larger amounts of data at higher speeds and to accessadditional products and services through their mobile phones.

 

***Career Development and Training in China***

 

Education inChina has been rapidly developing in order to keep pace with the ongoing economicdevelopment.  The Chinese government inits Tenth Five Year Plan stresses the importance of education, with its plannedsector spending level at about U.S.$50 billion annually.  We believe China’s population is becomingmore aware of the need for life-long learning in a complex world, and thedemand for higher education is rising quickly. With urban income increasingrapidly, we anticipate an increase in higher education consumption in the nextten years and beyond.

 

According to China’sMinistry of Education there are approximately 2,236 higher educationinstitutions with approximately 20million students in China, of which approximately 3.4 million have enteredthe job market in 2005.  This number of students is expected to grow to25 million****by 2008. According to published statistics, there are also more than 470,000 elementary and middle schoolsin China with a total of nearly200 million students.

 

**INTACMobile Telecommunications Institute**

 

***INTAC’s Approach***

 

We have identified mobile telecommunications training for informationtechnology professionals, specifically covering 3G technology, as a growingneed in China.  China is the largestmobile telecommunications market of any country, having over 383 million mobile subscribers as of October 2005, according to iResearch report.  Mobilehandset shipments in China have steadily increased and are expected to continueto do so according to the IDC 2005 Handsets Report.  Increasingly, these handsets are based on 3Gtechnology, rather than 2G or 2.5G technology.

 

Third Generation systems or “3G” (also known as International MobileTelecommunications 2000 or IMT-2000 systems) are digital mobile systems thatprovide high-speed access to a wide range of telecommunications servicessupported by fixed telecommunications networks, and to other services that arespecific to mobile users.  The keyfeatures of 3G systems are:

 

•                  high degree of commonality of designworldwide;

 

•                  compatibility of services with fixednetworks;

 

•                  high quality;

 

•                  small handsets for worldwide use;

 

•                  worldwide roaming capability; and

 

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•                  capability of multimedia applicationsincluding paging, voice telephony, digital data, audio and visualcommunications.

 

3G systems are expected to have the capability to support circuit andpacket data at 144 kilobits per second or higher in high mobility (vehicular)traffic, 384 kilobits per second or higher for pedestrian traffic, and 2megabits per second or higher for indoor traffic.

 

The increase in mobile telecommunications users and emergence of 3Gtechnology has lead to an increase in demand for information technologyprofessionals trained in this technology. It is estimated that there is currently a general shortage of approximately500,000 telecommunications industry professionals and existing professionalswill need additional training to address new technologies, according to areport from CCW, a leading IT industry research company in China.  IMTIseeks to meet the needs of this industry through courses specifically focusingon mobile telecommunications software engineering utilizing 3G technology.

 

***Courses***

 

INTAC Mobile Telecommunications Institute will include three levels ofcourses (S1, S2 and S3) combining written information, lectures and laboratoryexperience.  IMTI’s courses will bedeveloped based on our assessment and understanding of market needs inconjunction with industry and academic experts. We have assembled a panel currently consisting of ten full-time course editors, all graduates oftelecommunications universities in China, fifteen university professors from telecommunications universities in Chinaand twenty industry professionals from majortelecommunications companies.  Afterdeveloping a course outline, the panel of experts review the outline and adetailed course is prepared and compiled. A first draft of the courseware is then prepared and reviewed again bythe panel of experts with refinements being made as necessary.  Finally, a trial of the courseware iscompleted before release.

 

We plan to complete courseware for the first course level by the end of2005, with completion of courseware for the succeeding two courses to becompleted in the first half of 2006.  Thechart below summarizes the courses to be offered.

 
| **Level**                            | ** ** | **S1**                                                                                                                                                              | ** ** | **S2**                                                                                                                                                 | ** ** | **S3**                                                                                                                                                  |
|--------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                           | ** ** | ** **                                                                                                                                                          | ** ** | ** **                                                                                                                                             | ** ** | ** **                                                                                                                                              |
| **Course Name:**                     |       | Mobile  Telecommunications  Software Engineer                                                                                                                       |       | Advanced  Mobile Telecommunications  Software Engineer                                                                                                 |       | Expert  Mobile Telecommunications  Software Engineer                                                                                                    |
| ** **                           |       |                                                                                                                                                                |       |                                                                                                                                                   |       |                                                                                                                                                    |
| **Course Hours:****(approximately)** |       | 252 hours                                                                                                                                                           |       | 336  hours                                                                                                                                             |       | 358  hours                                                                                                                                              |
| ** **                           |       |                                                                                                                                                                |       |                                                                                                                                                   |       |                                                                                                                                                    |
| **Duration:****(approximately)**     |       | 3 – 4  months                                                                                                                                                  |       | 3 – 4  months                                                                                                                                     |       | 3 – 4 months                                                                                                                                       |
| ** **                           |       |                                                                                                                                                                |       |                                                                                                                                                   |       |                                                                                                                                                    |
| **Target****Students:**              |       | •              Mobile telecommunications  (system applications software) development engineer |       | •              Advanced embedded (handset)  software development engineer        |       | •              Mobile telecommunications  software structure expert/ consultant   |
| ** **                           |       |                                                                                                                                                                |       |                                                                                                                                                   |       |                                                                                                                                                    |
| ** **                           |       | •              Mobile telecommunications  (system applications software) testing engineer     |       | •              Advanced embedded (handset)  games development engineer           |       | •              Mobile telecommunications  value-added services expert/ consultant |
| ** **                           |       |                                                                                                                                                                |       |                                                                                                                                                   |       |                                                                                                                                                    |
| ** **                           |       | •           Embedded  (handset) software development engineer                                                |       | •              Mobile telecommunications  software development project manager   |       | •              Advanced mobile  telecommunications system project consultant      |
| ** **                           |       |                                                                                                                                                                |       |                                                                                                                                                   |       |                                                                                                                                                    |
| ** **                           |       | •              Embedded (handset) software  testing engineer                                  |       | •              Advanced mobile  telecommunications software testing engineer     |       |                                                                                                                                                    |
| ** **                           |       |                                                                                                                                                                |       |                                                                                                                                                   |       |                                                                                                                                                    |
| ** **                           |       |                                                                                                                                                                |       | •              Advanced mobile  telecommunications software development engineer |       |                                                                                                                                                    |

 

Graduates of each course will receive a certificate evidencing theircompletion.  We have receivedauthorization from the Ministry of Information and Technology and SoftwareDevelopment Consortium of the Chinese Government to offer the “Mobile

 

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Telecommunications Software ApplicationsTechnology Certification” to all of our qualified graduates.  Additionally, we are seeking endorsement of other governmentagencies, industry manufacturersand service providers and industry associations.

 

***Delivery of Courses***

 

Courses will be offered through company owned institutes, franchises,licenses, universities and corporate training. IMTI will also offer job placement services and career counseling forits graduates.  IMTI’scourses are targeted on IT professionals working in or seeking a job with themobile telecom industry, especially in the fields of software development,testing and project management. Therefore, we anticipate that students will come from the followingsources:

 

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

 

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

 

•                  Collegestudents.

 

Courses will initially be offered at company operated institutes.  All IMTI teachers will be trainedand certified by IMTI.  We plan on opening our initial institute inBeijing in our second fiscal quarter, early 2006.  Additional institutes for 2006 are planned inShanghai and Guangzhou/Shenzhen.  We project the opening of anadditional twelve company owned institutes by the end of 2007.

 

Under the lawof the People’s Republic of China, franchises may not be offered until one yearafter there are two company owned locations. Until we are able to offer franchises and continuing thereafter, we planto license the courseware to interested parties.  Licenses will be offered on standardlicensing agreement terms consisting of a one-time license fee of about U.S.$35,000 to U.S.$60,000 for the initial five years plus 20% of tuition.  We anticipate entering into in excess of twenty license agreements in2006.  Ultimately, we expect franchisingto be a major driver of revenues and profits due to its low variable costs andscalability.

 

IMTI intendsto offer its courseware to universities as a replacement for or addition toexisting course offerings.  Courses willbe sold to universities via direct sales efforts and by outside sales agents, instructortraining will be provided and the courses will be taught on-campus.  IMTI will also offer corporate training foremployees of telecommunications firms which will be designed to meet such firms’ particular needs and conducted atlocations specified by thesefirms.

 

***Sales and Marketing***

 

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

 

Our marketing strategy is focused on building brand awareness andprestige for IMTI’s courses.  We plan tolaunch promotion of IMTI in February 2006 with releases to the press, customer events, direct advertising andinternet advertising.  We currently haveone professional in charge of branding and three marketing professionals.

 

***Competition***

 

Several universities and companies provide software andtelecommunications related training, however to our knowledge, no universityoffers training focused on 3G technology. Courses offered by these universities range in duration from seven daysto seven months and cost between U.S.$220 and U.S.$1,960.  Universities and companies offering softwareand telecommunications courses include the School of Software at PekingUniversity, Beijing Hua Create Co., Ltd., the Training Center of the School ofSoftware of the Northeastern University, the Training Center of ShenzhenTelecom, Beijing Jiaotong University-Baige Training Center, Wuhan CVTech TrainingCenter, Shanghai Eutong Information Technology Co., Ltd. and the FudanUniversity Training Center of Embedded Technology.

 

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***Status of 3G Telecoms Licenses in China***

 

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

 

Manufacturers, operators and researchers have made a variety ofoptimistic predictions regard the time of issuance.  International Data Corporation predicted thatChina would issue 3G licenses in mid-2006; while Gartner predicted that thefirst Chinese 3G licenses would be issued within the first half of 2006.  PRC government officials and managers ofChinese state-owned telecommunications providers, however, have remained verycautious about make any such prediction.

 

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

 

**EducationManagement Software Business Unit**

 

***INTAC’s Approach***

 

According to CCW Research, education spending in China has increasedsubstantially in recent years, going from U.S.$41.6 billion to U.S.$74.8 billion between 1999 and 2003.  Spending on education information technologyhas likewise increased from U.S.$1.7 billion to U.S.$2.8 billion between 1999 and 2003.  We believethat Huana Xinlong is uniquely positioned to capitalize on this growingmarket.  Our education managementsoftware, which targets elementary and middle schools and universities hasgained significant acceptance, with installation in over 10,000 elementary andmiddle schools and over 50% of universities. Our education management software has been designated as the standard ofthe China School Administration System (for primary and middle schools) by theEMIC.  In addition we enjoy a strongrelationship with the MOE.  We plan toleverage our large installed base of software and our relationship with theEMIC and the MOE to become the leading provider of integrated education management information systems and services in China.

 

***Products***

 

Our products are divided into three major product lines consisting ofthe elementary/middle school segment, the college segment and the universalsoftware segment.  We are currentlyfocused on improving these products, strengthening our government and customerrelationships, diversifying our product portfolio and forming strategicpartnerships with industry leaders.  Todate, we have received a certificate from International Business MachinesCorporation (“IBM”) acknowledging Huana-Xinlong’s status as a “Qualified IBMPartnerworld Business Partner,” a relationship which we expect to includesupport from IBM of our technical development of education software in China,and we have entered into a cooperation framework agreement with Microsoft(China) Co., Ltd., an affiliate of Microsoft Corporation, with respect to our“Green Campus” Surveillance and Management System product as further describedbelow.  As these products mature and arerefined, we plan to move towards providing integrated management systems andsolutions which are specifically designed for the education industry toautomate, streamline and effectively manage every aspect of an educationinstitution, including student/faculty management, course set-up, design andoffering and the provision of various applications.

 

Elementary/ Middle School Products

 

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

 

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

 

CollegeProducts

 

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

 

UniversalProducts

 

***School Office Automatic Administration Management System (SOAAMS): ***This softwaresystem, developed independently by Huana Xinlong, is in compliance with theEMIC standards and helps standardize education office procedures for the schoolsand the education bureau. Standardization includes personal scheduling, document management, and adaily office work scheduler.

 

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

 

***Sales and Marketing***

 

Our sales efforts for our education management software unit arecoordinated in Beijing along with marketing and planning.  We have eight local sales offices located inChengdu, Guangzhou, Chongqing, Kumming, Nanjing, Xi’An, Xinjiang andShanxi.  These local sales officescollect and report market data, develop and maintain relationships with localgovernments and customers and manage our sales network, which consists of overone hundred agents nationwide.

 

Additionally, we intend to further utilize our relationship with theMOE to secure further government contracts. We are currently a participant in the MOE’s “Demonstrative ZoneConstruction Project for Elementary/Middle School MIS InfrastructureStandardization,” or “Demo Zone” project. This project is aimed at building a standardized management informationsystem at two to three Demo Zones for each province in China.  We have contracted with the MOE as theexclusive provider of software and implementation services for thisproject.  We have contracts with 23 DemoZones, covering over 28,000 schools out of 650,000 schools nationwide.

 

In 2004, the MOE has initiated a new project called the“Western China Remote Education Project” to build and improve the educationinfrastructure in China’s underdeveloped and rural areas.  The government has committed U.S.$1.2 billion to this project for the years of 2004 through 2009.  Weintend to seek additional government contracts under this project.

 

***Competition***

 

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

 

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

 

**DatabaseManagement Business Unit**

 

***INTAC’s Approach***

 

The database marketing industry is in its infancy in China.  Due to government regulations andtechnological roadblocks to the flow of information, large internationalcompanies have been reluctant to enter this market.  Chinese database marketing companiesgenerally either rent or own lists which are compiled from databases of dataregarding individuals for the ultimate purpose of marketing to suchindividuals.  List renters generally rentlists of data which have been compiled from government channels or other 

 

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companies, rather than owning and developing their own lists.  Database marketing service providersgenerally rent lists or obtain lists from their clients for the purpose ofoffering direct marketing solutions.

 

Through Intac Purun, we intend to offer a one-stop database marketingsolution based on a credible database of students and professionals.  Companies are seeking to acquire newcustomers in a cost-effective way. They are looking for lists of prospects andtailored marketing solutions to reach distinct customer segments. However, mostdomestic list rental service providers lack of credible data sources,high-quality data or database marketing services. Those database marketingsolution providers usually are not list owners themselves. Clients usually haveto pay higher charge for list rental as well as marketing services. A needexists in China’s marketplace for one-stop database marketing services usinghigh quality lists from reliable sources.

 

We plan to meet this need by providing high quality lists and customizeddatabase marketing solutions at a reasonable price. The nature of this productas a joint venture with MOE guarantees the data quality and decreases dataacquisition cost.  Student andprofessional databases are target markets for many companies in variousindustries and our professional team will provide effective database marketingsolutions to meet clients’ business needs.

 

***Database Products and Services***

 

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

 

Our database information can be used to select the target audience whoare most likely to respond to certain products or service offers. Throughadvanced data mining technologies, we can select people by their gender, age,major, school, location and other criteria. Furthermore, we can conduct moreprecise selections such as lifestyle, hobbies, potential profession andincomes. Our technology platform has the capacity to conduct electronicdatabase marketing campaigns.Additionally, we have established relationships with mobile service providerswho can help to conduct SMS based marketing campaign.

 

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

 

Within the next year, we intend to expand the service todatabase marketing consulting. We will provide our clients with integrateddatabase marketing solutions to convert prospects to sales. In addition to listrental, we will help the client to plan database marketing campaigns, setmarketing objectives, define program timing, choose target groups, designoffers, manage and fulfill campaigns, organize campaign production, managecreative, print and fulfillment suppliers, track the response, generateanalysis and reports and conduct profiling and data mining.

 

***Sales and Marketing***

 

Our potential database products and services clients include insurancecompanies, banks (new accounts and credit cards), career services, apartmentbrokers, moving companies, travel agencies, mobile phone companies and computermanufacturers.

 

Intac’sdatabase marketing team is staffed by three fully qualified marketing anddatabase experts with considerable experience of operating in the China market. Intac’s database marketing services will bemarketed via three channels: 1) We intend to position ourselves as a potentiallist vendor to those advertising agencies which conduct direct marketingconsulting services. The potential clients include OgilvyOne, Wundermann andsome local agencies. 2) We plan to market our database service directly to theend users, i.e. the marketing department of those companies which need customerdata. The potential clients include insurance companies, banks (checking/savingaccounts and credit cards), career/recruiting services, real estate brokers,travel agencies, education service provider, telecom companies and mobile phonemanufacturers. 3) We plan to place advertisements in industry magazines andChina’s Direct Marketing Association (DMA) website.

 

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***Competition***

 

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

 

**OtherProducts and Services**

 

***Family-School Link Communication System (FSLCS):***FSLCS is designed to help elementary and middle school teachers and parentscommunicate more effectively.  WithFSLCS, parents will have instant access to their children’s’ daily attendance records,exam scores and event announcements, as well as school news.  We believe that the FSLCS has large potentialdemand from Chinese parents looking to take a more active role in theirchildren’s education process and keep in contact with their children via SMSmessaging.

 

In addition, INTAC recently launched a new product, the InternetCo-Surfing (ICS) software and services, as a key functional add-on to FSLCS. Asan internet parental control software, ICS provides parents with immediatenotification via SMS when their child encounters a web site that has not beenproven safe. The parent can choose to permit the surfing or block the web siteutilizing a return SMS. ICS also provides the ability to set time limits on surfingand to trace surfing history. The software can also be used as an instantcommunication tool between children on their PCs and parents with theirhandsets.

 

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

 

***phrbank.com:***  In 2004, we launched www.phrbank.com, awebsite to integrate recruiting and professional training services in China forlarge companies with increasing demands for new employees.  This website is a platform for PHR Bank(professional human resource bank), an integrated program of placement, search,campus recruiting and professional training services for enterprises. Theservice is designed for international and Chinese companies that need to hirelarge numbers of new employees, and provides employment information to jobseekers and employers.  We plan toutilize this website in conjunction with IMTI to assist its graduates insecuring employment.

 

***joyba.com: ***IntacPurun’s website www.joyba.com is designed to attract students by providinginformation related to lifestyles and social activities of students and youngprofessionals.  This website alsocontains limited information on employment opportunities, with a link to ourwww.phrbank.com website.  We plan to selladvertising on this website targeting college students and young professionals.

 

***Other Value-added Mobile Telecommunication Services.***  Currently,we offer a variety of telecom value added services, including WirelessApplication Protocol surfing, Interactive Voice Responses and SMS, with China’smajor telecommunications network operators – China Mobile, China Unicom andChina Netcom.  All of the services aretargeted at the education community.  Theservices offered include career development services, interactive games, ringtone/screen saver downloads, and FSLCS, as described below.  These services, together with the twowebsites described above, will all be integrated into the Database ManagementBusiness Unit.

 

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

 

***Campus Student Training:*** Our campus student training business includestwo levels of job-related training programs to help students prepare forinterviews and acquire basic job skills. These include the: (1) CareerOrientation Class and (2) Internship Preparation and PlacementProgram.  The Career Orientation Class is designed to provide college students withtraining related to job seeking skills and career design, as well as offeringthem employment consulting services. The Internship Preparation and

 

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PlacementProgram is designed to help students prepare for internship opportunities.  Our initial Career Orientation Class washeld in October 2005.

 

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

 

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

 

**DISTRIBUTION/TELECOMMUNICATIONSSEGMENT**

 

**WirelessHandset Distribution**

 

***Industry Background – The Chinese Wireless Telecommunications Industry***

 

***General Information***

 

China hasexperienced rapid growth in mobile telecommunications use in recent years.According to China’s Ministry of Information Industry, China is the largestmobile telecommunications market in the world with approximately 383 millionmobile phone users as of the end of October 2005.  Although growth in China has slowed sharplysince 2002, we believe the size of the urban market still offers room forgrowth in the coming years. Prices for both handsets and services offered bythe two State companies controlling the market, China Mobile CommunicationsCorporation and China United Communications Corporation, have been fallingsteadily, as Chinese handset vendors challenge foreign giants such as Nokia andMotorola.

 

***Industry Challenges***

 

Numerousfactors have converged in recent years to create new challenges for traditionalwireless equipment distributors. These factors include the following:

 

*IncreasingNumber of Equipment Manufacturers and Available Models:*Originally, there were relatively few manufacturers of mobile communicationsequipment. However, within the last several years, numerous new manufacturershave entered the market and the number of available models has increased.  We believe that these trends have increasedthe costs and inventory risk of many traditional distributors who attempt tokeep an adequate supply of handsets for each manufacturer by model.

 

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

 

*Unaffiliatedand Operator-Affiliated Retailer Base:* Because of thestrong growth in worldwide users of mobile communications, the number of retaillocations selling wireless handsets is also increasing. We believe that many ofthese locations are unaffiliated with a network operator and are generally freeto purchase inventory from any entity they desire. We expect that this trendhas been 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 

 

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rely onsecondary sources of supply. In either case, we believe that the purchasingagents in these situations are motivated to buy from a distributor on the basisof price and availability and, to a lesser extent, on the basis of a priorbusiness relationship. Consequently, we expect that those distributors thatcompete on a basis other than price, availability and relationship will find itincreasingly difficult to reach the unaffiliated retailer andoperator-affiliated base.

 

*PriceVolatility:* Over the last several years, prices forwireless handsets have become increasingly volatile. This volatility is due to,among other things, increased supply into the various sales channels, a largernumber of manufacturers, and a slow-down in the economy generally. As a consequenceof this volatility, a “spot market” has developed in which large quantities ofinventory can be purchased and sold at the then-prevailing market price. 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 that ancillaryproducts and services carry a higher gross margin than merely the distributionof wireless handsets. At the same time, many large network operators andmanufacturers 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.

 

***INTAC’S Approach***

 

We distribute,through Holdings and its subsidiaries Global Creative and INTAC Telecom,wireless handsets manufactured by major mobile communications equipmentmanufacturers.  For nine months ended September 30, 2005 and the years endedDecember 31, 2004 and 2003, the majority of our total handset sales wereproducts manufactured by Nokia, Motorola, Sony Ericsson, Siemens andSamsung.  Our wireless handsetproducts are compatible with most network operators, as well as analog anddigital standards and other developing technologies.

 

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

 

We believethat our ability to take advantage of perceived inefficiencies in thedistribution markets for the wireless handset industry provides us with thefollowing 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 

 

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buy and sell only those models that we believe are the most popularamong end-users, thereby reducing our inventory risk and increasing the numberof inventory turns per month when compared 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 of operationsand financial condition would be materially adversely affected.

 

***Our Supply Channel***

 

Wirelesshandsets are available to us at low prices for a variety of reasons, includingour ability to quickly move large quantities of wireless handsets, the inabilityof a vendor to sell sufficient product through regular channels, thecancellation of orders placed by other distributors and the termination ofbusiness by a manufacturer or wholesaler. Currently, our access to sources ofequipment is based primarily on relationships which our management hasestablished over approximately the last seven years. Other sources of productinclude other distributors, network operators and independent brokers. Wereceive information about new sources of products from contacts, onlineresources, advertising and industry publications. Our Chief Executive Officercurrently handles all inventory procurement and has the most significantindustry contacts. To date, we have not been able to purchase inventorydirectly from a manufacturer. We currently do not have any supply agreements orauthorized distribution agreements with any manufacturers or other vendors and,therefore, our entire inventory is purchased on the “spot market,” mainly fromother wholesalers. We plan to purchase a larger portion of our inventory fromnetwork operators and manufacturers in the future, although there can be noassurances in this regard. Our experience has indicated that network operatorsand other wholesalers look favorably upon a distribution channel that enablesthem to dispose of significant quantities of merchandise quickly withoutaffecting their traditional sales channels. However, this situation couldchange if manufacturers or our suppliers decide to discourage the use of ourdistribution channels.

 

During thenine months ended September 30, 2005, we made purchases from more thanseven suppliers, substantially all of which are other wholesalers. Our threelargest suppliers of wireless handsets accounted for approximately 89.2% of ourproduct purchases for the nine months ended September 30, 2005, and oursingle largest supplier, T-Mobile, accounted for approximately 72.4% of ourproduct purchases for the nine months ended September 30, 2005.** **Atpresent, we seek to concentrate purchases with selected suppliers to ensureaccess to high-quality products on advantageous terms; however, we believe wewill need redundant sources of supply in the future. Because productavailability is unpredictable, a strong base of vendor relationships isimportant 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.

 

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

 

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

 

***Our Distribution Channel***

 

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

 

We do notgenerally maintain inventory for a long period of time. Instead, we generallyseek to have a buyer for our inventory prior to the time an order is placedwith a vendor.  The time between acustomer’s purchase order and the completion of the sale of that item isgenerally less than 10 days.  Although weassume certain inventory and price risk associated with selling these products,we believe 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.  Most of our new handsets comefully packaged in their original containers and carry the manufacturer’soriginal warranty. We have not previously experienced any material amount ofwarranty-related issues.

 

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

 

***Sales And Marketing***

 

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

 

***Seasonality***

 

Handset salesare influenced by a number of seasonal factors including customer buyingpatterns, product promotions, availability of distribution channels, holidays,including Chinese New Year during the first quarter of the year, and productsupply and pricing, and as a result, we adjust buying to reflect theanticipated level of sales activity. In addition, we also expect that our saleswill be influenced by cyclical economic conditions in the different countriesin which we operate.  An economicdownturn in one of our principal markets could materially and adversely affectour revenues and profits.

 

***Competition***

 

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:

 

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•      price;

 

•      inventoryavailability;

 

•      deliverytime; and

 

•      ourcustomer relationships.

 

Many of our existing and potential competitors,including traditional distributors, have longer operating histories, largercustomer bases, direct contractual relationships with manufacturers and otherhighly desirable vendors, greater name recognition and significantly greaterfinancial, personnel and marketing resources than we do. These competitorsgenerally can undertake more aggressive pricing policies, move more inventory,and make more attractive offers to customers, distribution partners andsuppliers than we can. Additionally, substantially all of our existing andprospective customers have established long-standing relationships with one ormore of our competitors or potential competitors. Consequently, we cannot becertain that we will be able to expand our customer list or retain our currentcustomers. We may not be able to compete successfully against our current orfuture competitors and competition could materially and adversely affect ourrevenues and profits.

 

Our competitors include:

 

***In the Asia-Pacific Rim****    *

 

•      Government-owneddistributors that have retail outlets;

 

•      FirstMobile;

 

•      GlobalTech Holdings; and

 

•      Numerousother smaller distributors, resellers and agents.

 

***In Europe***

 

•      Brightpoint;

 

•      Cellstar;

 

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

 

•      Numerousother small distributors, resellers and agents.

 

***Telecommunications Products***

 

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

 

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**BUSINESS SEGMENT FINANCIAL DATA**

 

Information concerningsegment income attributable to each of our Career Development and TrainingServices and our Distribution/Telecommunications business segments andgeographic areas is set forth in “Item 6 – Selected Financial Data” and in Note12 of Notes to Consolidated Financial Statements, all of which information isincorporated herein by reference. Information concerning identifiable assets of each of our businesssegments is set forth in Note 12 of Notes to Consolidated Financial Statements,which is incorporated herein by reference.

 

Revenue from our Career Development and TrainingServices Segment as a percentage of our total revenue was approximately 6.9%****in the nine months endedSeptember 30, 2005.  Revenuegenerated from sales of our education administration software accounted for78.4% of the total revenue from our Career Development and Training ServicesSegment in the nine months ended September 30, 2005.

 

Revenue from our Distribution Segment as a percentageof our total revenue was approximately 93.1%****inthe nine months ended September 30, 2005. During the nine months ended September 30, 2005, aggregate revenuesgenerated from our two largest customers accounted for approximately 62.0% ofour total revenues.  These customers wereMr. Lam and H-O-T Phone, and represented 52.9% and 9.1%****of our total revenue, respectively.  For a discussion of our account receivableand the related payment agreement with Mr. Lam, see “Management Discussionand Analysis of Financial Condition and Results of Operations – Liquidity andCapital Resources.”

 

**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 hasundertaken major changes in import and export rights; however, until thereforms have been completed and come into effect, trading rights will remainthe subject of government approval.  Wehave leveraged our contacts in China to allow us to take advantage of emergingopportunities in the wake of these reforms. We will continue to develop strategic contacts in the region as the planfor liberalizing Chinese Internet portal, human resources and distributionservices continues to follow the new open-door growth pattern.

 

China’s WTO membership has fundamentally redefinedChina’s relations with other countries, especially with the United States, itsmost significant export market, as well as its neighbors throughout Asia. WTOmembership has allowed China to defend its trade interests using the WTOdispute-settlement system. Chinese exporters have benefited from the certaintythat their trading partners must comply with WTO rules. For example, WTOmembers can no longer discriminate against Chinese products in their homemarkets. China’s membership into the WTO has made it more attractive to foreigninvestors, and foreign investments have resulted in more high-paying jobs, moregovernment tax receipts, more technology transfers and, ultimately, moreconsumer spending. China’s WTO commitments have facilitated increasedcompetition in every sector of the economy. As a result of increased tradingopportunities, Chinese consumers are expected to benefit from the increasedcompetition encouraging a larger range of choices, lower prices, and higherquality in consumer products and services. The combination of reduced tradebarriers and the increase in the standard of living in China has and shouldcontinue to significantly increase the demand for consumer products andservices in China, including wireless handsets, as well as demand for careerdevelopment services.

 

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

 

Information regarding financial data by geographicregion is contained in our financial statements beginning on page F-1.

 

**GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES**

 

Certain areas related to the Internet, such astelecommunications, Internet information services, international connections tocomputer information networks, information security and censorship are coveredin detail by a number of existing laws and

 

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regulations in China. The PRC Internet industry isregulated by various governmental authorities, such as the Ministry ofInformation Industry, or MII, the State Administration of Industry andCommerce, or SAIC, the State Press and Publications Administration, or SPPA,and the Ministry of Public Security.

 

Human resource service firms and Internet contentproviders are subject to substantial regulation by the PRC government. An“Internet content provider” is a commercial operator providing the delivery ofInternet content. This section sets forth a summary of the mostsignificant PRC regulations that affect the business and the industries inwhich we operate.

 

***Human Resources***

 

Human resource services firms in China are mainlyregulated by the PRC Ministry of Personnel. The principal regulation applicableto human resource services firms is the Regulations on Administration of HumanResource Markets (2001), jointly promulgated by the PRC Ministry of Personneland the PRC State Administration for Industry and Commerce. Under thisregulation, any entity providing human resource services in China must obtain ahuman resource services license from the local Administration of Personnel.Each of these Administrations may adopt rules, with some degrees of variationamong provinces, to regulate human resource services operations conductedwithin the province.

 

The principal regulation governing ownership in humanresource services companies in China is the Interim Regulations on theAdministration of Sino-foreign Equity Joint Venture as Human Resource Agencies(2003), jointly promulgated by the PRC Ministry of Personnel, the PRC Ministryof Commerce and the PRC State Administration for Industry and Commerce. Underthis regulation, the percentage of foreign ownership in the equity interest ofa foreign invested human resource services company cannot be less than 25% ormore than 49%. Because Intac Purun provides human resourceservices in China, Intac’s initial indirect ownership interest in Intac Purunwas set at 45% as a result of these regulations.  Subsequently in June 2004, INTACpurchased an additional 15% indirect ownership interest in Intac Purun fromChina Putian Corporation.  Thisadditional 15% indirect ownership interest increases INTAC’s total indirectownership in Intac Purun to 60%.  Subjectto the promulgation of additional regulations on foreign investment in the PRChuman resources services sector, INTAC may be required to undertake otherrestructuring measures in order to comply with Chinese regulations.

 

***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 telecommunicationsand telecommunications-related activities into basic or value-added services.The Catalogue lists the following services as being of a value-added nature:(a) e-mail, (b) voice mail, (c) online information storage andretrieval, (d) electronic data interchange, (e) online data processingand exchange, (f) value-added fax, (g) Internet access services,(h) Internet information services, (i) Internet data center servicesand Internet virtual private network services, (j) video-conferencing, (k) callcenter and voice mail services, and (l) certain mobile and satellitetelecommunications services.

 

On December 20,2001, the PRC State Council promulgated the Regulations for the Administrationof Foreign-Invested Telecommunications Enterprises, or the FITE Regulations,which became effective on January 1, 2002. The FITE Regulations stipulatethat foreign-invested telecommunications enterprises, or FITEs, must beestablished 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, or Telecom LicenseMeasures, were promulgated by MII on January 4, 2002, to supplement theFITE Regulations. The Telecom License Measures confirm that there are two typesof telecom operating licenses for operators in China (including FITEs), namely:licenses for basic services and licenses for value-added services. With respectto the latter, a distinction is made as to whether a license is granted forintra-provincial or “trans-regional” (inter-provincial) activities. An appendixto the license will detail the permitted activities of the enterprise to which

 

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it was granted. Anapproved telecom service operator must conduct its business (whether basic orvalue-added) in accordance with the specifications recorded on its TelecomService Operating License. The Telecommunications License Measures also confirmthat the MII is the competent industry authority for foreign-invested telecomenterprises.

 

***InternetInformation Services***

 

Intac Purun is structuredas an Internet content provider, or ICP, and has obtained approval from the MIIto develop Internet information services. On September 25, 2000, the State Council approved the Measures forthe Administration of Internet Information Services, or the ICP Measures.  Under the ICP Measures, any entity thatprovides information to online users of the Internet is obligated to obtain anoperating license from the MII or its local branch at the provincial ormunicipal level in accordance with the Telecom Regulations described above.

 

The ICP Measures stipulate further that entitiesproviding online information services regarding news, publishing, education,medicine, health, pharmaceuticals and medical equipment must procure theconsent of the national authorities responsible for such areas prior to applyingfor an operating license from the MII or its local branch at the provincial ormunicipal level.  Moreover, ICPs mustdisplay their operating license numbers in a conspicuous location on their homepage.  ICPs are obligated to police theirwebsites in order to remove categories of harmful content that are broadlydefined. This obligation reiterates Internet content restrictions that havebeen promulgated by other ministries over the past few years.  Most importantly for foreign investors, theICP Measures stipulate that ICPs must obtain the prior consent of the MII priorto establishing an equity or cooperative joint venture with a foreign partner.

 

On December 28, 2003, the BeijingTelecommunications Administration (the municipal branch of the MII) issued toIntac Purun a Telecommunications and Information Services OperatingLicense.  We believe we have allnecessary licenses to operate the Internet portal.

 

***InformationSecurity and Censorship***

 

The principal pieces ofPRC legislation 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 ofthe People’s Republic of China for Protecting the Security of ComputerInformation Systems (1994);

 

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

 

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

 

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

 

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

 

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

 

•      Measures forthe Administration of Commercial Web Site Filings for the Record (2002) andtheir Implementing Rules (2002);

 

•      Regulation for theInformation Dissemination of Watching and Listening through InternetPromulgated by State Bureau of Broadcasting Film & TV (2003);

 

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

 

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

 

These pieces oflegislation specifically prohibit the use of Internet infrastructure where itresults in a breach of public security, the provision of socially destabilizingcontent or the 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,policy decisions on state affairs, national economic and social development,political parties and “other State secrets that the State Secrecy Bureau hasdetermined should be safeguarded.”

 

According to theaforementioned legislation, it is mandatory for Internet companies in the PRCto complete security filing procedures with the local public security bureauand for them to update regularly with the local public security bureauregarding information security and censorship systems for their websites. Inthis regard, the *Detailed ImplementingRules for the Measures for the Administration of Commercial Web SiteFilings for the Record*, promulgated in July 2002 by the BeijingAdministration for Industry and Commerce (“AIC”), state that websites mustcomply with the following requirements:

 

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

 

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

 

•      they mustregister their website names with the Beijing AIC.

 

We have registered thedomain names, www.joyba.com and www.phrbank.com, and these registrations arerenewable annually.

 

In addition, the StateSecurity Bureau has issued regulations authorizing the blocking of access toany site it deems to be leaking State secrets or failing to meet the relevantlegal legislation regarding the protection of State secrets in the distributionof information 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.  We may be required to obtain this approval.

 

***Privacy Concern about Usage of Personal Information***

 

Despite the fact thatseveral PRC laws, regulations and PRC Supreme Court interpretations refer toprivacy, PRC law does not clearly define a “right of privacy.” PRC law doesprotect certain related rights such as personal dignity, right of reputation,right of name, and privacy of communications where a party can prove it hassuffered damage as a result of infringement on such rights.

 

Although the PRC has severallaws and regulations relating to the use of the Internet, addressing personalprivacy in use of the Internet and the freedom of communications, the PRCGovernment does not restrict online service providers in the collection,transmission and commercial use of personal information or data. Personal datais protected from unlawful use by general statutes and by any contractualarrangement between the user and the service provider.

 

Since spring 2005, theNPC and the State Council have begun legislative review of a draft Law forProtection of Personal Information which provides a wider scope of protectionthan merely protection of the personal privacy of a citizen; cellularphone-number, home address, medical files and occupation information will all beprotected.  The draft further providesthat usage of such personal information by service providers (excluding thenational security authority, research institutions, and news agency) shall besubject to the prior authorization of each individual and violations under thislaw will subject to violating party of administrative, civil, and even criminalliabilities.

 

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**INTELLECTUAL PROPERTY AND PROPRIETARYRIGHTS**

 

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

 

Many parties are actively developing chat, homepage,search and related Internet technologies. We expect these parties to continue to take steps to protect these technologies,including seeking patent protection. There may be patents issued or pending that are held by others and thatcover 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 that our products do notor will not infringe valid patents, copyrights or other intellectual propertyrights held by third parties.  We may besubject to legal proceedings and claims from time to time relating to theintellectual property of others in the ordinary course of our business.

 

We may license technology from third parties.  The market is evolving and we may need tolicense technologies to remain competitive. We may not be able to license these technologies on commerciallyreasonable terms or at all.  In addition,we may fail to successfully integrate any licensed technology into ourservices.  Our inability to obtain any ofthese licenses could delay product and service development until alternativetechnologies can be identified, licensed and integrated.

 

**TECHNOLOGY INFRASTRUCTURE**

 

We will place our servers at the facilities of21ViaNet which provide a reliable environment. 21ViaNet is currently thelargest neutral service provider for telecom data center in China.21Vianet is 4-layer constructed and provides abundant equipment and connectionfor each level from client equipment to network outlet to provide clients withclose to 100% network reliability. It is also designed for unique DNS Cache toguarantee uninterrupted stable operation. It is also safe constructed to resist over 60% DDoS attacks, which canprotect uninterrupted operation even if with severe network attacks. The RSAaccess control system is used, which blocks most illegal intrusions andprovides the system with truly reliable “lock”. Furthermore 21ViaNet is one ofthe members of China Anti-Junk Mail Organization.

 

21 Vianet also provides around-the-clock services,such as:

 

•      field supportof equipment installation and commissioning;

 

•      operations tosolve problems and also save labor and time;

 

•      technicalsupport and consulting services for clients; and

 

•      servicemonitoring and in-depth technical services.

 

**EMPLOYEES**

 

As of November 30, 2005, we had 127 full-timeemployees and 12 part-time employees within our Career Development and TrainingServices Segment, including 46 in sales and marketing, 28 in customer services,28 in technology and 37 in general and administrative functions.

 

We also had 7 full-time employees and 1 part timeemployee within our Distribution/Telecommunications Segment, including 3 insales and marketing, 2 in warehouse and distribution services and 3 in generaland administrative functions.

 

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**WEBSITE ACCESS TO REPORTS**

 

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

 

**ITEM 2 -PROPERTIES**

 

As of December 14, 2005, we leased approximately20,367 square feet for our operations. Our current significant leasedproperties are:

 
| **Location**                                                                | ** ** | **Size**     | ** ** | **Description**  | ** ** | **Business Segment**         | ** ** |
|-----------------------------------------------------------------------------|------------|--------------|------------|------------------|------------|------------------------------|------------|
|                                                                        |       |         |       |             |       |                         |       |
| Laws  Commercial Plaza, Kowloon, Hong Kong                                  |       | 2,774 sq ft  |       | Headquarters     |       | Distribution business        |       |
| Capital  Times Square, 88 Chanan Street, City West District, Beijing, China |       | 15,823 sq ft |       | Headquarters     |       | Career development  services |       |
| Frankfurt,  Germany                                                         |       | 1,500 sq ft  |       | Office           |       | Distribution business        |       |
| Dallas,  Texas                                                              |       | 270 sq ft    |       | Corporate office |       | Allocated                    |       |

 

Our current total remaining lease obligations are U.S.$405,654.

 

In addition to our leased facilities, some of whichare leased on a short-term basis, we also frequently utilize the storagecapabilities of our vendors and freight-forwarders. We believe that the termswe receive for storage space from those parties is comparable to, or betterthan, the terms we could obtain for additional leased facilities.

 

We believe that our facilities are suitable for ourcurrent business and that we could obtain suitable properties in the relevantareas without a material adverse effect on our business.

 

**ITEM 3 -LEGAL PROCEEDINGS**

 

We are not a party to any pending material legalproceedings, nor is our property subject to such proceedings, as of the date ofthis Report.

 

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

 

No matter was submitted to a vote of our securityholders during the third quarter (due to our change in fiscal year, we only hadthree quarters in fiscal year 2005) of the fiscal year ended September 30,2005.

 

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**PART II**

 

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

 

Our common stock is traded on The Nasdaq SmallCapMarket under the symbol “INTN” and on the Frankfurt Stock Exchange under thesymbol “WKN 805768.” The equity compensation plans information required by Item201(d) of Regulation S-K in response to this Item 5 is incorporated byreference from “Item 12 – Security Ownership of Certain Beneficial Owners andManagement,” of this Report, and should be considered an a part of this Item 5.

 

Market for Common Stock

 

As of December 7, 2005, there were 7 holders ofrecord of our common stock.

 

The following table sets forth the high and low bidprices of our common stock as reported by The Nasdaq SmallCap Market or OTCBBfor the quarters indicated. Such prices reflect inter-dealer prices, withoutretail markup, markdown or commission, and may not necessarily represent actualtransactions.

 
| **QUARTER  ENDING**     | ** ** | **LOW** | ** ** | **HIGH** | ** ** |
|-------------------------|------------|---------|------------|----------|------------|
|                    |       |    |       |     |       |
| December 31, 2003  |       | $       | 7.06       |     | $          | 13.90 |   |
|                    |       |    |       |     |       |
| March 31, 2004     |       | $       | 11.15      |     | $          | 17.98 |   |
|                    |       |    |       |     |       |
| June 30, 2004      |       | $       | 6.71       |     | $          | 19.18 |   |
|                    |       |    |       |     |       |
| September 30, 2004 |       | $       | 6.25       |     | $          | 12.54 |   |
|                    |       |    |       |     |       |
| December 31, 2004  |       | $       | 7.06       |     | $          | 15.97 |   |
|                    |       |    |       |     |       |
| March 31, 2005     |       | $       | 10.74      |     | $          | 17.65 |   |
|                    |       |    |       |     |       |
| June 30, 2005      |       | $       | 5.02       |     | $          | 14.11 |   |
|                    |       |    |       |     |       |
| September 30, 2005 |       | $       | 5.31       |     | $          | 8.90 |   |

 

The closing price of our common stock onDecember 7, 2005 on The Nasdaq SmallCap Market was $5.26.

 

Dividends

 

Since inception, we have not paid any cash dividendson our common stock and we do not anticipate declaring dividends in theforeseeable future. We intend to retain future earnings for reinvestment in ourbusiness.

 

**ITEM 6 –SELECTED FINANCIAL DATA**

 

We have changed our fiscal year-end fromDecember 31 to September 30. As a result of this change, we haveincluded in this filing the financial statements for the nine-month transitionperiod ended September 30, 2005. Accordingly, the following discussion ofresults of operations will compare the audited balances for the nine monthsended September 30, 2005 to the unaudited balances for the nine monthsended September 30, 2004 as noted below.

 

The selected financial data presented for the ninemonths ended September 30, 2005 and the years ended December 31, 2004and 2003 below has been derived from our audited consolidated financialstatements. The selected financial data for the nine months endedSeptember 30, 2004 is unaudited and has been derived from our quarterlyreport on Form 10-Q for the quarter ended September 30, 2004 as filedwith the Securities and Exchange Commission. The selected financial data shouldbe read in conjunction with our audited consolidated financial statements andnotes thereto, and “Management’s Discussion and Analysis of

 

25

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Financial Condition and Results of Operations”included elsewhere in this Report. Operating results for the periods below arenot necessarily indicative of the results that may be expected for futurefiscal years; refer to “Continuing Statement Regarding Forward-LookingStatements” and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” included elsewhere in this Report. Certain prioryear balances have been reclassified to conform to the current yearpresentation.

 

**Statement of Operations Data:**

 
| ** **                                        | ** ** | **Nine Months Ended September 30,** | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2005**                                 | ** ** | **2004**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                           |       |                                     |       |                             |       |   |   |   |   |
| Distribution  business                            |       | $                                        | 57,019,701 |                             | $          | 64,406,408 |   | $ | 111,025,925 |   | $ | 91,353,172 |   |
| Career  development services                      |       | 4,218,779                                |       | 58,975                           |       | 4,231,076 |   | — |   |
| Total revenue                                     |       | 61,238,480                               |       | 64,465,383                       |       | 115,257,001 |   | 91,353,172 |   |
| Cost of revenues                                  |       |                                     |       |                             |       |   |   |   |   |
| Distribution  business                            |       | 54,244,331                               |       | 59,415,086                       |       | 101,831,520 |   | 87,852,546 |   |
| Career  development services                      |       | 1,039,299                                |       | —                           |       | 1,233,490 |   | — |   |
| Total cost of revenue                             |       | 55,283,630                               |       | 59,415,086                       |       | 103,065,010 |   | 87,852,546 |   |
| Gross profit                                      |       | 5,954,850                                |       | 5,050,297                        |       | 12,191,991 |   | 3,500,626 |   |
| Operating expenses  (income)                      |       |                                     |       |                             |       |   |   |   |   |
| Product  development                              |       | 2,660,793                                |       | 1,121,219                        |       | 1,819,501 |   | — |   |
| Distribution  expenses                            |       | 507,761                                  |       | 647,594                          |       | 757,314 |   | 1,014,673 |   |
| Selling,  general and administrative expenses     |       | 4,765,585                                |       | 2,493,334                        |       | 3,354,956 |   | 2,768,750 |   |
| Gain  on sale of assets                           |       | (383,933                                 | )          | —                           |       | — |   | — |   |
| Total operating  expenses, net                    |       | 7,550,206                                |       | 4,262,147                        |       | 5,931,771 |   | 3,783,423 |   |
| Income (loss) from  operations                    |       | (1,595,356                               | )          | 788,150                          |       | 6,260,220 |   | (282,797 | ) |
| Total other income  (expenses)                    |       | (3,938                                   | )          | 516,825                          |       | 488,124 |   | 43,601 |   |
| Income (loss) before  income taxes                |       | (1,599,294                               | )          | 1,304,975                        |       | 6,748,344 |   | (776,755 | ) |
| Income taxes                                      |       | (132,912                                 | )          | 330,646                          |       | 931,847 |   | — |   |
| Net income (loss)                                 |       | $                                        | (1,466,382 | )                                | $          | 974,329 |   | $ | 5,816,497 |   | $ | (239,196 | ) |
| Net income (loss) per  share – basic         |       | $                                        | (0.07      | )                                | $          | 0.05 |   | $ | 0.28 |   | $ | (0.01 | ) |
| Net income (loss) per  share - diluted            |       | $                                        | (0.07      | )                                | $          | 0.05 |   | $ | 0.28 |   | $ | (0.01 | ) |
| Weighted average shares  outstanding – basic |       | 22,149,122                               |       | 20,574,344                       |       | 20,711,122 |   | 19,481,122 |   |
| Weighted average shares  outstanding - diluted    |       | 22,149,122                               |       | 20,870,056                       |       | 21,007,978 |   | 19,481,122 |   |

 

**Other Data:**

 
| ** **                                           | ** ** | **Nine Months Ended September 30,** | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2005**                                 | ** ** | **2004**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                 |       |                                     |       |                             |       |   |   |   |   |
| Net cash used in  operating activities               |       | $                                        | (3,329,920 | )                                | $          | (4,080,951 | ) | $ | (6,843,529 | ) | $ | (1,156,349 | ) |
| Net cash provided by  (used) in investing activities |       | 431,863                                  |       | 2,010,723                        |       | 1,791,499 |   | (4,125,386 | ) |
| Net cash provided by  financing activities           |       | 997                                      |       | 7,805,133                        |       | 7,774,384 |   | 7,502,737 |   |
|                                                      |            |                                          |            |                                  |            |  |  |  |  |  |  |  |  |

 

26

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**Balance Sheet Data:**

 
| ** **                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                             |       |                   |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                       |       | $                      | 2,635,868  |                  | $          | 8,545,479 |   | $ | 5,532,928 |   | $ | 2,810,574 |   |
| Restricted cash                                  |       | —                 |       | —                |       | — |   | 2,800,000 |   |
| Trade accounts  receivable                       |       | 21,000,362             |       | 20,401,154            |       | 17,549,905 |   | 4,000,286 |   |
| Current assets                                   |       | 27,723,728             |       | 29,987,723            |       | 23,915,863 |   | 10,429,357 |   |
| Property and equipment,  net                     |       | 1,547,863              |       | 1,218,107             |       | 1,667,708 |   | 883,061 |   |
| Acquired software, net                           |       | 1,409,460              |       | 258,814               |       | 1,976,322 |   | — |   |
| Goodwill                                         |       | 12,858,790             |       | 1,230,327             |       | 12,777,790 |   | 59,021 |   |
| Total assets                                     |       | 44,391,959             |       | 33,237,233            |       | 41,689,772 |   | 12,521,698 |   |
|                                             |       |                   |       |                  |       |   |   |   |   |
| Trade accounts payable  and accrued expenses     |       | 7,039,597              |       | 12,681,363            |       | 1,769,081 |   | 2,057,477 |   |
| Short-term note payable  to bank                 |       | —                 |       | —                |       | — |   | 2,728,202 |   |
| Current liabilities                              |       | 8,156,480              |       | 13,571,020            |       | 4,104,592 |   | 5,106,152 |   |
| Total stockholders’  equity                 |       | 36,235,479             |       | 19,666,213            |       | 37,585,180 |   | 6,720,138 |   |
| Total liabilities and  stockholders’ equity |       | 44,391,959             |       | 33,237,233            |       | 41,689,772 |   | 12,521,698 |   |
| Working capital                                  |       | 19,567,248             |       | 16,416,703            |       | 19,811,271 |   | 5,323,205 |   |
|                                                  |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

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

 

This Report, and in particular the followingdiscussion in this Item 7, contains forward-looking statements that involverisks and uncertainties. Our actual results could differ materially from thoseanticipated in forward-looking statements for many reasons - See “CautionaryStatement Regarding Forward-Looking Statements.” You should read the followingdiscussion with our consolidated financial statements and related notesincluded in Item 8 of in this Report.

 

**Overview**

 

On January 15, 2004, INTAC announced the shift infocus of its business plan from the traditional distribution of premium brandwireless handsets to its new Internet joint venture, Intac Purun.  On November 23, 2005, we announced thefurther refinement of this shift in focus. Under the refined focus of this business segment, we will operateprimarily in three business units:

 

•      INTAC MobileTelecommunications Institute,

 

•      EducationManagement Software Business Unit, and

 

•      DatabaseManagement Business Unit.

 

We have further expanded the capabilities of IntacPurun to encompass various integrated educational and career developmentservices.  Intac Purun was formed inOctober 2003 with China Putian Corporation and the EMIC.  The newly-founded joint venture was initiallyowned 45% by INTAC, 15% by China Putian Corporation, 30% by a private investorgroup and 10% by the EMIC.  InJune 2004, INTAC indirectly purchased an additional 15% interest in IntacPurun from China Putian Corporation. This additional 15% interest brings INTAC’s total ownership in IntacPurun to 60%.  INTAC’s ownership interestin Intac Purun is held indirectly through PRC nominees.

 

In September 2004, INTAC indirectly formed twonew, indirectly owned companies, Intac Advertising and Intac Technology.  Intac Advertising and Intac Technology areprivate Chinese corporations which were established to provide advertisingservices and value added services in support of Intac Purun.

 

In December 2004,Holdings acquired Huana Xinlong, a leading Chinese developer of managementsoftware for educational institution administration.  Huana Xinlong currently has productsdistributed and installed in more than 10,000elementary and middle schools.  We willfurther develop enhancements to Huana Xinlong’s software for educationalinstitution administration, which has been designated as the standard of theChina School Administration System for primary and middle schools by theEMIC.  As part of our business plan, weintend to bundle our Family – School Link Communication System (“FSLCS”) withHuana Xinlong’s current software and system products.

 

27

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Our objective in 2006 is to further expand and enhancethe business prospects and opportunities afforded by our relationship with theEMIC.  We are developing an array ofpremium products and services which will be made available directly and throughour Internet portal business.  OurInternet portal is being tailored to meet the growing demand by graduates inChina for career development products and services.

 

In addition, we continually evaluate investmentopportunities in other business segments within China, the Asia-Pacific Rimand, to a lesser extent, Europe. Our entry into these new business segments iscontingent upon our identifying both favorable investment opportunities and strategicpartners with expertise in such business segments as well as available capital.

 

INTAC raised equity financing of $4.5 million inSeptember 2003 in a private placement of common stock to an accreditedinvestor.  In May 2004, INTAC raisedan additional $12.0 million from the sale of its common stock in a privateplacement to an accredited investor. Proceeds from the private placements were used to expand our CareerDevelopment Services Segment and for general working capital purposes.  INTAC filed a registration statement thatregistered the resale of these shares for the purchasers.

 

Our revenues for the nine months endedSeptember 30, 2005 and for the years ended December 31, 2004 and 2003were derived primarily from the distribution of premium brand wireless handsetproducts to mobile communication equipment wholesalers, agents, retailers andother distributors mainly in Hong Kong. The Company is now focused on theexpansion and maturation of its Integrated Educational and Career DevelopmentServices Segment in China and expects increases in these types of revenue infuture years.  Our percentage revenue bygeographic sector was:

 
| ** ** | ** ** | **Nine months ended  September 30,** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|-------------------------------------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2005**                                  | ** ** | **2004**                         | ** ** | **2003** | ** ** |
|       |       |                                      |       |                             |       |   |   |
| Europe     |       | 32.3                                      | %          | 6.1                              | %          | 5.6 | % |
| Asia       |       | 67.7                                      | %          | 93.9                             | %          | 94.4 | % |
| Total      |       | 100.0                                     | %          | 100.0                            | %          | 100.0 | % |

 

Ourcost of revenue – distribution business is comprised of the cost of thewireless handset products we distributed.

 

Ourcost of revenue – career development services is comprised of the service feespaid for the provision of software training and technological services, and theamortization charge for computer software.

 

Distributionexpenses are principally comprised of costs attributable to the shipping andhandling of our wireless handset products, such as freight and insurance.

 

Productdevelopment expenses are principally comprised of costs attributable to thedevelopment, production and delivery of our educational and career developmentservices, such as salaries and facility costs.

 

Our selling, general and administration expenses arecomprised of sales expenses, together with commission expense, includingcommissions payable to sales staff; and general and administrative expenses,which consists primarily of compensation and related expenses for ouradministrative and accounting staff, occupancy costs and legal, accounting andconsulting fees, and costs related to being a public company.

 

We believe that the Company will have sufficientcapital for the next twelve months if we are able to collect our tradereceivables in a timely manner. However, if our customers with large tradereceivable balances do not pay timely, this would have a material adverseeffect on our liquidity. With timely payment, we believe that we currently haveadequate capital for the next twelve months; however, long-term plans willrequire that we obtain additional financing through the issuance of debt,equity, other securities or a combination thereof in order to take advantage ofother strategic agreements and business alliances.  In addition, we may seek to obtain a workingcapital or other traditional loan facility from a bank or other lendingsource.  Unless we are able to continueto improve our career development services operating performance with which wehave limited experience, additional outside financing required to execute ourlong-term business plan would be difficult to obtain on acceptable terms, if atall. As of the date of this Report, we do not have any financing arrangements,nor do we have any commitments to obtain such an arrangement with any bank orother third party. If we raise capital by issuing equity or convertible debtsecurities, the percentage ownership of our current

 

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stockholders will be reduced. Any new securities mayhave rights, preferences or privileges senior to those of our current commonshareholders. There can be no assurances that we will be able to obtainadditional financing on terms which are acceptable to us.

 

**CRITICALACCOUNTING POLICIES**

 

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

 

•      Revenuerecognition;

 

•      Inventory;

 

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

 

•      Impairmentof long lived assets other than goodwill;

 

•      Foreigncurrency exchange;

 

•      Goodwill;

 

•      Productand software development expenses;

 

•      Researchand development costs; and

 

•      Purchaseprice allocation.

 

A completedescription of all of our accounting policies is included in Note 1, “Generaland Summary of Significant Accounting Policies” in our consolidated financialstatements included in Item 8 of our annual report on Form 10-K for theyear ended December 31, 2004.

 

**RevenueRecognition:**

 

The Company’srevenue is derived from primarily two sources (i) integrated educational andcareer development services which includes software license maintenance andsupport, training, consulting, and subscription revenue delivered to customersin China and (ii) distribution revenue, which includes wireless handsetsdistribution mainly into Hong Kong.

 

Career DevelopmentServices:

 

The Companylicenses software products including access to its student database andeducation materials under two and three-year term licenses.  The softwarelicenses provide for updates to new versions if and when made available. No express rights of return are granted.  The Company sells its productsand services via a direct sales force, sales agents and its Internet portalswww.phrbank.com and www.Joyba.com.

 

Product revenuefrom the license of the Company’s software products is recognized in accordancewith Staff Accounting Bulletin (“SAB”) No. 104 when persuasive evidence ofan arrangement exists, the product has been delivered, the fee is fixed ordeterminable, and collection of the resulting receivable is reasonably assured,and, if applicable, upon acceptance when acceptance criteria are specified orupon expiration of the acceptance period. Maintenance and support revenue forcustomer support is deferred

 

29

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and recognizedratably over the service period unless it is included in the initial licensefee, provided for less than one year and is not a significant portion of thetotal license revenue. In this case, maintenance support revenue isrecognized when all revenue recognition criteria under SOP 97-2, SOP 98-9 andSAB 104 have been met.  Product upgradesand enhancement revenue is deferred and recognized ratably over the serviceperiod unless it is included in the initial license fee and is notsignificant.  Training and consulting revenue is recognized as servicesare performed and billable according to the terms of the service arrangement.

 

The Companyapplies the provisions of Statement of Position 97-2, “Software Revenue Recognition,” (“SOP 97-2”) as amended byStatement of Position 98-9 “Modificationof SOP 97-2, Software Revenue Recognition, With Respect to CertainTransactions” to all transactions involving the sale of all its softwareproducts.

 

For all sales ofsoftware products except those completed via the Internet, the Company useseither a binding purchase order or signed license agreement as evidence of anarrangement. For sales over the Internet, the Company uses a credit cardauthorization as evidence of an arrangement.

 

For arrangementswith multiple obligations (e.g. undelivered maintenance and support bundledwith term licenses), the Company allocates revenue to each component of thearrangement using the residual value method based on evidence of the fair valueof the undelivered elements, which is specific to the Company. The vendorspecific objective evidence of fair values for the ongoing maintenance andsupport obligations for term licenses are based upon the prices paid for theseparate renewal of these services by the customer or upon substantive renewalrates stated in the contractual arrangements.  In this case, maintenancesupport revenue is recognized when all revenue recognition criteria under SOP97-2, SOP 98-9 and SAB 104 have been met. Vendor specific objective evidence ofthe fair value of other services, primarily consulting and training services,is based upon separate sales of these services.

 

Subscriptionrevenue which will be earned primarily through our Internet portal business, isrecognized on a straight line basis over the term of the service contractprovided. The Company may also contract with third-party mobile operators forthe transmission of wireless short messages and subscriptions as well as forthe billing and collection of service fees from customers. Revenues arerecorded as the services are provided monthly or on a per usage basis. TheCompany recognizes the net amount received from the mobile operator asrevenue.  To date the Company has generated minimal revenue fromsubscription services.

 

The Company’s wirelesshandset and automobile revenues are generally generated from a quick turn ofproduct. The Company recognizes revenue upon delivery of product to itscustomers. Products are sold “as is” and the Company does not provide servicingof the wireless handsets or automobiles, nor does the Company receive any usagerevenue from the wireless handsets distributed.

 

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 as the cash isreceived.

 

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

 

**Inventory:**

 

Generally, we donot maintain any inventory of wireless handsets; however, due to the timing ofthe inventory being received and then being shipped to customers, we may holdinventory for a minimal time period, commonly a few days.  We purchaseproducts only upon the receipt of an order. Once an order is received, wesolicit additional orders to gain greater discounts from suppliers. Aggregateorders are then delivered in bulk to be allocated among customers.

 

Inventories forwireless 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 is determined on the basis of anticipatedsales proceeds less estimated costs for selling expenses.

 

**Concentrationof Credit Risk, Accounts Receivable and Related Provision for DoubtfulAccounts:**

 

Financialinstruments that potentially subject us to concentrations of credit riskconsist principally of cash and cash equivalents, short-term investments, andtrade receivables.  We are exposed tocredit risks in the event of default by the financial institutions or issuersof investments to the extent of amounts recorded on the balance sheet. We arealso exposed to credit risks in the event of non-payment by customers to theextent of amounts recorded on the balance sheet.  We limit our exposure to credit risk by

 

30

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performing ongoingcredit evaluations of our customers’ financial condition and generally requireno collateral.  We are exposed to creditrisks in the event of insolvency by our customers and manage such exposure toaccounting losses by limiting the amount of credit extended whenever deemednecessary.

 

**Impairmentof Long Lived Assets other than Goodwill:** We reviewlong-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.

 

**ForeignCurrency Exchange:** We are subject to fluctuations in foreigncurrencies, as distribution business customer orders may involve multi-currencyproduct and delivery transactions before the sale is complete. Additionally, aperiod of up to three months’ time may lapse between when an order is placeduntil revenue and costs are recognized and the supplier is paid. We do not engagein hedging activities nor in the use of financial derivatives.

 

The functionalcurrencies of the Company are the People’s Republic of China Renminbi (“RMB”)and the Hong Kong dollar (“HK$”). The accompanying consolidated financialstatements have been expressed in United States dollars, the reporting currencyof the Company.

 

Reported assetsand liabilities of INTAC’s foreign subsidiaries have been translated at therate 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 andunrealized gains (losses) on currency transactions between foreign entities areincluded in other income (expense) in the statements of operations.

 

**Goodwill:** We assess the carrying value of goodwill annually and when factors are presentthat indicate an impairment may have occurred.  Goodwill is consideredimpaired and a loss is recognized when its carrying value exceeds its impliedfair value. We may use a number of valuation methods including quoted marketprices, discounted cash flows and revenue multiples to determine fair value.The carrying value of goodwill amounted to $12,858,790 and $12,777,790 as ofSeptember 30, 2005 and December 31, 2004, respectively. No impairmentcharge has been made.

 

Factors that weconsider 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 we determinethat the carrying value of identifiable intangibles and goodwill may not berecoverable based upon the existence of one or more of the above indicators ofimpairment, we assess whether the carrying value of the asset is greater thanthe undiscounted future operating cash flow of the acquired operations. Anyimpairment is measured based on a projected discounted cash flow method using adiscount rate reflecting our average cost of funds.

 

**Productand Software Development Expenses:**  Product and softwaredevelopment expenses primarily include payroll and other employee benefitcosts.  For software to be marketed or sold, financial accountingstandards require the capitalization of development costs after technologicalfeasibility is established.  Due to the relatively short period betweentechnological feasibility and the completion of product development, theinsignificance of related costs and the immaterial nature of these costs, we

 

31

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generally do notcapitalize software development costs.  All products and softwaredevelopment costs are expensed when incurred.  Research and developmentcosts to date have not been material.

 

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

 

**RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND2003**

 

We have changedour fiscal year-end from December 31 to September 30. As a result ofthis change, we have prepared financial statements for the nine-monthtransition period ended September 30, 2005. Accordingly, the followingdiscussion of results of operations will compare the audited balances for thenine months ended September 30, 2005 to the unaudited balances for thenine months ended September 30, 2004 as noted below.

 

The following table summarizes the operating resultsfor the nine months ended September 30, 2005 and 2004 and the years endedDecember 31, 2004 and 2003 and should be read in conjunction with theaudited consolidated financial statements and related notes contained herein.

 
| ** **                                    | ** ** | **Nine Months Ended September 30,** | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2005**                                 | ** ** | **2004**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                       |       |                                     |       |                             |       |   |   |   |   |
| Distribution  business                        |       | $                                        | 57,019,701 |                             | $          | 64,406,408 |   | $ | 111,025,925 |   | $ | 91,353,172 |   |
| Career  development services                  |       | 4,218,779                                |       | 58,975                           |       | 4,231,076 |   | — |   |
| Total revenues                                |       | 61,238,480                               |       | 64,465,383                       |       | 115,257,001 |   | 91,353,172 |   |
| Cost of revenue                               |       |                                     |       |                             |       |   |   |   |   |
| Distribution  business                        |       | 54,244,331                               |       | 59,415,086                       |       | 101,831,520 |   | 87,852,546 |   |
| Career  development services                  |       | 1,039,299                                |       | —                           |       | 1,233,490 |   | — |   |
| Total cost of revenue                         |       | 55,283,630                               |       | 59,415,086                       |       | 103,065,010 |   | 87,852,546 |   |
| Gross profit                                  |       | 5,954,850                                |       | 5,050,297                        |       | 12,191,991 |   | 3,500,626 |   |
| Operating expenses  (income)                  |       |                                     |       |                             |       |   |   |   |   |
| Product  development                          |       | 2,660,793                                |       | 1,121,219                        |       | 1,819,501 |   | — |   |
| Distribution  expenses                        |       | 507,761                                  |       | 647,594                          |       | 757,314 |   | 1,014,673 |   |
| Selling,  general and administrative expenses |       | 4,765,585                                |       | 2,493,334                        |       | 3,354,956 |   | 2,768,750 |   |
| Gain  on sale of assets                       |       | (383,933                                 | )          | —                           |       | — |   | — |   |
| Total operating  expenses, net                |       | 7,550,206                                |       | 4,262,147                        |       | 5,931,771 |   | 3,783,423 |   |
|                                          |       |                                     |       |                             |       |   |   |   |   |
| Income (loss) from  operations                |       | (1,595,356                               | )          | 788,150                          |       | 6,260,220 |   | (282,797 | ) |
| Total other income  (expenses)                |       | (3,938                                   | )          | 516,825                          |       | 488,124 |   | 43,601 |   |
| Income (loss) before  income taxes            |       | (1,599,294                               | )          | 1,304,975                        |       | 6,748,344 |   | (239,196 | ) |
| Income taxes                                  |       | (132,912                                 | )          | (330,646                         | )          | 931,847 |   | — |   |
| Net income (loss)                             |       | $                                        | (1,466,382 | )                                | $          | 974,329 |   | $ | 5,816,497 |   | $ | (239,196 | ) |

 

**CareerDevelopment Services Revenue: **Revenue increased by$4.16 million to $4.22 million for nine months ended September 30, 2005,from $58,975 for the same period in 2004. Revenue for the year endedDecember 31, 2004 was $4.2 million as compared to zero for the year endedDecember 31, 2003. The new revenue during the nine months endedSeptember 30, 2005 and the year ended December 31, 2004 results fromthe change in focus of the Company’s business plan from the traditionaldistribution business to its career development services, and primarilyconsisted of revenues from sales of our education administration software. We expect career development and training services revenue to grow during theremainder of 2005 and throughout 2006.

 

**DistributionBusiness Revenue:**  Revenue decreased by $7.4 million, or11.5%, to $57.0 million for the nine months ended September 30, 2005, from$64.4 million for the same period in 2004. The decrease in revenue for the ninemonths is due to our reduced focus from the distribution business to careerdevelopment services and from increased competition in the wireless handset

 

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distributionindustry in China. Additionally, while demand for cell phones hasincreased consistently, the number of distributors has also increased to meetthis demand. The increase in Chinese cellular phone manufacturers hasnegatively impacted our revenue where we have traditionally dealt with large,international manufacturers who have higher manufacturing costs. We expectdistribution business revenue to remain relatively constant throughout 2006.

 

Revenue increased by $19.6 million, or 21.5%, to$111.0 million for the year ended December 31, 2004, from$91.4 million for the same period in 2003. The increase in revenue is dueto an increase in average sales prices and increased sales volume. Changing technologyand new customers enabled the Company to continue the substantial growth during2004.

 

**CareerDevelopment Services Gross Profit:** Gross profit was $3.2million and $58,975 for the nine months ended September 30, 2005 and 2004.This generated a gross margin of 75.4% and 100% for the nine month periodsended September 30, 2005 and 2004.  Gross profit was $2,997,586, or70.1% for the year ended December 31, 2004 as compared to zero for thesame period in 2003. This new gross margin is due to the change in focus of theCompany’s business plan from the traditional distribution business to itscareer development services, and primarily consisted of gross profit from salesof our education administration software.  We expect margins to remainhigh due to the nature of this service business.  Unlike the distributionbusiness which has product costs in cost of revenue, our career developmentservices’ cost of revenues does not have these product costs and thereforeproduce higher margins.

 

**DistributionBusiness Gross Profit:** Gross profit decreased by $2.2 millionto $2.7 million for the nine months ended September 30, 2005, from $4.9million for the same period in 2004 and the gross margin decreased by 2.8% to4.9% for the nine months ended September 30, 2005, from 7.7% for the sameperiod in 2004. The decrease in gross profit is due to lower sales volumeresulting from increased competition in the wireless handsets distributionindustry in China and lower gross margins. The decrease in gross margin iscaused by pricing pressures from increased competition, partially offset byvolume incentive rebates from a major supplier in the amount of $1,085,220 and$1,693,720 received in the third and second quarter of fiscal 2005,respectively.

 

Gross profitincreased by $5.7 million to $9.2 million for the year endedDecember 31, 2004, from $3.5 million for the same period in 2003. Thegross margin increased by 4.5% to 8.3% for the year ended December 31,2004 from 3.8% for the same period in 2003. The increase was due to the focuson higher margin wireless handset products, an increased sales volume during2004 and the volume incentive rebate from a major supplier in the amount of$1,904,357, partially offset by the continuing negative impact of theincreasing strength of the Euro with which the majority of inventory purchasesare made and a decrease of $263,643 to $489,755 for the premium received from amajor customer in December 2004, from $753,398 for the same period in2003.

 

**OperatingExpenses (Income): **Product development expense was $2.7million for the nine months ended September 30, 2005, as compared to $1.1million for the nine months ended September 30, 2004.  For theyear ended December 31, 2004, product development expense was $1.8 millionas compared to zero for the same period in 2003. Product development expense isprincipally comprised of costs directly attributable to the development,production and delivery of our career development services, such as salariesand facility costs.  These costs continue to increase due to the change infocus of the Company’s business plan from the traditional distribution businessto its career development services.  The increase in product developmentcosts was primarily due to higher salaries and other employee costs as thecareer development segment expands.  We expect to continue to incursignificant product development costs in future years.

 

Distributionexpenses decreased by $139,833 or 21.6%, to $507,762 for the nine months endedSeptember 30, 2005, from $647,594 for the same period in 2004, anddecreased as a percentage of distribution revenue to 0.9% in 2005 from 1.0% in2004.  Distribution expenses are principally comprised of costsattributable to the shipping and handling of our wireless handset products,such as salaries and facility costs. These costs decreased due to overall pricedecreases from common carriers because of a more competitive climate.

 

For the year endedDecember 31, 2004, distribution expenses decreased by $257,359, or 25.4%,to $757,314 from $1.0 million for the same period in 2003, and as apercentage of distribution revenue, decreased to 0.7% in 2004 from 1.1% in2003. These costs decreased due to overall price decreases from commoncarriers.

 

Selling, generaland administrative expenses increased by $2.3 million to $4.8 million for thenine months ended September 30, 2005, from $2.5 million for the sameperiod in 2004, and increased as a percentage of revenue to 7.8% in 2005 from3.9% in 2004**. **This overallincrease in total expense has been primarily due to the acquisition of HuanaXinlong, the increased business activity related to our career developmentservices and increased costs associated with being a public company, includingSarbanes-Oxley compliance. Specifically, for the nine months endedSeptember 30, 2005, the significant components of the overall costincrease are $1.6 million thatrelates to increased professional, legal and audit costs, $307,670 that relates to increasedsalary and staff costs, partially offset by a $341,000 decrease in businessdevelopment costs.  With the change infocus of the Company’s business plan, these funds are now directed towards thedevelopment of products and services in the career development and training servicessegment.

 

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The increases inprofessional fees related to Sarbanes-Oxley compliance and maintaining theCompany’s listing on the Nasdaq small cap market.  These costs areexpected to increase with the Company’s continued public entity compliancerelated matters.

 

Selling, generaland administrative expenses for the year ended December 31, 2004 increasedby $586,206, or 21.2%, to $3.4 million from $2.8 million for the sameperiod in 2003, and as a percentage of total revenue, decreased to 2.9% in 2004from 3.1% in 2003. This overall increase in total expense was primarily due tothe creation of the career development services business and Internet jointventure, Intac Purun, in October 2003 and the acquisition of Hunan Xinlongin December 2004. Specifically, for the year ended December 31, 2004,the significant components of the overall cost increase are $174,000 thatrelates to increased salary and staff costs, $208,000 that relates to increasedpromotion and business development costs, $257,000 that relates to increasedprofessional and banking services, and offset by $35,000 that relates todecreased rents and occupancy costs and $18,000 that relates to a decrease inequipment costs.

 

Gain on sale ofassets relates to a gain recognized on the sale of software which was developedfor Intac Purun’s internal use but subsequently sold to a third party.

 

We anticipate thatour operating expenses will increase in future periods as we increase sales andmarketing operations for our Career Development and Training Services segment.We also anticipate an increase in fiscal 2006 as we continue to addresscompliance related matters.

 

**Income(loss) from operations:**  Loss from operations was $1.5million for the nine months ended September 30, 2005, as compared toincome from operations of $788,150 for the same period in 2004.  Thedecline in income from operations is primarily due to lower distribution grossmargins due to increased competition and higher selling, general andadministrative and product development costs discussed above, partially offsetby improved career development services gross margins and the gain on sale ofassets.

 

Income fromoperations was $6.3 million for the year ended December 31, 2004, ascompared to a loss from operations of $282,797 for the same period in 2003. Theimprovement in income (loss) from operations was primarily due to the CareerDevelopment Services Segment and the increase in revenue and improved grossprofit margins in the distribution business. The most significant reason forthe operating loss in 2003 was the start-up costs associated with our CareerDevelopment Services Segment without accompanying revenues.

 

**Other income (expenses): **Foreign currency exchangeloss was $10,891 for the nine months ended September 30, 2005, as comparedto a gain of $112,865 for the same period in 2004. The foreign exchange loss in2005 was due to normal timing differences associated with fluxuations in theEuro.  The large gain in the first ninemonths of 2004 was due to a gain associated with the settlement of anintercompany balance with a subsidiary that was sold during that year.

 

For the year ended December 31, 2004, foreigncurrency exchange gain was $112,685, as compared to a loss of $9,440 for thesame period in 2003. The gain in 2004 was due to the translation gain notedabove.

 

**Netincome (loss):**  Net loss for the nine months endedSeptember 30, 2005 was $1.5 million, as compared to a net income of$974,329 for the nine months ended September 30, 2004. The decline wasprimarily due to lower distribution gross margins and higher selling, generaland administrative and product development costs discussed above, partiallyoffset by the improved career development services gross margins and the gainon sale of assets.

 

Net income was$5.8 million for year ended December 31, 2004, as compared to a netloss of $239,196 for the same period in 2003. The improved net income wasprimarily due to the Career Development Services Segment and the increase inrevenue and improved gross profit margins in the distribution business.However, the most significant reason for the net loss in 2003 was the start-upcosts associated with our Career Development Services Segment withoutaccompanying revenues.

 

**Liquidityand Capital Resources**

 

As of September 30, 2005 and December 31,2004, INTAC maintained cash of $2,635,868 and $5,532,928, respectively.  The Company measures liquidity throughworking capital (measured by current assets less current liabilities).  As of September 30, 2005 andDecember 31, 2004, INTAC maintained working capital of $19,567,248 and$19,811,271, respectively.

 

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Although there is asignificant amount of working capital as of September 30, 2005, asubstantial amount is tied up in trade accounts receivables and may not allnecessarily be readily available to satisfy short-term obligations. OurDistribution Segment business model has historically relied on customers payingon a cash basis.  However, in the lasttwo years certain of our major customers were granted credit terms as thesecustomers began to move away from paying on a cash basis.  Within our Distribution Business segment, alarge portion of trade accounts receivable is attributable to our largestcustomer – Mr. Lam, from whom we derived approximately 53% of our revenueduring the nine months ended September 30, 2005 and year endedDecember 31, 2004. The amount of the receivable balance with this customerhas increased over time.  Accordingly, wehave entered into an installment payment plan agreement with Mr. Lam topay his current balance due over a period of nine months with monthly paymentsin the amount of $1.7 million due each month commencing in November 2005.The first payment in accordance with this agreement was received inNovember 2005 in the amount of $1.7 million.  As part of this installment payment planagreement, we have agreed that all future sales to Mr. Lam are due andpayable within 45 days. The volume of sales in our Distribution Businesssegment relies on our keeping Mr. Lam as a customer.

 

Additionally, our CareerDevelopment Services trade receivable balance has increased in 2005 to $5.8million.  The increase relates primarilyto Huana Xinlong and the sale of educational software to school districts withinChina. These school districts pay for their software purchases using fundssupplied by the Chinese government. Historically, this funding has taken manymonths, which is typical of the business process in China. As ofSeptember 30, 2005, approximately $3.0 million of our trade receivablebalance relates to sales of educational software completed beforeDecember 31, 2004. We believe these accounts to be fully collectible;however, the timing of the collections cannot be estimated with certainty.

 

We believe that the Company will have sufficientcapital for the next twelve months if we are able to collect our tradereceivables in a timely manner. However, if Mr. Lam does not timely pay orif the Chinese government does not fund our school district customers in areasonable amount of time, it could have a material adverse effect on ourliquidity. With timely payment, we believe that we currently have adequatecapital for the next twelve months; however, long-term plans will require thatwe obtain additional financing through the issuance of debt, equity, othersecurities or a combination thereof in order to take advantage of otherstrategic agreements and business alliances. In addition, we may seek to obtain a working capital or other traditionalloan facility from a bank or other lending source.  Unless we are able to continue to improve ourcareer development and training services operating performance with which wehave limited experience, additional outside financing required to execute ourlong-term business plan would be difficult to obtain on acceptable terms, if atall. As of the date of this Report, we do not have any financing arrangements,nor do we have any commitments to obtain such an arrangement with any bank orother third party. If we raise capital by issuing equity or convertible debtsecurities, the percentage ownership of our current stockholders will bereduced. Any new securities may have rights, preferences or privileges seniorto those of our current common shareholders. There can be no assurances that wewill be able to obtain additional financing on terms which are acceptable tous.

 

For the ninemonths ended September 30, 2005, cash used in operating activities totaled$3.3 million. The use of funds was primarily due to the net loss as describedabove and an increase in trade and other accounts receivable, inventory,foreign sales tax receivable and a decrease in other liabilities and deferredrevenue, partially offset by an increase in trade accounts payable.  Forthe nine months ended September 30, 2004, cash used in operatingactivities totaled $4.1 million. The use of funds was primarily due to anincrease in trade receivables and a decrease in trade accounts payable,partially offset by net income.

 

For the ninemonths ended September 30, 2005, cash provided by investing activitiesamounted to $431,863 due to the sale of other assets and collection of a shortterm note receivable, partially offset by the purchase of property andequipment.  For the nine months ended September 30, 2004, cashprovided by investing activities amounted to $2.0 million due primarily to thedeposit of $2.8 million in restricted cash.

 

For the ninemonths ended September 30, 2005, cash provided by financing activitiesamounted to $997 due to a small increase in borrowings from ashareholder.  For the nine months ended September 30, 2004, cashprovided by financing activities amounted to $7.8 million due primarily to theissuance of common stock partially offset by the investment in INTAC Purun.

 

Trade accounts receivableincreased by $5.4 million to $21.0 million at September 30, 2005 comparedto $15.6 at December 31, 2004.  Theincrease relates primarily to the increase in the account of our largestdistribution business customer and Huana Xinlong and its sale of educational softwareto school districts within China. As of September 30, 2005, approximately$3.0 million of our trade receivable balance relates to educational softwaresales completed before December 31. 2004. We believe these accounts to befully collectible; however, the timing of the collections cannot be estimatedwith certainty.

 

Inventoriesincreased by $841,251 to $1,158,641 at September 30, 2005 compared to$317,390 at December 31, 2004.  The balance relates primarily towireless handsets which will be subsequently sold in the first quarter offiscal year 2006.  This and the increase

 

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in trade and otheraccounts receivable were partially funded by an increase in the accountspayable balance of $4.6 million to $5.9 million at September 30, 2005compared to $1.3 million at December 31, 2004.

 

Property and equipment,net, and purchased software, decreased by $119,846 and $566,862, respectively,to $1,547,863 and $1,409,460 at September 30 2005 compared to $1,667,709and $1,216,993 at December 31, 2004. These decreases were due to normal depreciation of fixed assets. We donot expect our purchases of property and equipment to change materially infiscal 2006.

 

**Commitments and Contingencies**

 

Liabilities for loss contingencies arising fromclaims, assessments and litigation and other sources are recorded when it isprobable that a liability has been incurred and the amount of the assessmentcan be reasonably estimated. In the opinion of management, after consultationwith legal counsel, there are no claims, assessments and litigation against theCompany.

 

**Contractual Obligations**

 

The Company’s contractual obligations as ofSeptember 30, 2005, are summarized below and relate to lease commitmentsunder non-cancelable operating leases of the Company’s office facilities:

 
| **Year ending September 30,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| 2006                               |       | $          | 270,788    |   |
| 2007                               |       | 238,527    |       |
| 2008                               |       | 42,498     |       |
| 2009                               |       | —     |       |
| 2010                               |       | —     |       |
| Thereafter                         |       | —     |       |
|                               |       | $          | 551,813    |   |

 

The acquisition consideration issued by the Company inthe December, 2004 acquisition of Huana Xinlong consisted of up to 2,000,000shares of Company common stock, including 1,000,000 shares issued on closingand up to an additional 1,000,000 shares contingent on achieving net income of$13 million during the thirteen month period ending December 31,2005.  INTAC will issue a lesser numberof shares on a pro rata basis in the event net income is less than $13 millionfor this period. The Company agreed to file a registration statement toregister these shares within 90 days after the closing of the acquisition,which filing deadline was subsequently verbally extended indefinitely.

 

Included as part of the obligation assumed in theacquisition of Huana Xinlong, is a commitment to complete the requiredcapitalization of that company in accordance with PRC laws andregulations.  A total of $1.6 millionmust be invested in Huana Xinlong by February 26, 2006 to complete the PRCcapitalization requirements.

 

**Off – Balance Sheet Arrangements**

 

The Company has no off-balance sheet arrangements thathave had, or are reasonably likely to have, a current or future effect on theCompany’s financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources that is material to investors.

 

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**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 123R, “Share-Based Payment.” SFAS No. 123R is a revisionof SFAS No. 123, “Accounting for Stock Based Compensation,” and supersedesAPB Opinion No. 25. Among other items, SFAS No. 123R eliminates theuse of APB 25 and the intrinsic value method of accounting, and requirescompanies to recognize the cost of employee services received in exchange forawards of equity instruments, based on the grant date fair value of thoseawards, in the financial statements. The effective date of SFAS No. 123Rfor the Company is the beginning of fiscal 2006. SFAS No. 123R permitscompanies to adopt its requirements using either a “modified prospective”method, or a “modified retrospective” method. Under the “modified prospective”method, compensation cost is recognized in the financial statements beginningwith the effective date, based on the requirements of SFAS No. 123R forall share-based payments granted after that date, and based on the requirementsof SFAS No. 123 for all unvested awards granted prior to the effectivedate of SFAS No. 123R. Under the “modified retrospective” method, therequirements are the same as under the “modified prospective” method, but alsopermits entities to restate financial statements of previous periods, eitherfor all prior periods presented or to the beginning of the fiscal year in whichthe statement is adopted, based on previous pro forma disclosures made inaccordance with SFAS No. 123. The Company has not yet determined which ofthe methods it will use upon adoption.

 

The Company currently utilizes the Black-Scholesoption pricing model to measure the fair value of stock options granted toemployees. While SFAS No. 123R permits entities to continue to use such amodel, it also permits the use of a “lattice” model. The Company expects to continueusing the Black-Scholes option pricing model upon adoption of SFASNo. 123R to measure the fair value of stock options.  The adoption of this statement will have theeffect of reducing net income and income per share or increasing net loss andnet loss per share as compared to what would be reported under the currentrequirements. These future amounts cannot be precisely estimated because theydepend on, among other things, the number of options issued in the future, andaccordingly, the Company has not determined the impact of adoption of thisstatement on its results of operations.

 

SFAS No. 123R also requires that the benefitsassociated with the tax deductions in excess of recognized compensation cost bereported as a financing cash flow, rather than as an operating cash flow asrequired under current literature. This requirement will reduce net operatingcash flows and increase net financing cash flows in periods after the effectivedate. These future amounts cannot be estimated, because they depend on, amongother things, when employees exercise stock options.

 

**ITEM 7A –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**FOREIGN CURRENCY EXCHANGE RATE RISK**

 

We may be affected by fluctuations in the translationof foreign currency. Currently, our primary currency risk arises from ourpurchase of inventory and distribution of products in different geographicregions with constantly changing relative exchange rates. As the cycle betweenour purchases and ultimate resale of the inventory lengthens, our risks offoreign currency changes will increase. Most of our banking accounts are heldin Euros and Hong Kong dollars, and significant changes in the exchange ratiosof these currencies to the markets in which we purchase and sell inventorycould affect our ability to operate in those markets. We do not use anyderivative financial instruments to mitigate any of our currency risks. We donot currently have any credit facilities and therefore we are not subject toany risks associated with interest rate changes.

 

**ITEM 8 –FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

The information required by this Item 8 is set forthin the Company’s Consolidated Financial Statements and Notes thereto beginningat page F-1 of this Report and incorporated herein by reference.

 

**ITEM 9 –CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

 

None.

 

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**ITEM 9A – CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

 Our Chief ExecutiveOfficer and Chief Financial Officer, after evaluating the effectiveness of our“disclosure controls and procedures” (as defined in the Securities Exchange Actof 1934 Rules 13a-15(e) or 15d-15(e)) as of the end of the periodcovered by this report (the “Evaluation Date”), have concluded that, as of theEvaluation Date, our disclosure controls and procedures were ineffectivebecause of the material weaknesses discussed below. Disclosure controls andprocedures are controls and other procedures designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Securities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’srules and forms and include, without limitation, controls and proceduresdesigned to ensure that information we are required to disclose in such reportsis accumulated and communicated to management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosure.

 

**Management’sReport on Internal Control Over Financial Reporting**

 

Our management is responsiblefor establishing and maintaining adequate internal control over financialreporting as defined in Rules 13a-15(f) or 15d-15(f) under theSecurities Exchange Act of 1934. The Company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. Internal control over financial reporting includes those writtenpolicies and procedures that:

 

•      pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

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

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

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

An internal controlmaterial weakness is a significant deficiency, or aggregation of deficiencies,that results in a more than remote likelihood that a material misstatement inannual or interim financial statements will not be prevented or detected on atimely basis by employees in the normal course of their work. An internalcontrol significant deficiency, or aggregation of deficiencies, is a deficiencythat results in a more than remote likelihood that a misstatement in annual orinterim financial statements is more than inconsequential.

 

Our management assessedthe effectiveness of the Company’s internal control over financial reporting,as defined in Securities Exchange Commission Act Rule 13a-15(f) as ofSeptember 30, 2005, and this assessment identified the following materialweaknesses in the company’s internal control over financial reporting:

 

1.     Deficienciesexisted in our information technology (“IT”) environment due to inadequateprocedures and controls which, when considered in the aggregate, constitute amaterial weakness over financial reporting. These deficiencies included: general design deficiencies that were notrisk based, IT entity level controls, general computer controls, spreadsheetcontrols, segregation of duties controls, and physical security controls.

 

2.     Deficienciesexisted in the lack of certain established policies and procedures includingthe areas of expense and accounts payable accruals, and capitalization ofsoftware development costs, which constitute material weaknesses over financialreporting.  The Company did not haveadequate procedures and controls to ensure that: (i) expensereimbursements and accounts payable accrual policies are being consistentlyfollowed and the review by management is being evidenced, and(ii) software development costs are being properly recorded and the reviewby management is being evidenced.

 

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3.     Deficienciesexisted in INTAC Deutschland GmbH, our Germany subsidiary, in relation tocertain key financial cycles, including financial reporting, inventory, revenueand expenses; however, remediation efforts were successfully completed andcontrols established as of September 30, 2005. Management was successfulin testing these newly established controls; however, these controls were inplace for only one month prior to year end. Due to having only one month ofactivity to test these controls, management is unable to conclude as to theeffectiveness of these controls, and thus considers these controls a materialweakness over financial reporting.

 

In making its assessmentof internal control over financial reporting, management used the criteriaissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in Internal Control—Integrated Framework. Because of the materialweaknesses described in the preceding paragraphs, management believes that, asof September 30, 2005, the Company’s internal control over financialreporting was not effective based on those criteria.

 

Since the discovery ofthe material weaknesses in internal controls described above, management isstrengthening the Company’s internal controls over financial reporting and hastaken various actions to improve our internal controls including, but notlimited to the following:

 

1.     Remediationefforts were initiated within the Company’s information technology “IT” area toaddress the design deficiencies discovered during testing.  We have engaged an outside consulting firm tohelp the Company implement controls and procedures required to address thedeficiencies noted as of September 30, 2005 and then to test ourremediation efforts in the information technology area by the end of the secondquarter of fiscal 2006.

 

2.     Managementis developing new policy and procedures and reviewing existing policy andprocedures in the areas of expense and accounts payable accruals andcapitalization of software development costs. These policies will be implemented by the end of the second quarter offiscal 2006.

 

3.     Managementbelieves that effective controls have been implemented at our German subsidiarydue to successful remediation efforts and testing in fiscal 2005. Subsequenttesting is expected by the end of the second quarter of fiscal 2006 to confirmthat the fiscal 2005 remediation efforts were successful and that effectivecontrols are in place and continue to operate effectively at our Germansubsidiary.

 

Because of the materialweaknesses described above, management has concluded that the Company’sinternal control over financial reporting was not effective as ofSeptember 30, 2005 based on the criteria in the Internal Control –Integrated Framework issued by COSO. Management’s assessment of the effectiveness of the Company’s internalcontrol over financial reporting as September 30, 2005 has been audited byKBA Group LLP, an independent registered public accounting firm.  This report appears as page F-3 of thisannual report on Form 10-K.

 

**Changesin Control Over Financial Reporting**

 

After discoveringmaterial weaknesses in internal controls over financial reporting in the areasof policy and procedures, IT and our German subsidiary, there were changes madein our internal controls over financial reporting during our third fiscalquarter ended September 30, 2005 to address the material weaknessesidentified. These changes in our internal control over financial reporting weredesigned to remediate the deficiencies noted during fiscal 2005 testing.Subsequent testing is expected by the end of the second quarter of fiscal 2006to confirm the success of our remediation efforts in fiscal 2005 and to confirmthat effective controls are in place and continue to operate as designed.

 

**ITEM 9B – OTHER INFORMATION**

 

None

 

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**PART III**

 

**ITEM 10 –DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information required by Items 401, 405 and 406 ofRegulation S-K in response to this Item 10 is set forth in the Company’sdefinitive proxy statement for its annual meeting of stockholders and isincorporated herein by reference.

 

We have adopted a Code of Conduct and Ethicsapplicable to all employees, including the principal executive officer,principal financial officer, principal accounting officer and controller.  Our Code of Ethics is posted on our website,www.intac-international.com.cn.

 

**ITEM 11 –EXECUTIVE COMPENSATION**

 

The information required by Item 402 ofRegulation S-K in response to this Item 11 is set forth in the Company’sdefinitive proxy statement for its annual meeting of stockholders and isincorporated herein by reference.

 

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

 

The following table sets forth information withrespect to INTAC’s equity compensation plans, as of September 30, 2005,under which equity securities of INTAC 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        |       | 600,000                                                                                             |       | $                                                                                  | 6.80       |                                                                                                                                                          | 1,900,000  |   |
| Equity  compensation plans not approved by security holders(1) |       | —                                                                                              |       | —                                                                             |       | —                                                                                                                                                        |       |
| Total                                                          |       | 600,000                                                                                             |       | $                                                                                  | 6.80       | (2)                                                                                                                                                           | 1,900,000  |   |

 

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(1)           Asan inducement to his employment with the Company, Mr. Darnell was awarded,on July 29, 2002, an agreement whereby, upon the occurrence of certainvesting dates, he would receive 200,000 shares of the Company’s common stock.This award vests in three equal annual installments on the first threeanniversary dates from the date of grant. As of fiscal year end 2005,Mr. Darnell had been issued 200,000 shares of the Company’s common stock.

 

(2)           Theweighted-average exercise price does not take into account Mr. Darnell’sstock award.

 

The information required by Item 403 of Regulation S-Kin response to this Item 12 is set forth in the Company’s definitive proxystatement for its annual meeting of stockholders and is incorporated herein byreference.

 

**ITEM 13 –CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information required by Item 404 ofRegulation S-K in response to this Item 13 is set forth in the Company’sdefinitive proxy statement for its annual meeting of stockholders and isincorporated herein by reference.

 

**ITEM 14 – PRINCIPAL ACCOUNTINGFEES AND SERVICES**

 

The information required by Item 9(e) ofSchedule 14A in response to this Item 14 is set forth in the Company’sdefinitive proxy statement for its annual meeting of stockholders and isincorporated herein by reference.

 

40

----

 

**PART IV**

 

**ITEM 15 –EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

(a)(1) Index toConsolidated Financial Statements

 

Please see theaccompanying Index to Consolidated Financial Statements which appears onpage F-1 of this report. The Reports of Independent Registered PublicAccounting Firm, Consolidated Financial Statements and Notes to ConsolidatedFinancial Statements which are listed in the Index to Consolidated FinancialStatements and which appear beginning on page F-2 of this report areincluded in Item 8 above.

 

(a)(2) FinancialStatement Schedule

 

Financial StatementSchedules have been omitted because the information required to be set forththerein is not applicable or is included in the Consolidated FinancialStatements or notes thereto.

 

(a)(3) The exhibitsto this report are listed on the Index to Exhibits following the signaturepages of this report.

 

(b)     Exhibits.

 

See theExhibit Index following the signature pages of this report.

 

(c)      Financial Statement Schedule

 

See the description underItem 15.(a)(2) above.

 

41

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Date:  | December 16, 2005 | INTAC INTERNATIONAL, INC.            |
|--------|------------------------|--------------------------------------|
|   |                   |                                 |
|   |                   | By:                                  | /s/ WEI ZHOU |   |
|   |                   | Wei Zhou, President, Chief Executive |
|   |                   | Officer and Director (Principal      |
|   |                   | Executive Officer)                   |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 

KNOW ALL MEN BY THESE PRESENTS, that each person whosesignature appears below hereby constitutes and appoints Wei Zhou and J. DavidDarnell, and each of them, his true and lawful proxies, attorneys-in-fact andagents, with full power of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities, to (i) act on, sign andtitle with the SEC any and all amendments to this Annual Report onForm 10-K, together with all exhibits thereto, (ii) act, sign andfile such certificates, instruments, agreements and other documents as may benecessary or appropriate in connection therewith, and (iii) take any andall actions which may be necessary or appropriate in connection therewith,granting unto such agents, proxies and attorneys-in-fact, and each of them andhis and their substitute or substitutes, full power and authority to do andperform each and every act and thing necessary or appropriate to be done inconnection therewith, as fully for all intents and purposes as he might orcould do in person, hereby approving, ratifying and confirming all that suchagents, proxies and attorneys-in-fact, any of them or any of his or theirsubstitute or substitutes may lawfully do or cause to be done by virtue hereof.

 
| **Name**                  | ** ** | **Title**                              | ** **                                                | **Date** |
|---------------------------|------------|----------------------------------------|-----------------------------------------------------------|----------|
|                      |       |                                   |                                                      |     |
| /s/ WEI ZHOU              |       |                                   | President, Chief Executive Officer and                    |     | December 16, 2005 |
|                      |       | Director (Principal Executive Officer) |                                                      |     |
|                      |       |                                   |                                                      |     |
| Wei Zhou                  |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ J. DAVID DARNELL      |       |                                   | Senior Vice President & Chief Financial  Officer |     | December 16, 2005 |
|                      |       | and Director (Principal Financial and  |                                                      |     |
|                      |       | Accounting Officer)                    |                                                      |     |
|                      |       |                                   |                                                      |     |
| J. David Darnell          |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ Theodore P. Botts     |       |                                   | Director                                                  |     | December 16, 2005 |
|                      |       |                                   |                                                      |     |
| Theodore P. Botts         |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ KEVIN K. JONES        |       |                                   | Director                                                  |     | December 16, 2005 |
|                      |       |                                   |                                                      |     |
| Kevin K. Jones            |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ DR. HEINZ-GERD STEIN  |       |                                   | Director                                                  |     | December 16, 2005 |
|                      |       |                                   |                                                      |     |
| Dr. Heinz-Gerd Stein |       |                                   |                                                      |     |
|                      |       |                                   |                                                      |     |
| /s/ LARRIE A. WEIL        |       |                                   | Director                                                  |     | December 16, 2005 |
|                      |       |                                   |                                                      |     |
| Larrie A. Weil            |       |                                   |                                                      |     |
|                           |            |                                        |                                                           |          |  |  |  |  |  |  |

 

42

----

 

**INDEX TO EXHIBITS**

 
| **Exhibits** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                              |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.1          |       | Agreement and Plan of Reorganization, dated  October 13, 2001, by and between Commodore Minerals, Inc., INTAC  Holdco Corp., Wei Zhou and Yip Yin Kwan (filed as Exhibit 2.1 to Current  Report on Form 8-K dated October 13, 2001, filed with the  Commission on October 30, 2001 (the “Reorganization Form 8-K”) and  incorporated herein by reference).      |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.2          |       | Stock Purchase Agreement, dated September 28,  2001, by and between Wei Zhou and Grayson Hand (filed as Exhibit 2.2 to  Reorganization Form 8-K and incorporated herein by reference).                                                                                                                                                                                                        |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.3          |       | Stock for Stock Exchange Agreement, dated  December 31, 2004, by and among INTAC International, Inc. and  Forever Sino International Limited (filed as Exhibit 2.1 to Current  Report on Form 8-K, filed with the Commission on January 5, 2005  and incorporated herein by reference).                                                                                             |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1(i)       |       | Amended and Restated Articles of Incorporation  (filed as Exhibit 3.1 to Current Report on Form 8-K/A dated  October 13, 2001, filed with the Commission on December 26, 2001  and incorporated herein by reference).                                                                                                                                                                    |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2(ii)      |       | Amended and Restated Bylaws (filed herewith).                                                                                                                                                                                                                                                                                                                                                                |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1         |       | Employment Agreement by and between Commodore  Minerals, Inc. (predecessor to the Registrant) and Wei Zhou dated as of  October 16, 2001 (filed as Exhibit 10.5 to the Reorganization  Form 8-K and incorporated herein by reference).                                                                                                                                                   |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2         |       | INTAC International, Inc. 2001 Long Term  Incentive Plan (filed as Exhibit 4.1 to Form S 8 dated  April 30, 2004, filed with the Commission on May 4, 2004 and  incorporated herein by reference).                                                                                                                                                                                  |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3         |       | Lease agreement by and between INTAC International  Holdings, Ltd. and Realty Star Development Limited dated March 13, 2002  (filed as Exhibit 10.7 to Form 10-QSB for the quarter ended  March 31, 2003, filed with the Commission on May 20, 2002 and  incorporated herein by reference).                                                                                         |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4         |       | Employment Agreement by and between the Registrant  and J. David Darnell dated as of June 11, 2002 (filed as  Exhibit 10.1 to Form 10-QSB for the quarter June 30, 2002,  filed with the Commission on August 20, 2002 and incorporated herein by  reference).                                                                                                                      |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5         |       | Restricted Stock Agreement between the Registrant  and J. David Darnell dated July 29, 2002 (filed as Exhibit 4.2 to  Form S-8 dated April 30, 2004, filed with the Commission on  May 4, 2004 and incorporated herein by reference).                                                                                                                                               |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6         |       | T-Mobile agreement (a translation of which was also  filed) (filed as Exhibit 10.3 to Form 10-KSB for the fiscal year  ended December 31, 2002, filed with the Commission on March 28,  2003 and incorporated herein by reference).                                                                                                                                                      |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7         |       | Joint Venture Agreement for the establishment of Beijing  INTAC Purun Educational Development Ltd by and among EMIC of the Ministry of  Education P.R.C., China Putian Corporation and INTAC International Inc.  (filed as Exhibit 10.4 to Form 10-QSB for the quarter ended  September 30, 2003, filed with the Commission on November 14, 2003  and incorporated herein by reference). |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8         |       | Subscription and Investment Representation  Agreement, dated as of September 15, 2003, between INTAC  International, Inc. and an accredited investor (filed as  Exhibit 10.4 to Form 10-Q for the quarter ended September 30,  2003, filed with the Commission on November 14, 2003 and incorporated  herein by reference).                                                    |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.9         |       | Assignment of Joint Venture Interest and Release of  Debt agreement (filed as Exhibit 10.6 to Form 10-KSB for the fiscal  year ended December 31, 2003, filed with the Commission on  March 30, 2004 and incorporated herein by reference).                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10        |       | Loan and Interest Pledge Agreement (filed as  Exhibit 10.7 to Form 10-KSB for the fiscal year ended  December 31, 2003, filed with the Commission on March 30, 2004 and  incorporated herein by reference).                                                                                                                                                                              |

 

43

----

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

 

44

----

 

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**AND RELATED FINANCIAL STATEMENTSCHEDULE**

 
| CONSOLIDATED FINANCIAL STATEMENTS                                                     |   |
|---------------------------------------------------------------------------------------|--------|
|                                                                                  |   |
| REPORTS OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM                             |   |
|                                                                                  |   |
| 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                                           |   |
|                                                                                  |   |
| FINANCIAL STATEMENT SCHEDULE                                                          |   |
|                                                                                  |   |
| SCHEDULE II—VALUATION  AND QUALIFYING ACCOUNTS                              |   |

 

All other schedules areomitted since the required information is not present, or is not present inamounts sufficient to require submission of the schedule, or because theinformation is included in the consolidated financial statements and notesthereto.

 

F-1

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directorsand Stockholders

 

INTACInternational, Inc.:

 

We have audited theaccompanying consolidated balance sheets of INTAC International, Inc. andsubsidiaries (the “Company”) as of September 30, 2005 andDecember 31, 2004, and the related consolidated statements of operations,stockholders’ equity and comprehensive income (loss), and cash flows for thenine months ended September 30, 2005 and the years ended December 31,2004 and 2003. In connection with our audit of the consolidated financialstatements, we have also audited the financial statement schedule for thenine months ended September 30, 2005 and the years ended December 31,2004 and 2003.  These consolidatedfinancial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedule based on our audits.

 

We conducted our auditsin accordance with standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of INTAC International, Inc. andsubsidiaries as of September 30, 2005 and December 31, 2004, and theresults of their operations and their cash flows for the nine months endedSeptember 30, 2005 and the years ended December 31, 2004 and 2003 inconformity with accounting principles generally accepted in the United Statesof America.  Also in our opinion, therelated financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Intac International Inc.’s internalcontrol over financial reporting as of September 30, 2005, based oncriteria established in Internal Control— Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”), andour report dated November 10, 2005 expressed an unqualified opinion onmanagement’s assessment of, and an adverse opinion on the effective operationof internal control over financial reporting.

 
| /s/ KBA Group LLP      |   |
|------------------------|--------|
| Dallas, Texas          |
| November 10, 2005 |

 

F-2

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

We were engaged to auditmanagement’s assessment included in Management’s Report on Internal Controlover Financial Reporting (included in Item 9A of this Form 10-K) thatINTAC International, Inc and subsidiaries (“the Company”) did not maintaineffective internal control over financial reporting as of September 30,2005 based on the criteria established in Internal Control – IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”) because of the material weaknesses as describedtherein.  Management of the Company isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

 

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

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

A material weakness is acontrol deficiency, or combination of control deficiencies, that results inmore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected.  The following material weaknesses have beenidentified and included in management’s assessment.

 

Deficiencies existed inthe Company’s information technology (“IT”) environment due to inadequateprocedures and controls which, when considered in the aggregate, constitute amaterial weakness over financial reporting. These deficiencies included: general design deficiencies that were notrisk based, IT entity level controls, general computer controls, spreadsheetcontrols, segregation of duties controls, and physical security controls.

 

Deficiencies existed inthe lack of certain established policies and procedures including the areas ofexpense and accounts payable accruals, and capitalization of softwaredevelopment costs, which constitute material weaknesses over financialreporting.  The Company did not haveadequate procedures and controls to ensure that: (i) expense reimbursementsand accounts payable accrual policies are being consistently followed and thereview by management is being evidenced, and (ii) software developmentcosts are being properly recorded and the review by management is beingevidenced.

 

Deficiencies existed inINTAC Deutschland GmbH, the Company’s German subsidiary, for certain keyfinancials cycles, including financial reporting, inventory, revenue andexpenses which constitute material weaknesses over financial reporting.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of INTACInternational, Inc. and subsidiaries as of September 30, 2005 andDecember 31, 2004, and the related consolidated statements of operations,stockholders’ equity and comprehensive income (loss), and cash flows for thenine months ended September 30, 2005 and the years ended December 31,2004 and 2003.  The above materialweaknesses were considered in determining the nature, timing, and extent ofaudit tests applied in our audit of the 2005 consolidated financial statements,and this report does not affect our report dated November 10, 2005, whichexpressed an unqualified opinion on those consolidated financial statements.

 

In our opinion,management’s assessment that Intac International Inc. did not maintaineffective internal control over financial reporting as of September 30,2005, is fairly stated, in all material respects, based on the COSO controlcriteria.  Also, in our opinion, becauseof the effect of the material weaknesses as described above on the achievementof the objectives of the control

 

F-3

----

 

criteria, IntacInternational Inc. has not maintained effective internal control over financialreporting as of September 30, 2005, based on the COSO control criteria.

 
| /s/ KBA Group LLP      |   |
|------------------------|--------|
| Dallas, Texas          |
| November 10, 2005 |

 

F-4

----

 

**INTAC INTERNATIONAL, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 

(expressed in U.S.dollars)

 
| ** **                                                                                                                             | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Assets                                                                                                                                 |       |                         |       |                        |       |
| Current assets                                                                                                                         |       |                         |       |                        |       |
| Cash  and cash equivalents                                                                                                             |       | $                            | 2,635,868  |                        | $          | 5,532,928 |   |
| Trade  accounts receivable (net of allowance for doubtful accounts of $0 in 2005 and  2004)                                            |       | 21,000,362                   |       | 15,645,548                  |       |
| Supplier  rebate receivable                                                                                                            |       | 2,485,267                    |       | 1,904,357                   |       |
| Other  receivables                                                                                                                     |       | 416,770                      |       | —                      |       |
| Inventories                                                                                                                            |       | 1,158,641                    |       | 317,390                     |       |
| Short  term note receivable                                                                                                            |       | —                       |       | 365,370                     |       |
| Deposits  paid                                                                                                                         |       | 26,820                       |       | 150,270                     |       |
| Total  current assets                                                                                                                  |       | 27,723,728                   |       | 23,915,863                  |       |
| Property and equipment,  net                                                                                                           |       | 1,547,863                    |       | 1,667,709                   |       |
| Other assets                                                                                                                           |       | 519,932                      |       | 968,387                     |       |
| Advances to officers of  subsidiaries and employees                                                                                    |       | 27,090                       |       | 32,932                      |       |
| Internet portal  database gateway, net                                                                                                 |       | 305,096                      |       | 350,769                     |       |
| Acquired software, net                                                                                                                 |       | 1,409,460                    |       | 1,976,322                   |       |
| Goodwill                                                                                                                               |       | 12,858,790                   |       | 12,777,790                  |       |
| Total  assets                                                                                                                          |       | $                            | 44,391,959 |                        | $          | 41,689,772 |   |
| Liabilities and  Stockholders’ Equity                                                                                             |       |                         |       |                        |       |
| Current liabilities                                                                                                                    |       |                         |       |                        |       |
| Trade  accounts payable                                                                                                                |       | $                            | 5,949,452  |                        | $          | 1,316,597 |   |
| Accrued  expenses                                                                                                                      |       | 1,090,145                    |       | 452,484                     |       |
| Income  taxes payable                                                                                                                  |       | 604,481                      |       | 974,699                     |       |
| Other  liabilities                                                                                                                     |       | 311,979                      |       | 627,243                     |       |
| Deferred  revenue                                                                                                                      |       | 32,479                       |       | 302,457                     |       |
| Due  to officer of subsidiary                                                                                                          |       | —                       |       | 315,448                     |       |
| Due  to shareholder                                                                                                                    |       | 116,661                      |       | 115,664                     |       |
| Deposits  received                                                                                                                     |       | 51,283                       |       | —                      |       |
| Total  current liabilities                                                                                                             |       | 8,156,480                    |       | 4,104,592                   |       |
| Commitments and  contingencies                                                                                                         |       |                         |       |                        |       |
| Stockholders’ equity                                                                                                              |       |                         |       |                        |       |
| Preferred  stock, $0.001 par value, 10,000,000 shares authorized; none issued and  outstanding                                         |       | —                       |       | —                      |       |
| Common  stock, $0.001 par value, 100,000,000 shares authorized; 22,189,455 and  22,121,455 shares issued and outstanding, respectively |       | 22,189                       |       | 22,121                      |       |
| Additional  paid-in capital                                                                                                            |       | 33,399,433                   |       | 33,263,389                  |       |
| Retained  earnings                                                                                                                     |       | 2,786,610                    |       | 4,252,992                   |       |
| Accumulated  other comprehensive income                                                                                                |       | 27,247                       |       | 46,678                      |       |
| Total  stockholders’ equity                                                                                                       |       | 36,235,479                   |       | 37,585,180                  |       |
| Total  liabilities and stockholders’ equity                                                                                       |       | $                            | 44,391,959 |                        | $          | 41,689,772 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-5

----

 

**INTAC INTERNATIONAL, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

 

(expressed in U.S.dollars)

 
| ** **                                               | ** ** | **Nine Months Ended, September 30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** | **Year Ended  December 31, 2003** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Revenue                                                  |       |                                           |       |                                   |       |                                   |       |
| Distribution  business                                   |       | $                                              | 57,019,701 |                                   | $          | 111,025,925                            |       | $ | 91,353,172 |   |
| Career  development services                             |       | 4,218,779                                      |       | 4,231,076                              |       | —                                 |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Total revenues                                           |       | 61,238,480                                     |       | 115,257,001                            |       | 91,353,172                             |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Cost of revenue                                          |       |                                           |       |                                   |       |                                   |       |
| Distribution  business                                   |       | 54,244,331                                     |       | 101,831,520                            |       | 87,852,546                             |       |
| Career  development services                             |       | 1,039,299                                      |       | 1,233,490                              |       | —                                 |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Total cost of revenue                                    |       | 55,283,630                                     |       | 103,065,010                            |       | 87,852,546                             |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Total gross profit                                       |       | 5,954,850                                      |       | 12,191,991                             |       | 3,500,626                              |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Operating expenses  (income)                             |       |                                           |       |                                   |       |                                   |       |
| Product  development                                     |       | 2,660,793                                      |       | 1,819,501                              |       | —                                 |       |
| Distribution  expenses                                   |       | 507,761                                        |       | 757,314                                |       | 1,014,673                              |       |
| Selling,  general and administrative expenses            |       | 4,765,585                                      |       | 3,354,956                              |       | 2,768,750                              |       |
| Gain  on sale of assets                                  |       | (383,933                                       | )          | —                                 |       | —                                 |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Total operating  expenses, net                           |       | 7,550,206                                      |       | 5,931,771                              |       | 3,783,423                              |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Income (loss) from  operations                           |       | (1,595,356                                     | )          | 6,260,220                              |       | (282,797                               | )          |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Other income (expenses)                                  |       |                                           |       |                                   |       |                                   |       |
| Foreign  currency exchange gain (loss)                   |       | (10,891                                        | )          | 112,685                                |       | (9,440                                 | )          |
| Interest  income (expense), net                          |       | 66                                             |       | 19,382                                 |       | (41,119                                | )          |
| Minority  interest in loss of consolidated joint venture |       | —                                         |       | 366,715                                |       | 65,809                                 |       |
| Other  income (expense), net                             |       | 6,887                                          |       | (10,658                                | )          | 28,351                                 |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Total other income  (expenses), net                      |       | (3,938                                         | )          | 488,124                                |       | 43,601                                 |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Income (loss) before  income taxes                       |       | (1,599,294                                     | )          | 6,748,344                              |       | (239,196                               | )          |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Income taxes                                             |       | (132,912                                       | )          | 931,847                                |       | —                                 |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Net income (loss)                                        |       | $                                              | (1,466,382 | )                                      | $          | 5,816,497                              |       | $ | (239,196 | ) |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Net income (loss) per  share – basic                |       | $                                              | (0.07      | )                                      | $          | 0.28                                   |       | $ | (0.01 | ) |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Net income (loss) per  share –diluted               |       | $                                              | (0.07      | )                                      | $          | 0.28                                   |       | $ | (0.04 | ) |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Weighted average shares  outstanding - basic             |       | 22,149,122                                     |       | 20,711,122                             |       | 19,481,122                             |       |
|                                                     |       |                                           |       |                                   |       |                                   |       |
| Weighted average shares  outstanding - diluted           |       | 22,149,122                                     |       | 21,007,978                             |       | 19,481,122                             |       |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-6

----

 

**INTAC INTERNATIONAL, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)**

 

(expressed in U.S.Dollars)

 
| ** **                                                                                                                | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|
| ** **                                                                                                                | ** ** | **Shares**       | ** ** | **$**                   | ** ** | **Capital** | ** ** |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Balance at  January 1, 2003                                                                                          |       | 19,189,455       |       | $                       | 19,189     |   | $ | 3,330,468 |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Issuance of common  stock for cash                                                                                        |       | 1,000,000        |       | 1,000                   |       | 4,499,000 |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Compensation in  connection with restricted stock award                                                                   |       | —           |       | —                  |       | 233,333 |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Comprehensive income                                                                                                      |       |             |       |                    |       |   |   |
| Net  loss                                                                                                                 |       | —           |       | —                  |       | — |   |
| Foreign  currency translation                                                                                             |       | —           |       | —                  |       | — |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Total comprehensive  income                                                                                               |       |             |       |                    |       |   |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Balance at  December 31, 2003                                                                                        |       | 20,189,455       |       | 20,189                  |       | 8,062,801 |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Issuance of common  stock for cash                                                                                        |       | 800,000          |       | 800                     |       | 11,968,387 |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Compensation in  connection with restricted stock award                                                                   |       | —           |       | —                  |       | 233,333 |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Share issuance in  connection with restricted stock award                                                                 |       | 132,000          |       | 132                     |       | (132 | ) |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Share  issuance in connection with acquisition of Beijing Huana Xinlong Information  and Technology Development Co., Ltd. |       | 1,000,000        |       | 1,000                   |       | 12,999,000 |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Comprehensive income                                                                                                      |       |             |       |                    |       |   |   |
| Net  income                                                                                                               |       | —           |       | —                  |       | — |   |
| Foreign  currency translation                                                                                             |       | —           |       | —                  |       | — |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Total comprehensive  income                                                                                               |       |             |       |                    |       |   |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Balance at  December 31, 2004                                                                                        |       | 22,121,455       |       | 22,121                  |       | 33,263,389 |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Compensation in  connection with restricted stock award                                                                   |       | —           |       | —                  |       | 136,112 |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Share issuance in  connection with restricted stock award                                                                 |       | 68,000           |       | 68                      |       | (68 | ) |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Comprehensive loss                                                                                                        |       |             |       |                    |       |   |   |
| Net  loss                                                                                                                 |       | —           |       | —                  |       | — |   |
| Foreign  currency translation                                                                                             |       | —           |       | —                  |       | — |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Total comprehensive  loss                                                                                                 |       | —           |       | —                  |       | — |   |
|                                                                                                                      |       |             |       |                    |       |   |   |
| Balance at  September 30, 2005                                                                                       |       | 22,189,455       |       | $                       | 22,189     |   | $ | 33,399,433 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-7

----

 
| ** **                                                                                                                | ** ** | **Retained Earnings  (deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Balance at  January 1, 2003                                                                                          |       | $                                | (1,324,309 | )                                                    | $          | (128,266                              | )          | $ | 1,897,082 |   |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Issuance of common  stock for cash                                                                                        |       | —                           |       | —                                               |       | 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                             |       |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Issuance of common  stock for cash                                                                                        |       | —                           |       | —                                               |       | 11,969,187                            |       |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Compensation in  connection with restricted stock award                                                                   |       | —                           |       | —                                               |       | 233,333                               |       |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Share issuance in  connection with restricted stock award                                                                 |       | —                           |       | —                                               |       | —                                |       |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Share  issuance in connection with acquisition of Beijing Huana Xinlong Information  and Technology Development Co., Ltd. |       | —                           |       | —                                               |       | 13,000,000                            |       |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Comprehensive income                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Net  income                                                                                                               |       | 5,816,497                        |       | —                                               |       | 5,816,497                             |       |
| Foreign  currency translation                                                                                             |       | —                           |       | (153,975                                             | )          | (153,975                              | )          |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Total comprehensive  income                                                                                               |       |                             |       |                                                 |       | 5,662,522                             |       |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Balance at  December 31, 2004                                                                                        |       | 4,252,992                        |       | 46,678                                               |       | 37,585,180                            |       |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Compensation in  connection with restricted stock award                                                                   |       | —                           |       | —                                               |       | 136,112                               |       |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Share issuance in  connection with restricted stock award                                                                 |       | —                           |       | —                                               |       | —                                |       |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Comprehensive loss                                                                                                        |       |                             |       |                                                 |       |                                  |       |
| Net  loss                                                                                                                 |       | (1,466,382                       | )          | —                                               |       | (1,466,382                            | )          |
| Foreign  currency translation                                                                                             |       | —                           |       | (19,431                                              | )          | (19,431                               | )          |
| Total comprehensive loss                                                                                                  |       |                             |       |                                                 |       | (1,485,813                            | )          |
|                                                                                                                      |       |                             |       |                                                 |       |                                  |       |
| Balance at  September 30, 2005                                                                                       |       | $                                | 2,786,610  |                                                 | $          | 27,247                                |       | $ | 36,235,479 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-8

----

 

**INTAC INTERNATIONAL, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

(expressed in U.S.dollars)

 
| ** **                                                                                           | ** ** | **Nine Months Ended  September 30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** | **Year Ended  December 31, 2003** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| CASH FLOW FROM  OPERATING ACTIVITIES:                                                                |       |                                           |       |                                   |       |                                   |       |
| Net income (loss)                                                                                    |       | $                                              | (1,466,382 | )                                      | $          | 5,816,497                              |       | $ | (239,196 | ) |
| Adjustments  to reconcile net income (loss) to net cash used in operating activities:                |       |                                           |       |                                   |       |                                   |       |
| Depreciation  of property and equipment                                                              |       | 325,283                                        |       | 278,382                                |       | 68,793                                 |       |
| Amortization  of internet portal database gateway and acquired software                              |       | 612,535                                        |       | 123,883                                |       | —                                 |       |
| Minority  interest in loss of consolidated joint venture                                             |       | —                                         |       | (366,715                               | )          | (65,809                                | )          |
| Compensation  in connection with restricted stock award                                              |       | 136,112                                        |       | 233,333                                |       | 233,333                                |       |
| Other  comprehensive income (loss)                                                                   |       | (19,431                                        | )          | (153,975                               | )          | 328,919                                |       |
| Gain  on sale of subsidiary                                                                          |       | —                                         |       | (15,055                                | )          | —                                 |       |
| Loss  (gain) on sale of property and equipment and other assets                                      |       | (383,933                                       | )          | 15,695                                 |       | (2,838                                 | )          |
| Changes  in operating assets and liabilities, net of effects of acquisition and  disposition in 2004 |       |                                           |       |                                   |       |                                   |       |
| Trade  accounts receivable                                                                           |       | (5,354,812                                     | )          | (13,248,203                            | )          | (3,071,659                             | )          |
| Supplier  rebate receivable                                                                          |       | (580,910                                       | )          | —                                 |       | —                                 |       |
| Other  receivables                                                                                   |       | (161,001                                       | )          | —                                 |       | —                                 |       |
| Inventories                                                                                          |       | (841,251                                       | )          | (95,441                                | )          | 908,135                                |       |
| Deposits  paid                                                                                       |       | 123,450                                        |       | 99,863                                 |       | 947,295                                |       |
| Other  assets                                                                                        |       | 229,529                                        |       | —                                 |       | —                                 |       |
| Trade  accounts payable and accrued expenses                                                         |       | 5,270,516                                      |       | (587,560                               | )          | (242,274                               | )          |
| Other  liabilities                                                                                   |       | (630,712                                       | )          | —                                 |       | —                                 |       |
| Deferred  revenue                                                                                    |       | (269,978                                       | )          | 302,457                                |       | —                                 |       |
| Income  taxes payable                                                                                |       | (370,218                                       | )          | 974,699                                |       | (39,598                                | )          |
| Deposits  received                                                                                   |       | 51,283                                         |       | (221,389                               | )          | 18,550                                 |       |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| Net cash used in  operating activities                                                               |       | (3,329,920                                     | )          | (6,843,529                             | )          | (1,156,349                             | )          |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| CASH FLOW FROM  INVESTING ACTIVITIES:                                                                |       |                                           |       |                                   |       |                                   |       |
| Restricted  cash deposit                                                                             |       | —                                         |       | 2,800,000                              |       | (2,800,000                             | )          |
| Purchase  of property and equipment                                                                  |       | (187,195                                       | )          | (943,513                               | )          | (637,523                               | )          |
| Purchase  (sale) of other assets                                                                     |       | 328,846                                        |       | (491,753                               | )          | (392,272                               | )          |
| Repayments  from (advances to) officers of subsidiaries and employees                                |       | 5,842                                          |       | 313,158                                |       | (332,747                               | )          |
| Collection  of short-term note receivable                                                            |       | 365,370                                        |       | —                                 |       | —                                 |       |
| Acquisition  costs                                                                                   |       | (81,000                                        | )          | —                                 |       | —                                 |       |
| Cash  included in sale of subsidiary                                                                 |       | —                                         |       | (132,921                               | )          | —                                 |       |
| Cash  included in purchase of subsidiary                                                             |       | —                                         |       | 246,528                                |       | —                                 |       |
| Proceeds  from sale of equipment                                                                     |       | —                                         |       | —                                 |       | 37,156                                 |       |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| Net cash provided by  (used in) investing activities                                                 |       | 431,863                                        |       | 1,791,499                              |       | (4,125,386                             | )          |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| CASH FLOW FROM  FINANCING ACTIVITIES:                                                                |       |                                           |       |                                   |       |                                   |       |
| Proceeds  from issuance of common stock                                                              |       | —                                         |       | 11,969,187                             |       | 4,500,000                              |       |
| Borrowings  from (repayments to) shareholder, net                                                    |       | 997                                            |       | 33,399                                 |       | (182,195                               | )          |
| Borrowings  from (repayments to) bank                                                                |       | —                                         |       | (2,728,202                             | )          | 2,728,202                              |       |
| Incremental  purchase of Intac Purun shares                                                          |       | —                                         |       | (1,500,000                             | )          | —                                 |       |
| Investment  into Intac Purun from joint venture partners                                             |       | —                                         |       | —                                 |       | 456,730                                |       |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| Net cash provided by  financing activities                                                           |       | 997                                            |       | 7,774,384                              |       | 7,502,737                              |       |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                |       | (2,897,060                                     | )          | 2,722,354                              |       | 2,221,002                              |       |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| CASH  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                    |       | 5,532,928                                      |       | 2,810,574                              |       | 589,572                                |       |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| CASH  AND CASH EQUIVALENTS AT END OF PERIOD                                                          |       | $                                              | 2,635,868  |                                   | $          | 5,532,928                              |       | $ | 2,810,574 |   |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                   |       |                                           |       |                                   |       |                                   |       |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| Cash paid for interest                                                                               |       | $                                              | 401        |                                   | $          | 38,570                                 |       | $ | 43,400 |   |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| Cash paid for taxes                                                                                  |       | $                                              | —     |                                   | $          | —                                 |       | $ | 39,598 |   |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| NON-CASH INVESTING AND  FINANCING ACTIVITIES:                                                        |       |                                           |       |                                   |       |                                   |       |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| Sale of property and  equipment for note receivable                                                  |       | $                                              | 584,615    |                                   | $          | —                                 |       | $ | — |   |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| Issuance  of Intac Purun stock for the Internet portal database gateway                              |       | $                                              | —     |                                   | $          | —                                 |       | $ | 304,487 |   |
|                                                                                                 |       |                                           |       |                                   |       |                                   |       |
| Issuance of Company  stock for the Huana Xinlong acquisition                                         |       | $                                              | —     |                                   | $          | 13,000,000                             |       | $ | — |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-9

----

 

**INTAC INTERNATIONAL, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(expressed in U.S. dollars)**

 

**1.  GENERALAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

(a)     Description of Business and Basis of Presentation

 

INTAC International, Inc. (“INTAC” or the“Company”) is a U.S. holding company focused on the exploitation of strategicbusiness opportunities available in China and the Asia-Pacific Rim.  The Company currently maintains offices inChina (Hong Kong, Beijing and Tianjin), Germany (Frankfurt) and the UnitedStates (Dallas, Texas).  During theperiods reported, the Company’s revenues were derived primarily from thedistribution of premium brand wireless handsets from wholesalers, manufacturersand other distributors to equipment wholesalers, agents, retailers and otherdistributors (referred to as our Distribution Segment), mainly in HongKong,   The Company announced the shiftin focus of its business plan and is now focused on the expansion andmaturation of its career development services in China.

 

In October 2003,INTAC formed a new Internet joint venture, Beijing Intac Purun EducationalDevelopment Ltd (“Intac Purun”), with China Putian Corporation (“Putian”) andthe Ministry of Education in The People’s Republic of China (“PRC”).  Intac Purun was established to meet thegrowing need for expanding the employment opportunities for graduates of higherlevel education institutions in the PRC. The Ministry of Education has alreadyestablished a database of graduates which has been made exclusively availableto Intac Purun. Intac Purun intends to provide comprehensive employmentinformation over its Internet portal to facilitate these graduates’ employmentsearch and future career development. This Internet portal will also offeremployers a platform to list open positions available to final year graduatescontained within this database. This fee-based service will be primarily madeavailable to final year graduates; however, it is anticipated that in thefuture, the portal will be developed further to offer a variety of premiumproducts and services to subscribers.  Atthe time of formation, the joint venture was owned 45% by INTAC, 15% by Putian,30% by a private investor group and 10% by the Ministry of Education.  In June 2004, INTAC purchased anadditional indirect 15% interest in Intac Purun from Putian.  This additional 15% indirect ownershipinterest increases INTAC’s total indirect ownership in Intac Purun to60%.  INTAC’s ownership in Intac Purun is held indirectly through PRCnominees.

 

In September 2004, INTAC indirectly formed twonew companies, Beijing Intac Meidi Advertising Company Limited (“IntacAdvertising”) and Beijing Intac Meidi Technology Development Company Limited(“Intac Technology”), both Chinese corporations.  Intac Advertising and Intac Technology wereestablished to provide advertising services and value added services in supportof Intac Purun.

 

In September 2004, INTAC sold all of theoutstanding shares of New Tech Handel GmbH (“New Tech”). The results ofoperations of New Tech have been included in the consolidated financialstatements through the date of disposal. INTAC then formed a new subsidiary, INTAC Deutschland GmbH (“INTACDeutschland”), a German corporation, for the continuation of similar operationsin Germany.  INTAC Deutschland now actsas the Company’s primary purchasing agent and distributor of mobile handsets fromEurope into the Asia-Pacific Rim.

 

In December 2004, INTAC acquired Beijing HuanaXinlong Information and Technology Development Co., Ltd. (“Huana Xinlong”),which INTAC is in the process of assigning to INTAC International HoldingsLimited (“Holdings”), a Hong Kong corporation and a wholly-owned subsidiary ofINTAC.  Huana Xinlong, a leading Chinesedeveloper of management software for educational institution administration, islocated in Beijing, China.

 

The consolidated financial statements have beenprepared in accordance with generally accepted accounting principles in theUnited States of America (“USGAAP”). In the opinion of management, alladjustments necessary for a fair presentation have been included.

 

In August of 2005, the Company changed its fiscalyear end from December 31st to September 30th.Accordingly, the accompanying financial statements include the consolidatedbalance sheets as of September 30, 2005 and December 31, 2004. Therelated consolidated statements of operations, consolidated statements ofstockholders’ equity and comprehensive income (loss) and consolidatedstatements of cash flows are presented for the nine months endedSeptember 30, 2005 and the two years ended December 31, 2004 and2003.

 

F-10

----

 

(b)     Principles of Consolidation

 

The accompanyingconsolidated financial statements include the financial statements of theCompany and its wholly owned subsidiaries, INTAC International HoldingsLimited, INTAC Deutschland GmbH, INTAC Holdco Corp., FUTAC Group Limited,Global Creative International Limited, INTAC Telecommunications Limited, Intac(Tianjin) International Trading Co., Beijing Intac Media Advertising CompanyLimited, Beijing Intac Meidi Technology Development Company Limited, BeijingHuana Xinlong Information and Technology Development Co., Ltd. and its 60%owned subsidiary INTAC Purun.  Allintercompany balances and transactions have been eliminated in consolidation.

 

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

 

(c)     Liquidity

 

As of September 30, 2005 and December 31,2004, INTAC had retained earnings balances of $2,786,610 and $4,252,992,respectively, primarily due to net income (loss) for the nine months endedSeptember 30, 2005 and the years ended December 31, 2004 and 2003,partially offset by prior periods’ accumulated deficits.  The Company raised equity financing of $4.5million in September 2003 and $12.0 million in May 2004.  Proceeds of the private placements are beingused to expand Intac Purun’s career development services and for workingcapital purposes.

 

As of September 30, 2005 and December 31,2004, INTAC maintained cash of $2,635,868 and $5,532,928, respectively.  The Company measures liquidity throughworking capital (measured by current assets less current liabilities).  As of September 30, 2005 andDecember 31, 2004, INTAC maintained working capital of $19,567,248 and$19,811,271, respectively.

 

Although there is asignificant amount of working capital as of September 30, 2005, asubstantial amount is tied up in trade receivables and may not all necessarilybe readily available to satisfy short-term obligations. Our DistributionSegment business model has historically relied on customers paying on a cashbasis. However, in the last two years as our sales volume and customer sizehave increased, it has become necessary to grant credit terms to majorcustomers. Within our Distribution Business segment, a large portion of tradeaccounts receivable is attributable to our largest customer – Mr. Lam,from whom we derived approximately 53% of our revenue during the nine monthsended September 30, 2005 and year ended December 31, 2004. The amountof the receivable balance with this customer has increased over time and weexpect this balance to remain high for the foreseeable future. Although webelieve that this receivable balance is all collectible, we do not anticipatereducing the outstanding balance ($14.9 million) significantly in the nearfuture.

 

We have entered into an installmentpayment plan agreement with Mr. Lam to pay his current balance due over aperiod of nine months. The first payment in accordance with this agreement wasreceived in November 2005 in the amount of $1.7 million. As part of thisinstallment payment plan agreement, we have agreed that all future sales toMr. Lam are due and payable within 45 days. The volume of sales in ourDistribution Business segment relies on our keeping Mr. Lam as a customer.

 

Additionally, our CareerDevelopment Services trade receivable balance has increased in 2005 to $5.8million. The increase relates primarily to Huana Xinlong and the sale ofeducational software to school districts within China. These school districtspay for their software purchases using funds supplied by the Chinesegovernment. Historically, this funding has taken many months. As ofSeptember 30, 2005, approximately $3.0 million of our trade receivablebalance relates to sales of educational software completed beforeDecember 31, 2004. We believe these accounts to be fully collectible;however, the timing of the collections cannot be estimated with certainty.

 

F-11

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Included as part of the obligations assumed in theacquisition of Huana Xinlong is a commitment to complete the requiredcapitalization of that company in accordance with PRC laws andregulations.  A total of $1.6 millionmust be invested in Huana Xinlong by February 26, 2006 to complete the PRCcapitalization requirements. We believe an extension can be obtained if fundsare not available to capitalize Huana Xinlong.

 

We believe that the Company will have sufficientcapital for the next twelve months if we are able to collect our tradereceivables in a timely manner. However, if Mr. Lam does not pay timely orif the Chinese government does not fund our school district customers in areasonable amount of time, it will have a material adverse effect on ourliquidity. With timely payment, we believe that we currently have adequatecapital for the next twelve months; however, long-term plans will require thatwe obtain additional financing through the issuance of debt, equity, othersecurities or a combination thereof in order to take advantage of otherstrategic agreements and business alliances. In addition, we may seek to obtain a working capital or othertraditional loan facility from a bank or other lending source.  Unless we are able to continue to improve ourcareer development services operating performance with which we have limitedexperience, additional outside financing required to execute our long-termbusiness plan would be difficult to obtain on acceptable terms, if at all. Asof the date of this Report, we do not have any financing arrangements, nor dowe have any commitments to obtain such an arrangement with any bank or otherthird party. If we raise capital by issuing equity or convertible debtsecurities, the percentage ownership of our current stockholders will bereduced. Any new securities may have rights, preferences or privileges seniorto those of our current common shareholders. There can be no assurances that wewill be able to obtain additional financing or obtain additional financing onterms which are acceptable to us.

 

(d)     Cash and Cash Equivalents

 

For purposes of the balance sheets and statement ofcash flows, the Company considers all highly liquid investments with originalmaturities of three months or less to be cash equivalents.  The Company maintains its cash in highquality financial institutions and does not believe any undue risk isassociated with its cash balances.  Alarge portion of the cash balance is maintained at one financial institution.

 

(e)     Concentration of Credit Risk and Accounts Receivable

 

Trade accounts receivable are stated at the amount theCompany expects to collect and are not collateralized. The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments. The Company does not chargeinterest on overdue balances. Management considers the following factors whendetermining the collectibility of specific customer accounts: customercredit-worthiness, past transaction history with the customer, current economicindustry trends, and changes in customer payment terms.  If the financial condition of the Company’scustomers were to deteriorate, adversely affecting their ability to makepayments, additional allowances would be 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 remainoutstanding after the Company has used reasonable collection efforts arewritten off through a charge to the valuation allowance and a credit toaccounts receivable.  Based upon theabove criteria, as of September 30, 2005 and December 31, 2004, thereis no allowance for uncollectible amounts. As noted above in our discussionabout liquidity, we believe all trade receivable balances, specifically thoserelated to our customer Mr. Lam and the various school districts in China,are ultimately collectible in full; however, the timing of the collections fromthe Chinese school districts cannot be estimated with certainty.

 

(f)     Inventories

 

Inventories for wireless handsets are stated at thelower of cost and net realizable value, calculated on the first-in, first-outbasis, and are comprised of finished goods. Net realizable value is determined on the basis of anticipated salesproceeds less estimated costs for selling expenses.  Inventories for vehicles are stated at theactual amount paid to manufacturers or market, if lower.

 

(g)     Deposits Paid

 

Deposits paid are payments made to suppliers for downpayments for wireless handsets and vehicles.

 

F-12

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(h)     Property and Equipment

 

Property and equipment is stated at cost lessaccumulated depreciation and amortization and any provisions for impairmentlosses required to reflect recoverable amounts. Cost represents the purchase price and any directly attributable costsof 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.

 

Depreciation and amortization is calculated to writeoff the cost of the fixed asset over the shorter of the useful life or, ifapplicable, the remaining lease term, on a straight line basis, at thefollowing annual rates:

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

 

(i)     Intangible Assets

 

In accordance with theaccounting rules contained in SFAS No. 142 “Goodwill and IntangibleAssets” (“SFAS 142”), the Company reviews each indefinitely lived intangibleasset for impairment annually and when events or circumstances indicate thatthe asset might be impaired.  Impairmentis measured as the amount by which the Company’s carrying value exceeds thefair value.  Should impairment beindicated, the impaired amount will be charged to expense.  As of September 30, 2005 and December 31,2004, the Company performed its annual impairment tests and found none of itsgoodwill to be impaired.

 

Non-amortizableintangible assets include the following:

 

•      Recorded goodwill of $59,021 attributableto the wireless handset distribution segment.

 

•      Recorded goodwill of $1,064,113 relatingto the acquisition of an additional 15% indirect ownership interest in IntacPurun from Putian for $1.5 million attributable to the career developmentservices segment.

 

•      Recorded goodwill of $11,735,656 relatingto the acquisition of Huana Xinlong attributable to the career developmentservices segment. The acquisition consideration issued by the Company in thetransaction consisted of up to 2,000,000 shares of Company common stock,including 1,000,000 shares issued on closing and up to an additional 1,000,000shares contingent on achieving net income of $13 million during the thirteenmonth period ending December 31, 2005.

 

Goodwill represents the excessof the purchase price over the fair value of identifiable assets andliabilities acquired as a result of the Company’s acquisitions of interests inits subsidiaries.

 

F-13

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Amortizable intangible assetsinclude the following:

 

**•**      The legal right for exclusive access to a student databasewhich is owned by the PRC Ministry of Education.  The Company acquired the access right in October 2003in connection with the formation of Intac Purun.  The access right to this student database hasbeen recorded based on a valuation completed in December 2004.  Management has determined that thisintangible asset has a finite life as contemplated by SFAS No. 142 andaccordingly, this asset is being amortized over a five year life on a straightline basis in accordance with the terms of the internet content providerlicense agreement.  

 
| ** **                        | ** ** | **Weighted Average**                             | ** ** | **September 30, 2005** | ** ** | **December 31, 2004**     | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Remaining Amortization   Period (Years)** | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated   Amortization** | ** ** |
|                              |       |                                             |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Internet portal  database gateway |       | 3.0                                              |       | $                           | 411,666    |                           | $          | 106,570 |   | $ | 411,666 |   | $ | 60,897 |   |

 

Amortization expense was$45,673 for the nine months ended September 30, 2005 and $60,897 for theyear ended December 31, 2004. Estimated aggregate amortization expense for eachof the next five years is as follows: 

 
| 2006  |   | $      | 98,950  |   |
|-------|--------|--------|---------|--------|
| 2007  |   | 98,950 |    |
| 2008  |   | 98,950 |    |
| 2009  |   | 8,246  |    |
| 2010  |   | — |    |
| Total |   | $      | 305,096 |   |

 

(j)     Acquired Software

 

Software was acquired in connection with theacquisition of Huana Xinlong.  Thissoftware has been recorded based on a valuation completed in December 2004.  Amortization is recorded based on theremaining estimated useful life of approximately three years on a straight linebasis.  At September 30, 2005,acquired software recorded value totalled $2,039,307 with accumulatedamortization totalling $629,847.

 

(k)     Deposits Received

 

Deposits received are payments received from customersfor down payments for wireless handsets and vehicles.

 

(l)      RevenueRecognition

 

The Company’s revenue isderived from primarily two sources (i) career development services whichincludes software license maintenance and support, training, consulting, andsubscription revenue delivered to customers in China and (ii) distributionrevenue, which includes wireless handsets distribution mainly into China.

 

Career DevelopmentServices:

 

The Company licensessoftware products including access to its student database and educationmaterials under two and three-year term licenses. The software licenses providefor updates to new versions if and when made available.  No express rights of return are granted.  The Company sells its products and servicesvia a direct sales force and under certain circumstances, sales agents.

 

F-14

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Product revenue from thelicense of the Company’s software products is recognized in accordance withStaff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” whenpersuasive evidence of an arrangement exists, the product has been delivered,the fee is fixed or determinable, and collection of the resulting receivable isreasonably assured, and, if applicable, upon acceptance when acceptance criteriaare specified or upon expiration of the acceptance period. Maintenance andsupport revenue for customer support is deferred and recognized ratably overthe service period unless it is included in the initial license fee, providedfor less than one year and is not a significant portion of the total licenserevenue.  In this case, maintenancesupport revenue is recognized when all revenue recognition criteria under SOP 97-2,SOP 98-9 and SAB 104 have been met. Product upgrades and enhancement revenue is deferred and recognizedratably over the service period unless it is included in the initial licensefee and is not significant.  Training andconsulting revenue is recognized as services are performed and billableaccording to the terms of the service arrangement.

 

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

 

For all sales of softwareproducts except those completed via the Internet, the Company uses either abinding purchase order or signed license agreement as evidence of an arrangement.For sales over the Internet, the Company uses a credit card authorization asevidence of an arrangement.

 

For arrangements withmultiple obligations (e.g. undelivered maintenance and support bundled withterm licenses), the Company allocates revenue to each component of thearrangement based on vendor specific objective evidence of the undeliveredelements, which is specific to the Company. The vendor specific objectiveevidence of fair values for the licenses and the ongoing maintenance andsupport obligations for term licenses are based upon the prices paid for theseparate renewal of these services by the customer or upon substantive renewalrates stated in the contractual arrangements. Vendor specific objectiveevidence of the fair value of other services, primarily consulting and trainingservices, is based upon separate sales of these services.

 

Subscription revenuewhich will be earned primarily through our Internet portal business, will berecognized on a straight line basis over the term of the service contractprovided. The Company may also contract with third-party mobile operators forthe transmission of wireless short messages and subscriptions as well as forthe billing and collection of service fees from customers. Revenues arerecorded as the services are provided monthly or on a per usage basis. TheCompany will recognize the net amount billed by the mobile operator asrevenue.  To date the Company hasgenerated minimal revenue from subscription services.

 

(l)      RevenueRecognition

 

Distribution Business:

 

The Company’s wirelesshandset revenue is generally generated from a quick turn of product. TheCompany recognizes revenue upon delivery of product to its customers. Productsare sold “as is” and the Company does not provide servicing of the wirelesshandsets, nor does the Company receive any usage revenue from the wirelesshandsets distributed.

 

Revenue is recognizedwhen customers take delivery of the goods, which is taken to be the point intime where the customer has accepted the goods and the related risks andrewards of ownership. Certain sales arrangements provide the Company the rightto receive a contingent payment based on sales made by the customers.Contingent payment revenue for these arrangements is recognized as the cash is received.

 

Receipts of cash inadvance of shipment or delivery are recorded as deposits received.

 

(m)          Costof Revenues

 

Career DevelopmentServices:

 

The Company’s careerdevelopment services cost of revenue is comprised of the service fees paid forthe provision of software training and technological services, and theamortization charge for acquired software.

 

F-15

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Distribution Business:

 

TheCompany’s distribution business cost of revenues is comprised of the cost ofthe wireless handset products distributed.

 

(n)      VendorPrograms

 

Incentivearrangements such as volume incentive rebates or other vendor programs areaccounted for in accordance with the Emerging Issues Task Force Issue No. 02-16,“Accounting by a Customer (Including a Reseller) for Certain ConsiderationReceived from a Vendor” and Emerging Issues Task Force No. 03-10, “Applicationof Issue No. 02-16 by Resellers to Sales Incentives Offered to Customersby Manufacturer”.  To the extent that theCompany receives excess funds from suppliers for reimbursement of its costs,the Company recognizes the excess as a liability due to the supplier, which isapplied to future costs incurred on behalf of the supplier.  Volume incentive rebates are considerationreceived from the suppliers when purchases or sell-through targets are attainedor exceeded within a specific time period. The amount of rebate earned in any financial reporting period is accruedas a vendor receivable. This same amount is either a reduction on inventorycost or is a reduction of cost of sales for those items already sold.  Volume rebates to date have been determinedbased on actual negotiated volume discounts.

 

(o)     Distribution Expenses

 

Distributionexpenses are principally comprised of costs attributable to the shipping andhandling of our products, such as freight and insurance.

 

(p)      IncomeTaxes

 

Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities, and theirrespective tax bases and operating loss and tax credit carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the period in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

(q)      ForeignCurrency Translation

 

The Company’s operations in China and Hong Kong usethe local currencies as their functional currencies.  German operations use the Hong Kong dollar asits functional currency. The accompanying consolidated financial statementshave been expressed in United States dollars, the reporting currency of theCompany.

 

Reported assets and liabilities of INTAC’s foreignsubsidiaries have been translated at the rate of exchange at the end of eachperiod. Revenues and expenses have been translated at the weighted average rateof exchange in effect during the respective period. Gains and losses resultingfrom translation are accumulated in other comprehensive income (loss) instockholders’ equity.

 

Realized and unrealized gains (losses) on currencytransactions between foreign entities is included in other income (expense) inthe accompanying statements of operations.

 

(r)      NetIncome (Loss) Per Share – Basic and Diluted

 

Basic income (loss) per share is calculated bydividing net income (loss) by the weighted-average number of common sharesoutstanding during the period. Diluted income (loss) per share is calculated bydividing net income (loss) by the weighted-average number of common shares anddilutive potential common shares, if any, outstanding during the period.  Computation of diluted income per share forthe year ended December 31, 2004 includes dilutive stock options andrestricted stock awards granted under the terms of the Company’s 2001 Long TermIncentive Plan.  Stock options and therestricted stock award (to the extent not vested) were not included in thecomputation of diluted loss per share for the nine months ended September 30,2005 and year ended December 31, 2003 because their effects areanti-dilutive.

 

F-16

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(s)      SegmentReporting

 

SFAS No. 131 “Disclosures about Segments of anEnterprise and Related Information”, established standards for reportinginformation about operating segments in financial statements. Operatingsegments are defined as components of an enterprise about which separatefinancial information is available that is evaluated regularly by the chiefoperating decision maker, or decision making group, in deciding how to allocateresources and assessing performance.

 

At September 30,2005, the Company is considered to be comprised of two reportablesegments:  (i) *careerdevelopment services* and (ii) *distribution*of wireless handsets.  The Companymeasures segment profit (loss) as operating profit (loss) beforedepreciation.  As used herein, themeasure of segment profit (loss) is not intended as either a substitute orreplacement for operating income (as reported according to USGAAP), or as ameasure of the financial results of operations or cash flows from operations(as presented according to USGAAP).

 

(t)     Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

 

The Company accounts for long-lived assets in accordancewith the provisions of SFAS No. 144, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of”. This Statementrequires that long-lived assets and certain identifiable intangibles bereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to future net cash flow expected to be generated by the asset. Ifsuch assets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceeds thefair value of the assets. Assets to be disposed of are reported at the lower ofthe carrying amount or fair value less costs to sell.

 

 (u)      Use of Estimates

 

Management of the Company has made a number ofestimates and assumptions relating to the reporting of assets and liabilitiesand the disclosure of contingent assets and liabilities to prepare theseconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America. The most significantestimates and related assumptions include the assessment of the provision fordoubtful accounts, the assessment of the impairment of tangible and intangiblelong-lived assets, the assessment of the valuation allowance on deferred taxassets, the purchase price allocation on acquisitions and the assessment ofcriteria related to revenue recognition. Actual results could differ from thoseestimates.

 

(v)     Product and Software Development Expenses

 

Product and software development expenses primarilyinclude payroll and other employee benefit costs.  For software to be marketed or sold,financial accounting standards require the capitalization of development costsafter technological feasibility is established. Due to the relatively short period between technological feasibility andthe completion of product development, and the insignificance of the relatedcosts, the Company generally does not capitalize software developmentcosts.  All product and softwaredevelopment costs are expensed when incurred. Research and development costs to date have not been significant.

 

(w)      EmployeeBenefit Plans

 

The Company’s subsidiaries in China participate in agovernment-mandated multi-employer defined contribution plan pursuant to whichcertain retirement, medical and other welfare benefits are provided toemployees.  Chinese labor regulationsrequire the Company’s subsidiaries to pay to the local labor bureau monthlycontributions at a stated contribution rate based on the monthly basiccompensation of qualified employees.  Therelevant local labor bureau is responsible for meeting all retirement benefitobligations; the Company has no further commitments beyond its monthlycontributions.  Employee benefit plancosts to date have not been significant.

 

(x)      StockOption Plans and Stock-Based Compensation

 

The Company applies the intrinsic value-based methodof accounting prescribed by Accounting Principles Board (“APB”) Opinion 

 

F-17

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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 amendedby SFAS 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 permitted 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).

 

On August 28, 2005,the Board of Directors of INTAC approved the acceleration of vesting of allunvested options to acquire shares of the Company’s common stock.  Theseoptions were previously awarded in 2003 and 2004 under the Company’s 2001 LongTerm Incentive Plan and were to vest in three equal annual installments afterthe date of grant.  Options to purchase 200,000 shares of common stock atexercise prices between $9.50 and $15.75, prices above the current market priceof the Company’s common stock, are subject to this acceleration.

 

The acceleration of thevesting of these options was undertaken primarily to eliminate the relatedfuture stock-based compensation expense.  Upon the commencement of fiscalyear 2006, on October 1, 2005, the Company is required to adopt theprovisions of Statement of Financial Accounting Standard No. 123R “ShareBased Payment” (“SFAS 123R”) which requires the recognition of stock-basedcompensation associated with stock options as an expense in financialstatements.  Stock-based compensation pro forma expense associated withthe accelerated options amounts to approximately $525,000 on a pre-tax basis($331,000 in fiscal year 2006, $182,000 in fiscal year 2007 and $12,000****in fiscal year 2008).

 

For purposes of proforma disclosure, the estimatedfair value of the option is amortized to expense over the option’s vestingperiod.  Had the Company determinedcompensation based on the fair value at the date of grant for its options underSFAS No. 123 (as amended), net income (loss) and net income (loss) per sharefor the nine months ended September 30, 2005 and the years ended December 31,2004 and, 2003 would have decreased or increased as follows:

 
| ** **                                                                                               | ** ** | **Nine Months Ended September 30, 2005** | ** ** | **Year Ended December 31, 2004** | ** ** | **Year Ended December 31, 2003** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
|                                                                                                     |       |                                          |       |                                  |       |                                  |       |
| Net income (loss), as  reported                                                                          |       | $                                             | (1,466,382 | )                                     | $          | 5,816,497                             |       | $ | (239,196 | ) |
| Add:   Total stock-based employee compensation expense included in reported net  income (loss)      |       | 136,112                                       |       | 233,333                               |       | 233,333                               |       |
| Deduct:   Total stock-based employee compensation expense determined under fair value  based method |       | (1,117,425                                    | )          | (843,407                              | )          | (447,092                              | )          |
| Pro forma net income  (loss)                                                                             |       | $                                             | (2,447,695 | )                                     | $          | 5,206,423                             |       | $ | (452,955 | ) |
|                                                                                                     |       |                                          |       |                                  |       |                                  |       |
| Net income (loss) per  share – basic as reported                                                    |       | $                                             | (0.07      | )                                     | $          | 0.28                                  |       | $ | (0.01 | ) |
|                                                                                                     |       |                                          |       |                                  |       |                                  |       |
| Net income (loss) per  share – diluted as reported                                                  |       | $                                             | (0.07      | )                                     | $          | 0.28                                  |       | $ | (0.01 | ) |
|                                                                                                     |       |                                          |       |                                  |       |                                  |       |
| Net income (loss) per  share – basic proforma                                                       |       | $                                             | (0.11      | )                                     | $          | 0.25                                  |       | $ | (0.02 | ) |
|                                                                                                     |       |                                          |       |                                  |       |                                  |       |
| Net income (loss) per  share – diluted proforma                                                     |       | $                                             | (0.11      | )                                     | $          | 0.25                                  |       | $ | (0.02 | ) |

 

(y)     Commitments and Contingencies

 

Liabilities for loss contingencies arising fromclaims, assessments and litigation and other sources are recorded when it isprobable that a liability has been incurred and the amount of the assessmentcan be reasonably estimated. In the opinion of management, after consultationwith legal counsel, there are no claims, assessments and litigation against theCompany.

 

F-18

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(z)      FairValue of Financial Instruments

 

The carrying amounts of all current assets and currentliabilities at September 30, 2005 and December 31, 2004 approximatetheir fair values because of the short maturity of these instruments.

 

(aa)     Comprehensive Income (Loss)

 

Comprehensive income (loss)is defined as the change in equity of a company during a period fromtransactions and other events and circumstances excluding transactionsresulting from investments from owners and distributions to owners.  For the Company, comprehensive income (loss)for the periods presented includes net income (loss) and foreign currencytranslation adjustments.

 

(bb)     Impact of New Accounting Standards

 

In December 2004, the FASB issued SFAS No. 123R,“Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123, “Accountingfor Stock Based Compensation,” and supersedes APB Opinion No. 25. Amongother items, SFAS No. 123R eliminates the use of APB 25 and the intrinsicvalue method of accounting, and requires companies to recognize the cost ofemployee services received in exchange for awards of equity instruments, basedon the grant date fair value of those awards, in the financial statements. Theeffective date of SFAS No. 123R for the Company is the beginning of fiscal2006. SFAS No. 123R permits companies to adopt its requirements usingeither a “modified prospective” method, or a “modified retrospective” method.Under the “modified prospective” method, compensation cost is recognized in thefinancial statements beginning with the effective date, based on therequirements of SFAS No. 123R for all share-based payments granted afterthat date, and based on the requirements of SFAS No. 123 for all unvestedawards granted prior to the effective date of SFAS No. 123R. Under the “modifiedretrospective” method, the requirements are the same as under the “modifiedprospective” method, but also permits entities to restate financial statementsof previous periods, either for all prior periods presented or to the beginningof the fiscal year in which the statement is adopted, based on previous proforma disclosures made in accordance with SFAS No. 123. The Company hasnot yet determined which of the methods it will use upon adoption.

 

The Company currently utilizes the Black-Scholesoption pricing model to measure the fair value of stock options granted toemployees. While SFAS No. 123R permits entities to continue to use such amodel, it also permits the use of a “lattice” model. The Company expects tocontinue using the Black-Scholes option pricing model upon adoption of SFAS No. 123Rto measure the fair value of stock options. The adoption of this statement will have the effect of reducing netincome and income per share or increasing net loss and net loss per share ascompared to what would be reported under the current requirements. These futureamounts cannot be precisely estimated because they depend on, among otherthings, the number of options issued in the future, and accordingly, theCompany has not determined the impact of adoption of this statement on itsresults of operations.

 

SFAS No. 123R also requires that the benefitsassociated with the tax deductions in excess of recognized compensation cost bereported as a financing cash flow, rather than as an operating cash flow asrequired under current literature. This requirement will reduce net operatingcash flows and increase net financing cash flows in periods after the effectivedate. These future amounts cannot be estimated, because they depend on, amongother things, when employees exercise stock options.

 

F-19

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**2. INVESTMENT IN INTAC PURUN**

 

On January 15, 2004, INTAC announced the shift infocus of its business plan from the traditional distribution of premium brandwireless handsets to its new career development services and 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 indirectly invested a total of$2.3 million in cash in the newly founded Internet joint venture in September 2003and October 2003, owned 45% indirectly by INTAC, 15% by Putian, 30% by aprivate investor group and 10% by the Ministry of Education.

 

In order to meet ownership requirements under PRC lawwhich restrict or prohibit INTAC from operating in certain industries such asInternet content providers, INTAC made loans of $1,233,000 and $123,000 to twoChina nationals, Miss Zhang Wanqin and Miss Li Min,respectively.  Miss Zhang and Miss Liare the equity owners of Tianjin Weilian, a company incorporated in thePRC.  These loans were made to finance Miss Zhangand Miss Li, on behalf of INTAC, for the purpose of establishing TianjinWeilian.  Tianjin Weilian pledged ascollateral the 45% ownership of Intac Purun against these loans fromINTAC.  Furthermore Tianjin Weilianassigned all operating rights, title and interest they had in Intac Purun toINTAC including all interest held, all rights to capital accounts,distributions and/or allocations of cash property and income, and all rights toparticipate in management and to vote with regard to affairs relating to theIntac Purun.  When the Company is able totransfer ownership to INTAC the ownership of Intac Purun will be transferred directlyinto the Company.

 

In June 2004, INTACpurchased an additional 15% interest in Intac Purun from Putian for $1.5million. The incremental acquired ownership was accounted for using thepurchase method of accounting.  INTACmade loans of $1.5 million to two China nationals, Mr. Zou Jingchen and Ms. TianJinmei.  Mr. Jingchen and Ms. Jinmeiare the equity investors of Tianjin Chengtai International Trading Limited (“Chengtai”),a company incorporated in the PRC.  Theseloans were made to finance Mr. Jingchen and Ms. Jinmei, on behalf ofINTAC, for the purpose of establishing Chengtai which purchased the 15%interest in Intac Purun in June 2004 from Putian.  A total of 15% of the outstanding securitiesof Intac Purun, representing the 15% ownership, were pledged as collateral forthese loans from INTAC and all operating, economic, voting and other rightswere assigned to INTAC by Chengtai.  Thisadditional 15% interest increases INTAC’s total indirect ownership in IntacPurun to 60%, for which the Company has paid or invested $3.8 million. Intac Purun is incorporated and domiciled in PRC.

 

The following tablesummarizes the estimated fair value of the assets acquired and liabilitiesassumed as of the date of acquisition of the indirect 15% incremental ownershipin Intac Purun.

 
| Current  assets              |   | $         | 256,290   |   |
|------------------------------|--------|-----------|-----------|--------|
| Non-current assets           |   | 252,613   |      |
| Total assets acquired        |   | 508,903   |      |
| Current liabilities  assumed |   | (73,016   | )         |
| Net assets acquired          |   | 435,887   |      |
| Purchase price               |   | 1,500,000 |      |
| Excess purchase price        |   | $         | 1,064,113 |   |

 

The excess of thepurchase price over the fair value of the net identifiable assets acquiredrepresents goodwill and is not deductible for income tax purposes.  As further described in the accountingpolicies, the results of Intac Purun operations have been included in theconsolidated financial statements since the inception of Intac Purun.

 

Aggregate minorityinterest in losses have been recorded by the Company (since inception $432,524at September 30, 2005) to reduce the minority interest in Intac Purun tozero.  The Company will record 100% ofincome related to the minority interest, if any, until the amount of thepreviously reported losses of the minority interests in shareholders’ equity(deficit) in Intac Purun by the Company have been restored.

 

**3.  SALE OF INVESTMENT IN NEW TECH HANDELS**

 

On September 1,2004, Holdings sold all of the outstanding shares of New Tech. The results ofoperations of New Tech have been included in the consolidated financialstatements through the date of disposal. The aggregate sales price of $365,370was received in 

 

F-20

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the form of a unsecured,non-interest bearing short-term note which was collected in the second quarterof 2005.

 

The following tablesummarizes the investment in New Tech as of the date of sale and the gain ondisposal.

 
| Current  assets                          |   | $        | 850,644 |   |
|------------------------------------------|--------|----------|---------|--------|
| Property and equipment                   |   | 57,589   |    |
| Total assets                             |   | 908,233  |    |
| Total liabilities                        |   | (557,918 | )       |
| Investment in New Tech                   |   | 350,315  |    |
| Consideration                            |   | 365,370  |    |
| Gain on sale (included  in other income) |   | $        | 15,055  |   |

 

F-21

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**4.  PURCHASEOF HUANA XINLONG**

 

In December 2004, the Company acquired BeijingHuana Xinlong Information and Technology Development Co., Ltd. (“Huana Xinlong”).Huana Xinlong, a leading Chinese developer of management software foreducational institution administration, is located in Beijing, China. Theacquisition was accounted for using the purchase method of accounting.  The acquisition consideration issued by theCompany in the transaction consisted of up to 2,000,000 shares of Companycommon stock, including 1,000,000 shares issued on closing and up to anadditional 1,000,000 shares contingent on achieving net income of $13 millionduring the thirteen month period ending December 31, 2005 (and the Companywill issue a lesser number of shares on a pro rata basis in the event netincome is less than $13 million).  The Company agreed to file aregistration statement to register these shares within 90 days after theclosing of the acquisition, which has now been verbally extended indefinitely.

 

The following tablesummarizes the estimated fair value of the assets acquired and liabilitiesassumed as of the date of acquisition:

 
| Current  assets              |   | $          | 306,333    |   |
|------------------------------|--------|------------|------------|--------|
| Acquired software            |   | 2,039,307  |       |
| Other non-current  assets    |   | 192,801    |       |
| Total assets acquired        |   | 2,538,441  |       |
| Current liabilities  assumed |   | 1,274,097  |       |
| Net assets acquired          |   | 1,264,344  |       |
| Purchase price               |   | 13,000,000 |       |
| Excess purchase price        |   | $          | 11,735,656 |   |

 

The excess of the purchase price over the fair valueof the net indentifiable assets acquired represents goodwill and is notdeductible for income tax purposes.  Theallocation of the purchase price includes an independent valuation of thesoftware which was completed in December 2004.

 

**5. INVENTORIES**

 

As of September 30, 2005 and December 31,2004, inventories totaled $1,158,641 and $317,390, respectively, consisting of$1,148,981 and $306,749 for the distribution business segment (wirelesshandsets $1,148,981 and $1,067 and vehicles $0 and $305,682, respectively) and$9,660 and $10,641, respectively for the career developments services segment

 

**6.  PROPERTYAND EQUIPMENT, NET**

 

As of September 30, 2005 and December 31,2004, property and equipment consisted of the following:

 
| ** **                                             | ** ** | **September 30,   2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
|                                                   |       |                          |       |                       |       |
| Furniture and fixtures                                 |       | $                             | 938,036    |                       | $          | 873,920 |   |
| Leasehold improvements                                 |       | 155,302                       |       | 129,039                    |       |
| Motor vehicles                                         |       | 1,039,036                     |       | 973,023                    |       |
| Other                                                  |       | 24,395                        |       | 17,428                     |       |
|                                                   |       | 2,156,769                     |       | 1,993,410                  |       |
| Less:  Accumulated  depreciation and amortization |       | (608,906                      | )          | (325,701                   | )          |
|                                                   |       | $                             | 1,547,863  |                       | $          | 1,667,709 |   |

 

F-22

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**7.  OTHERASSETS**

 

As of September 30, 2005 and December 31,2004, other assets consisted of the following:

 
| ** **                                    | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
|                                          |       |                        |       |                       |       |
| Deposit for software  development costs       |       | $                           | 99,490     |                       | $          | 218,926 |   |
| Deposits and  memberships                     |       | 194,225                     |       | 452,722                    |       |
| Prepaid administrative  and professional fees |       | 122,163                     |       | 87,112                     |       |
| Other                                         |       | 104,054                     |       | 209,627                    |       |
|                                          |       | $                           | 519,932    |                       | $          | 968,387 |   |

** **

**8. CONCENTRATION OF RISKS**

 

For the nine months ended September 30, 2005, onedistribution customer accounted for more than 10% of our total revenue. For theyear ended December 31, 2004, two distribution customers each accountedfor more than 10% of total revenue, as follows:

 
| ** **   | ** ** | **Sales percentage**        | ** ** |
|--------------|------------|-----------------------------|------------|
| **Company**  | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| Mr. Lam |       | 52.9                        | %          | 54.9 | % |
| Mr. Lau |       | 0.0                         | %          | 10.4 | % |

 

For the nine months ended September 30, 2005 onedistribution vendor accounted for more than 10% of our total purchases. For theyear ended December 31, 2004, our product suppliers were concentrated inthree distribution vendors, as follows:

 
| ** **                              | ** ** | **Purchase percentage**     | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| **Company**                             | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
| T-Mobile Deutschland                    |       | 72.4                        | %          | — |   |
| Deutsche Telekom                        |       | —                      |       | 57.0 | % |
| Mr. Wong                           |       | —                      |       | 14.1 | % |
| Wai Luen International  Trading Company |       | —                      |       | 11.8 | % |

 

As of September 30, 2005, one distributioncustomer accounted for more than 10% of our trade receivables. As of December 31,2004, two distribution customers each accounted for more than 10% of our tradereceivables as follows: 

 
| ** **           | ** ** | **Trade Receivable percentage** | ** ** |
|----------------------|------------|---------------------------------|------------|
| **Company**          | ** ** | **September 30, 2005**     | ** ** | **December 31, 2004** | ** ** |
| Mr. Lam         |       | 66.9                            | %          | 64.7 | % |
| T-Mobile Deutschland |       | —                          |       | 13.6 | % |

** **

**9.  INCOMETAXES**

 

The Company is subject to income taxes on incomearising in or derived from the tax jurisdictions in which it is domiciled andoperates.  Pursuant to an expense sharingarrangement, the Company’s U.S. losses have been allocated to the Hong Kongoperating subsidiaries based upon the relative amount of each Hong Kongsubsidiary’s’ gross profit margin. Net income (loss) before income pertainingto foreign operations totals approximately $140,000, $7.4 million and $860,000 forthe nine months ended September 30, 2005 and years ended December 31, 2004 and2003, respectively.

 
| ** **                                | ** ** | **Nine Months ended   September 30, 2005** | ** ** | **Year Ended   December 31, 2004** | ** ** | **Year Ended   December 31, 2003** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Current:                                  |       |                                            |       |                                    |       |                                    |       |
| United  States Federal and State          |       | $                                               | —     |                                    | $          | —                                  |       | $ | — |   |
| Foreign                                   |       | (132,912                                        | )          | 931,847                                 |       | —                                  |       |
| Total  current provision for income taxes |       | $                                               | (132,912   | )                                       | $          | 931,847                                 |       | $ | — |   |

 

The Company has substantial net operating losscarryforwards in some of its Hong Kong and PRC operating entities.  As a result, 

 

F-23

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most of these entities have net deferred taxassets.  The Company has provided avaluation allowance to reduce these deferred tax assets to $156,580 based onthe uncertainty of generating future taxable income. Accordingly, the Companyhas recorded a deferred income tax benefit of $156,580 for the nine monthsended September 30, 2005 and no income tax provision for the years ended December 31,2004 and 2003.

 

The provision for income taxes for the nine monthsended September 30, 2005 and the years ended December 31, 2004 and2003 differed from the amount computed by applying the U.S. income tax rate of34% to income (loss) before income taxes as follows:

 
| ** **                                                                            | ** ** | **Nine Months Ended September 30, 2005** | ** ** | **Year Ended   December 31, 2004** | ** ** | **Year Ended   December 31, 2003** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
|                                                                                  |       |                                          |       |                                    |       |                                    |       |
| Computed  “expected” tax expense                                            |       | $                                             | (543,760   | )                                       | $          | 2,294,437                               |       | $ | (81,327 | ) |
| Rate  differences resulting from differing tax rates for different tax  jurisdictions |       | 49,152                                        |       | (853,464                                | )          | 244,309                                 |       |
| Tax  holiday effect for PRC entities not currently subject to income taxes            |       | (561,483                                      | )          | (754,337                                | )          | —                                  |       |
| Change  in valuation allowance                                                        |       | 921,910                                       |       | 237,549                                 |       | (173,325                                | )          |
| Other                                                                                 |       | 1,269                                         |       | 7,662                                   |       | 10,343                                  |       |
|                                                                                  |       | $                                             | (132,912   | )                                       | $          | 931,847                                 |       | $ | — |   |

 

The tax holiday earnings per share for the nine monthsended September 30, 2005 and the year ended December 31, 2004 total $0.03 and$0.04, respectively.

 

The tax effects of temporary differences that giverise to significant portions of the net deferred tax asset at September 30,2005 and December 31, 2004, are as follows:

 
| ** **                        | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Deferred tax assets:              |       |                        |       |                       |       |
| Net  operating loss carryforwards |       | $                           | 1,676,495  |                       | $          | 848,538 |   |
| Depreciation  of fixed assets     |       | —                      |       | 5,124                      |       |
| Restricted  Stock                 |       | 80,920                      |       | 34,643                     |       |
| Total deferred tax  assets        |       | 1,757,415                   |       | 888,305                    |       |
| Deferred tax  liabilities:        |       |                        |       |                       |       |
| Deferred  income                  |       | (75,730                     | )          | (122,587                   | )          |
| Depreciation  of fixed assets     |       | (9,093                      | )          | (20,735                    | )          |
| Other                             |       | (5,699                      | )          | —                     |       |
| Valuation  allowance              |       | (1,666,893                  | )          | (744,983                   | )          |
| Net deferred tax assets           |       | $                           | —     |                       | $          | — |   |

 

The net operating losses available at September 30,2005, to offset future taxable income in the U.S., Hong Kong, China, andGermany are $599,742, $1,650,026, $4,061,844, and $0 respectively.  The income tax rates for Hong Kong, China andGermany are 17.5%, 33% and 26.375%, respectively. The net operating lossesgenerated in China expire beginning in 2007 if not utilized.  The net operating losses generated in Germanyand Hong Kong have no expiration date and carry forward indefinitely.

 

**10.  RELATEDPARTY TRANSACTIONS**

 

(a)           Asof September 30, 2005 and December 31, 2004, the Company’s majorityshareholder, Mr. Wei Zhou was the beneficial owner of 54.0% and 54.0%respectively, of the Company’s issued outstanding common stock.

 

(b)           Mr. Zhouis the CEO, President, Treasurer and a Director of the Company. As of September 30,2005 and December 31, 2004, Mr. Zhou had made net advances to theCompany amounting to $116,661 and $115,664, respectively.

 

F-24

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**11. STOCKHOLDERS’ EQUITY**

 

(a) Common Stock

 

In December 2004, the Company entered into aStock for Stock Exchange Agreement to acquire all of the outstanding equitysecurities of Huana Xinlong, a company organized under the laws of the PeoplesRepublic of China.  The acquisition consideration issued by the Company inthe transaction consists of up to 2,000,000 shares of Company common stock,including 1,000,000 shares issued on closing and up to an additional 1,000,000shares issuable in the event the acquired business generates net income of $13million for the thirteen month period commencing December 1, 2004 through December 31,2005 (the Company will issue a lesser number of shares on a pro rata basis inthe event net income is less than $13 million).

 

In May 2004, theCompany sold 800,000 shares of its unregistered, restricted common stock to anaccredited investor in a private placement transaction for proceeds of $12.0million.  This transaction was exemptfrom the registration requirements of the Securities Act under Rule 506 ofRegulation D. Proceeds from the $12.0 million private placement were used toexpand Intac Purun’s career development and Internet portal business and forgeneral working capital purposes.  In May 2004,the Company filed a registration statement with the Securities and ExchangeCommission, registering the resale of these shares plus 1,000,000 shares fromthe private placement to a different shareholder completed in September 2003.  The registration statement also registered anadditional 2,000,000 shares for possible future issuances.  The registration statement was effective July 29,2004.

 

In September 2003,the Company issued 1,000,000 shares of its unregistered, restricted commonstock to an accredited investor in a private placement transaction for proceedsof $4.5 million. This transaction was exempt from the registration requirementsof the Securities Act under Rule 506 of Regulation D.

 

(b) Stock Options andStock Awards

 

On November 28, 2001, INTAC adopted a stockpurchase plan entitled the “2001 Long Term Incentive Plan” to attract, retainand motivate its management and other persons, to encourage and reward theircontributions to the performance of the Company and to align their interestswith the interests of the Company’s shareholders. The Company authorized2,500,000 shares to be available for grant as part of the long term incentiveplan.  Options are generally granted atfair value on the date of issuance.

 

On August 28, 2005the Company completed a stock option grant to four of its Directors to purchase25,000 shares of the Company’s common stock (an aggregate of 100,000 shares) atan exercise price of $6.40 per share, representing the market value on the dateof the grant. These stock options vest in two equal annual installments on thefirst two anniversaries of the date of the grant. The per share fair value ofthe stock options granted, estimated on the date of the grant using theBlack-Scholes options pricing model was $1.97. The fair value of the optiongrant was estimated on the date of the grant using the following assumptions:no dividend yield; expected volatility of 50%; risk-free interest rate of4.09%; and expected life of two years. For purposes of pro forma disclosure,the estimated fair value of the options is amortized to expense over theoptions’ vesting period.

 

On August 28, 2005 the Company completed a stockoption grant to four of its Directors to purchase 12,500 shares of the Company’scommon stock (an aggregate of 50,000 shares) at an exercise price of $6.40 pershare, representing the market value on the date of grant.  These stock options vest in three equalannual installments on the first three anniversary dates of the grant.  The per share fair value of the stock optionsgranted, estimated on the date of the grant using the Black-Scholes optionspricing model was $2.19.  The fair valueof the option grant was estimated on the date of the grant using the followingassumptions:  no dividend yield; expectedvolatility of 44%; risk-free interest rate of 4.09%; and expected life of threeyears.  For purposes of pro formadisclosure, the estimated fair value of the options is amortized to expenseover the options’ vesting period.

 

On December 3, 2004, the Company made a stockoption grant to an employee to purchase 50,000 shares of the Company’s commonstock at an exercise price of $9.50 per share, representing the market value onthe date of the grant. These stock options were cancelled in the third quarterof 2005 upon resignation of the employee.

 

On March 2, 2004 andMarch 11, 2004, the Company completed a stock option grant to four of itsDirectors to purchase 50,000 shares of the Company’s common stock (an aggregateof 200,000 shares) at an exercise price of $15.75 per share for three of theDirectors and $14.72 per share for the remaining Director, representing themarket values on the date of each grant. These stock 

 

F-25

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options vest in threeequal annual installments on the first three anniversary dates of the date of grant.  The per share fair value of the stock optionsgranted on March 2, 2004 and March 11, 2004, estimated on the date ofgrant using the Black-Scholes options pricing model, was $6.03 and $5.63,respectively.  The fair value of theoption grant was estimated on the date of grant using the followingassumptions: no dividend yield; expected volatility of 55%; risk-free interestrate of 2.0%; and expected life of three years. For purposes of proforma disclosure, the estimated fair value of theoptions is amortized to expense over the options vesting periods. On March 31,2005, 50,000 of these options were cancelled due to the resignation of adirector.  On June 30, 2005 another50,000 of these options were cancelled when another director did not stand forre-election.  On August 28, 2005,the Board of Directors accelerated the vesting of the remaining options asdescribed in “General and Summary of Significant Accounting Policies”.

 

On November 3, 2003,the Company made a stock option grant to one of its Directors to purchase50,000 shares of the Company’s common stock at an exercise price of $9.89 pershare, representing the market value on the date of grant.  This stock option vests in 3 equal annualinstallments on the first three anniversary dates of the date of grant.  The per share fair value of the stock optionsgranted in 2003, estimated on the date of grant using the Black-Scholes optionspricing model, was $3.85.  The fair valueof the option grant was estimated on the date of grant using the followingassumptions: no dividend yield; expected volatility of 66%; risk-free interestrate of 2.1%; and expected life of three years. For purposes of proforma disclosure, the estimated fair value of theoption is amortized to expense over the option’s vesting period. On August 28,2005, the Board of Directors accelerated the vesting of these options asdescribed in “General and Summary of Significant Accounting Policies”.

 

On July 29, 2002, the Company made the followingstock option grant and restricted stock award to its Senior Vice President andChief Financial Officer:  (i) astock option to purchase 300,000 shares of the Company’s common stock at anexercise price of $3.50 per share representing the market value on the date ofgrant under the Company’s “2001 Long Term Incentive Plan” and (ii) arestricted stock award of 200,000 shares of the Company’s common stock.  This stock option and restricted stock awardvested in three equal annual installments on the first three anniversary datesof the date of grant.  The total marketvalue of the stock award totaled $700,000 at the date of grant.  This amount was amortized and expensed overthe three year vesting period.  TheCompany’s amortization in connection with the stock award resulted in anon-cash compensation charge of $136,112, $233,333 and $233,333 during the nine months ended September 30,2005 and the years ended December 31, 2004 and 2003, respectively.  At September 30, 2005, all options areexercisable and all options expire, if unexercised, on July 29, 2009.  During the nine months ended September 30,2005, 68,000 shares of restricted stock were issued, and during the year ended December 31,2004, 132,000 shares of the restricted stock were issued.  The per share fair value of the stock optionsgranted in 2002, estimated on the date of grant using the Black-Scholes optionspricing model, was $2.01.  The fair valueof the option grant is estimated on the date of grant using the followingassumptions: no dividend yield; expected volatility of 86%; risk-free interestrate of 4.7%; and expected life of three years. For purposes of proforma disclosure, the estimated fair value of theoption is amortized to expense over the option’s vesting period.

 

A summary of stock option activity and relatedinformation for the nine months ended September 30, 2005 and years endedDecember 31, 2004 and 2003 is as follows:

 
| ** **                          | ** ** | **2005**                | ** ** | **2004**                                 | ** ** | **2003**                  | ** ** |
|-------------------------------------|------------|-------------------------|------------|------------------------------------------|------------|---------------------------|------------|
| **Plan  Category**                  | ** ** | **Number   of options** | ** ** | **Weighted-  average   exercise  price** | ** ** | **Number   of   options** | ** ** | **Weighted-  average   exercise  price** | ** ** | **Number of   options** | ** ** | **Weighted-  average   exercise  price** | ** ** |
|                                |       |                    |       |                                     |       |                      |       |   |   |   |   |   |   |
| Outstanding at  beginning of year   |       | 600,000                 |       | $                                        | 8.53       |                      | 350,000    |   | $ | 4.41 |   | 300,000 |   | $ | 3.50 |   |
| Grant                               |       | 150,000                 |       | $                                        | 6.40       |                      | 250,000    |   | $ | 14.29 |   | 50,000 |   | $ | 9.89 |   |
| Cancelled                           |       | (150,000                | )          | $                                        | 13.32      |                      | —     |   | — |   | — |   | — |   |
| Exercised                           |       | —                  |       |                                     |       | —                    |       | — |   | — |   | — |   |
| Total                               |       | 600,000                 |       | $                                        | 6.80       |                      | 600,000    |   | $ | 8.53 |   | 350,000 |   | $ | 4.41 |   |
| Options exercisable at  end of year |       | 450,000                 |       | $                                        | 6.93       |                      | 216,667    |   | $ | 3.99 |   | 100,000 |   | $ | 3.50 |   |

 

F-26

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Information related to stock options outstanding at September 30,2005, is summarized below:

 
| ** **                        | ** ** | **Options Outstanding**     | ** ** | **Options Exercisable**                               | ** ** |
|-----------------------------------|------------|-----------------------------|------------|-------------------------------------------------------|------------|
| **Range  of   Exercise   Prices** | ** ** | **Outstanding  at 9/30/05** | ** ** | **Weighted   Average   Remaining   Contractual Life** | ** ** | **Weighted   Average   Exercise Price** | ** ** | **Exercisable   at 9/30/05** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
| $                                 | 3.50       |                        | 300,000    |                                                  | 3.8 years  |   | $ | 3.50 |   | 300,000 |   | $ | 3.50 |   |
| $                                 | 9.89       |                        | 50,000     |                                                  | 5.0 years  |   | $ | 9.89 |   | 50,000 |   | $ | 9.89 |   |
| $                                 | 15.75      |                        | 100,000    |                                                  | 5.4 years  |   | $ | 15.75 |   | 100,000 |   | $ | 15.75 |   |
| $                                 | 6.40       |                        | 150,000    |                                                  | 7.0 years  |   | $ | 6.40 |   | — |   |   |   |
|                              |       | 600,000                     |       |                                                  |       |   |   | 450,000 |   |   |   |
|                                   |            |                             |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |

 

(c) Earnings Per Share

 

The Company has100,000,000 common shares authorized. The Company has granted options topurchase common shares to employees and directors of the Company. Certainoptions have a dilutive effect on the calculation of earnings per share. Thefollowing is a reconciliation of the numerators and denominators of the basicand diluted earnings per share computations. 

 
| ** **                                         | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Basic earnings per share:**                      |       |       |       |       |       |       |       |
| Net income (loss)                                  |       | $          | (1,466,382 | )          | $          | 5,816,497  |       | $ | (239,196 | ) |
|                                               |       |       |       |       |       |       |       |
| Weighted average shares  outstanding               |       | 22,149,122 |       | 20,711,122 |       | 19,481,122 |       |
|                                               |       |       |       |       |       |       |       |
| Basic earnings (loss)  per share                   |       | $          | (0.07      | )          | $          | 0.28       |       | $ | (0.01 | ) |
|                                               |       |       |       |       |       |       |       |
| **Diluted earnings per share:**                    |       |       |       |       |       |       |       |
| Net income (loss)                                  |       | $          | (1,466,382 | )          | $          | 5,816,497  |       | $ | (239,196 | ) |
|                                               |       |       |       |       |       |       |       |
| Weighted average shares  outstanding               |       | 22,149,122 |       | 20,711,122 |       | 19,481,122 |       |
|                                               |       |       |       |       |       |       |       |
| Dilutive stock options  and restricted stock award |       | —     |       | 296,856    |       | —     |       |
|                                               |       |       |       |       |       |       |       |
| Total common shares and  dilutive securities       |       | 22,149,122 |       | 21,007,978 |       | 19,481,122 |       |
|                                               |       |       |       |       |       |       |       |
| Diluted earnings (loss)  per share                 |       | $          | (0.07      | )          | $          | 0.28       |       | $ | (0.01 | ) |

 

Stock options and the restricted stock award outstandingat September 30, 2005 and December 31, 2003, are not included in thediluted earnings per share computation because they are anti-dilutive.

 

(d)           DividendPayment Restrictions

 

There are no restrictions on the Company’s payment of dividends.  Although there are certain ministerialrequirements with respect to dividends by our PRC domiciled subsidiaries, theseministerial requirements do not rise to the level of “restrictions”.  Substantially all of our retained earnings isattributable to our PRC and Hong Kong domiciled subsidiaries.

 

**12.  SEGMENTREPORTING**

 

The Company is currentlyconsidered to be comprised of two reportable segments:  (i) career development services and (ii) distributionof wireless handsets.  The Companymeasures segment profit (loss) as operating profit (loss) beforedepreciation.  The reportable segmentsare components of the Company which offer different products or services andare separately managed, with separate financial information available that isseparately evaluated regularly by the chief financial officer in determiningthe performance of the business. Information regarding operating segments is presented in the followingtables:

 

F-27

----

 
| ** **                                 | ** ** | **Revenues** | ** **  | **Segment  profit (loss)** | ** ** |
|--------------------------------------------|------------|--------------|-------------|----------------------------|------------|
| Nine Months Ended  September 30, 2005 |       |         |        |                       |       |
| Distribution business  segment             |       | $            | 57,019,701  |                       | $          | (610,651 | ) |
| Career development  services segment       |       | 4,218,779    |        | (659,422                   | )          |
| Total                                      |       | $            | 61,238,480  |                       | $          | (1,270,073 | ) |
|                                       |       |         |        |                       |       |
| Year Ended  December 31, 2004         |       |         |        |                       |       |
| Distribution business  segment             |       | $            | 111,025,925 |                       | $          | 5,828,120 |   |
| Career development  services segment       |       | 4,231,076    |        | 710,482                    |       |
| Total                                      |       | $            | 115,257,001 |                       | $          | 6,538,602 |   |
|                                       |       |         |        |                       |       |
| Year Ended  December 31, 2003         |       |         |        |                       |       |
| Distribution business  segment             |       | $            | 91,353,172  |                       | $          | (87,267 | ) |
| Career development  services segment       |       | —       |        | (126,737                   | )          |
| Total                                      |       | $            | 91,353,172  |                       | $          | (214,004 | ) |

 

A reconciliation from the segment information to thenet income (loss) for the years ended September 30, 2005 and December 31,2004 and 2003, is as follows:

 
| ** **             | ** ** | **Nine Months ended   September 30, 2005** | ** ** | **Year Ended   December 31, 2004** | ** ** | **Year Ended   December 31, 2003** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Segment gain (loss)    |       | $                                               | (1,270,073 | )                                       | $          | 6,538,602                               |       | $ | (214,004 | ) |
| Depreciation           |       | (325,283                                        | )          | (278,382                                | )          | (68,793                                 | )          |
|                   |       | (1,595,356                                      | )          | 6,260,220                               |       | (282,797                                | )          |
| Other income           |       | (4,004                                          | )          | 102,027                                 |       | 18,911                                  |       |
| Minority interest      |       | —                                          |       | 366,715                                 |       | 65,809                                  |       |
| Interest expense (net) |       | 66                                              |       | 19,382                                  |       | (41,119                                 | )          |
| Income taxes           |       | 132,912                                         |       | (931,847                                | )          | —                                  |       |
| Net income (loss)      |       | $                                               | (1,466,382 | )                                       | $          | 5,816,497                               |       | $ | (239,196 | ) |

 

F-28

----

 

Total assets for the operating segments at September 30,2005 and December 31, 2004, are as follows:

 
| ** **                           | ** ** | **September 30,   2005** | ** ** | **December 31,   2004** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
|                                 |       |                          |       |                         |       |
| Distribution business  segment       |       | $                             | 21,554,481 |                         | $          | 19,432,313 |   |
| Career development  services segment |       | 22,837,478                    |       | 22,257,459                   |       |
| Total                                |       | $                             | 44,391,959 |                         | $          | 41,689,772 |   |

 

Total assets based on their geographic location at September 30,2005 and December 31, 2004, are as follows:

 
| ** **    | ** ** | **September 30,   2005** | ** ** | **December 31,   2004** | ** ** |
|---------------|------------|-------------------------------|------------|------------------------------|------------|
|          |       |                          |       |                         |       |
| Europe        |       | $                             | 2,703,556  |                         | $          | 417,445 |   |
| Asia          |       | 41,523,590                    |       | 41,187,605                   |       |
| United States |       | 164,813                       |       | 84,722                       |       |
| Total         |       | $                             | 44,391,959 |                         | $          | 41,689,772 |   |

 

The percentage of total revenue based upon thedestination of the sale by geographic sector: 

 
| ** ** | ** ** | **September 30,   2005** | ** ** | **December 31,   2004** | ** ** | **December 31,   2003** | ** ** |
|------------|------------|-------------------------------|------------|------------------------------|------------|------------------------------|------------|
|       |       |                          |       |                         |       |                         |       |
| Europe     |       | 32.3                          | %          | 6.1                          | %          | 5.6                          | %          |
| Asia       |       | 67.7                          | %          | 93.9                         | %          | 94.4                         | %          |
| Total      |       | 100.0                         | %          | 100.0                        | %          | 100.0                        | %          |

 

The percentage of total revenue based upon the originof the sale by geographic sector: 

 
| ** ** | ** ** | **September 30,   2005** | ** ** | **December 31,   2004** | ** ** | **December 31,   2003** | ** ** |
|------------|------------|-------------------------------|------------|------------------------------|------------|------------------------------|------------|
|       |       |                          |       |                         |       |                         |       |
| Europe     |       | 32.3                          | %          | 6.1                          | %          | 7.1                          | %          |
| Asia       |       | 67.7                          | %          | 93.9                         | %          | 92.9                         | %          |
| Total      |       | 100.0                         | %          | 100.0                        | %          | 100.0                        | %          |

 

F-29

----

 

**13. COMMITMENTS AND CONTINGENCIES**

 

As of September 30, 2005, the total futureminimum lease payments under non-cancelable operating leases of the Company’soffice facilities are as follows:  

 
| Fiscal 2006 |   | $       | 270,788 |   |
|-------------|--------|---------|---------|--------|
| Fiscal 2007 |   | 238,527 |    |
| Fiscal 2008 |   | 42,498  |    |
| Fiscal 2009 |   | —  |    |
| Fiscal 2010 |   | —  |    |
| Thereafter  |   | —  |    |
|        |   | $       | 551,813 |   |

 

For the nine months ended September 30, 2005 andthe years ended December 31, 2004 and 2003, rental expense which isincluded in selling, general and administrative expense amounted to $445,067, $163,000 and $147,972,respectively.

 

There are uncertainties regarding the indirectownership and the legal basis of the Company’s ability to operate an Internetportal business in China. Although China has implemented a wide range ofmarket-oriented economic reforms, the telecommunication, information and mediaindustries remain highly regulated. Not only are restrictions currently inplace, but regulations are unclear regarding in what specific segments of theseindustries companies with foreign investors, including the Company, mayoperate. Therefore, the Company might be required to limit the scope of itsoperations in China, and this could have a material adverse effect on theCompany’s financial position, results of operations and cash flows.

 

Included as part of the obligations assumed in theacquisition of Huana Xinlong is a commitment to complete the requiredcapitalization of that company in accordance with PRC laws andregulations.  A total of $1.6 millionmust be invested in Huana Xinlong by February 26, 2006 to complete the PRCcapitalization requirements.

 

F-30

----

 

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

 

The following table sets forth, for the periodspresented, our unaudited quarterly results of operations for the eight quartersended September 30, 2005. 
| ** **                                          | ** ** | **Three  Months Ended** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **Sept, 30  2005**      | ** ** | **Jun. 30,  2005** | ** ** | **Mar. 31,  2005** | ** ** | **Dec. 31,  2004** | ** ** | **Sept. 30,  2004** | ** ** | **Jun. 30,  2004** | ** ** | **Mar. 31,  2004** | ** ** | **Dec. 31,  2003** | ** ** |
| Revenue                                             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Distribution  business                              |       | $                       | 24,233,681 |   | $ | 19,812,031 |   | $ | 12,973,988 |   | $ | 46,619,517 |   | $ | 33,219,898 |   | $ | 22,751,340 |   | $ | 8,435,170 |   | $ | 24,898,160 |   |
| Career  development services                        |       | 1,117,396               |       | 1,416,238 |   | 1,685,145 |   | 4,172,101 |   | 39,416 |   | 19,559 |   | — |   | — |   |
| Total  revenues                                     |       | 25,351,077              |       | 21,228,269 |   | 14,659,133 |   | 50,791,618 |   | 33,259,314 |   | 22,770,899 |   | 8,435,170 |   | 24,898,160 |   |
|                                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  gross profit                                 |       | 1,955,248               |       | 1,734,308 |   | 2,265,294 |   | 7,141,693 |   | 2,361,717 |   | 2,329,178 |   | 359,403 |   | 937,945 |   |
|                                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss)                                  |       | $                       | (854,129   | ) | $ | (437,124 | ) | $ | (175,129 | ) | $ | 4,842,168 |   | $ | 619,838 |   | $ | 873,362 |   | $ | (518,871 | ) | $ | (145,975 | ) |
|                                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss) per share – basic           |       | $                       | (0.04      | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.23 |   | $ | 0.03 |   | $ | 0.04 |   | $ | (0.03 | ) | $ | 0.00 |   |
|                                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss) per share – diluted         |       | $                       | (0.04      | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.23 |   | $ | 0.03 |   | $ | 004 |   | $ | (0.03 | ) | $ | 0.00 |   |
|                                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted  average shares outstanding – basic   |       | 22,164,455              |       | 22,141,455 |   | 22,141,455 |   | 21,121,455 |   | 21,077,455 |   | 20,456,122 |   | 20,189,455 |   | 20,189,455 |   |
|                                                |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted  average shares outstanding – diluted |       | 22,164,455              |       | 22,141,455 |   | 22,141,455 |   | 21,373,234 |   | 21,323,077 |   | 20,898,939 |   | 20,189,455 |   | 20,189,455 |   |

 

*Significant adjustments in the third quarter forthe nine months ended September 30, 2005 and the fourth quarter for theyears ended December 31, 2004 and 2003*

 

In September 2005, the Company was awarded a volume discountincentive rebate related to the third quarter of 2005 from a major supplier inthe amount of $1,085,220. The volume discount was recorded as a decrease tocost of revenue in the third quarter of 2005.

 

In December of 2004 and 2003, the Company entered into an agreementwith a major customer whereby the customer would pay an additional premium of$489,755 and $753,398, respectively to the Company for wireless handsetproducts previously purchased. The premium was recorded as an increase inrevenue for the fourth quarter of 2004 and 2003, respectively.

 

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

 

**15.  RESULTS OF OPERATIONS FOR THE NINE MONTHSENDED SEPTEMBER 30, 2004**

 

The selected financial data presented for the nine months endedSeptember 30, 2005 and the years ended December 31, 2004 and 2003below has been derived from our audited consolidated financial statements. Theselected financial data for the nine months ended September 30, 2004 isunaudited and has been derived from our quarterly report on Form 10-Q forthe quarter ended September 30, 2004 as filed with the Securities andExchange Commission.

 

**Statement of Operations Data:**

 
| ** **                                        | ** ** | **Nine Months Ended September 30,** | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2005**                                 | ** ** | **2004**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                           |       |                                     |       |                             |       |   |   |   |   |
| Distribution  business                            |       | $                                        | 57,019,701 |                             | $          | 64,406,408 |   | $ | 111,025,925 |   | $ | 91,353,172 |   |
| Career  development services                      |       | 4,218,779                                |       | 58,975                           |       | 4,231,076 |   | — |   |
| Total revenue                                     |       | 61,238,480                               |       | 64,465,383                       |       | 115,257,001 |   | 91,353,172 |   |
| Cost of revenues                                  |       |                                     |       |                             |       |   |   |   |   |
| Distribution  business                            |       | 54,244,331                               |       | 59,415,086                       |       | 101,831,520 |   | 87,852,546 |   |
| Career  development services                      |       | 1,039,299                                |       | —                           |       | 1,233,490 |   | — |   |
| Total cost of revenue                             |       | 55,283,630                               |       | 59,415,086                       |       | 103,065,010 |   | 87,852,546 |   |
| Gross profit                                      |       | 5,954,850                                |       | 5,050,297                        |       | 12,191,991 |   | 3,500,626 |   |
| Operating expenses  (income)                      |       |                                     |       |                             |       |   |   |   |   |
| Product  development                              |       | 2,660,793                                |       | 1,121,219                        |       | 1,819,501 |   | — |   |
| Distribution  expenses                            |       | 507,761                                  |       | 647,594                          |       | 757,314 |   | 1,014,673 |   |
| Selling,  general and administrative expenses     |       | 4,765,585                                |       | 2,493,334                        |       | 3,354,956 |   | 2,768,750 |   |
| Gain  on sale of assets                           |       | (383,933                                 | )          | —                           |       | — |   | — |   |
| Total operating  expenses, net                    |       | 7,550,206                                |       | 4,262,147                        |       | 5,931,771 |   | 3,783,423 |   |
| Income (loss) from  operations                    |       | (1,595,356                               | )          | 788,150                          |       | 6,260,220 |   | (282,797 | ) |
| Total other income  (expenses)                    |       | (3,938                                   | )          | 516,825                          |       | 488,124 |   | 43,601 |   |
| Income (loss) before  income taxes                |       | (1,599,294                               | )          | 1,304,975                        |       | 6,748,344 |   | (776,755 | ) |
| Income taxes                                      |       | (132,912                                 | )          | 330,646                          |       | 931,847 |   | — |   |
| Net income (loss)                                 |       | $                                        | (1,466,382 | )                                | $          | 974,329 |   | $ | 5,816,497 |   | $ | (239,196 | ) |
| Net income (loss) per  share – basic         |       | $                                        | (0.07      | )                                | $          | 0.05 |   | $ | 0.28 |   | $ | (0.01 | ) |
| Net income (loss) per  share - diluted            |       | $                                        | (0.07      | )                                | $          | 0.05 |   | $ | 0.28 |   | $ | (0.01 | ) |
| Weighted average shares  outstanding – basic |       | 22,149,122                               |       | 20,574,344                       |       | 20,711,122 |   | 19,481,122 |   |
| Weighted average shares  outstanding - diluted    |       | 22,149,122                               |       | 20,870,056                       |       | 21,007,978 |   | 19,481,122 |   |

 

F31

----

 

Valuation and QualifyingAccounts

 

Nine months endedSeptember 30, 2005 and years ended December 31, 2004 and 2003

 
| ** **                       | ** ** | **Balance at  Beginning of   Year** | ** ** | **Charged to  Expenses**             | ** ** | **Write-Offs Net   of Recoveries**          | ** ** | **Balance at  End of Year** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| Accounts  receivable             |       |                                |       |                                 |       |                                        |       |                        |       |
| Allowance  for doubtful accounts |       |                                |       |                                 |       |                                        |       |                        |       |
| 2003                             |       | $                                   | —     |                                 | $          | —                                      |       | $                           | —     |   | $ | — |   |
| 2004                             |       | —                              |       | —                               |       | —                                      |       | —                      |       |
| 2005                             |       | —                              |       | —                               |       | —                                      |       | —                      |       |
|                             |       |                                |       |                                 |       |                                        |       |                        |       |
| ** **                       | ** ** | **Balance at  Beginning   of Year** | ** ** | **Charged  (Credited)  to Expenses** | ** ** | **Charged  (Credited)  to Other  Accounts** | ** ** | **Balance at  End of Year** | ** ** |
|                                  |            |                                     |            |                                      |            |                                             |            |                             |            |  |  |  |  |

 
| Deferred  income tax asset |   |    |    |   |   |    |   |      |     |
|----------------------------|--------|---------|---------|--------|--------|---------|--------|-----------|----------|
| Valuation  allowance       |   |    |    |   |   |    |   |      |     |
| 2003                       |   | $       | 401,304 |   | $      | —  |   | $         | (173,235 | ) | $ | 228,069 |   |
| 2004                       |   | 228,069 |    | — |   | 516,914 |   | 744,983   |     |
| 2005                       |   | 744,983 |    | — |   | 921,910 |   | 1,666,893 |     |
|                            |        |         |         |        |        |         |        |           |          |  |  |  |  |

 

S-1

----