Interactive entertainment is one of the world’s most popular forms of consumer media, as measured by revenues. The interactive entertainment industry is principally divided into two segments: online games and offline games. Online games can be played on devices that can access the Internet, generally through a broadband connection, may require downloading of certain software in order to access the game and can involve a multitude of players from different locations. Online games also include web-based games and games played through mobile phones. Offline games include personal computer, console and handheld games that do not require an Internet connection to play.

According to IDC, China’s online game revenues were US$815 million in 2006, representing a 73.5% increase over 2005, and are expected to grow to US$3.0 billion in 2011. This would represent a compound annual growth rate of 30.2%. In 2006, the top five game vendors in China, measured by revenues, all produced MMO games according to IDC. MMO games generated US$662 million in revenues in 2006, representing 81.2% of China’s total online game revenues. MMO games are expected to achieve revenues of US$2.0 billion by 2011, representing a compound annual growth rate of 24.2% from 2006.

In the United States, Europe and Japan, game consoles for home entertainment and handheld games have the greatest market share in their respective interactive entertainment markets. By comparison, the world’s leading videogame console makers, including Sony, Nintendo and Microsoft, have only reported limited sales in China.

According to IDC, China’s online game players reached 32.7 million in 2006, generating US$815.5 million in subscription revenue. The following table sets forth IDC’s estimate of the number of online game players and the revenues generated from the online game market in China from 2006 to 2011.

ZT Online, or “Zheng Tu” in Chinese, is a two-dimensional online role-playing game set in ancient China, and was the first game that was wholly developed by the Company’s internal product development team. ZT Online players assume one of five different roles, including soldiers and magicians, in 10 different “kingdoms.” Players develop skills, use magical weapons and team up with other players to fight against monsters and players from other kingdoms.

ZT Online PTP is the first pay-to-play MMO game to be developed by the Company, and is based on the ZT Online free-to-play game. As in ZT Online, players assume one of five different roles in 10 different kingdoms. ZT Online PTP also requires players to log into one of multiple shards while enabling players to travel between different shards.

The Company’s Giant Online is one of the first modern-era military-themed MMO games developed in China. Giant Online players may assume one of 14 different roles, such as detectives and spies. As with ZT Online, the game world in Giant Online is divided into numerous regions. Each player must guide his or her character to develop skills and cooperate with other players to fight against players from other regions.

In addition to ZT Online PTP and Giant Online, the Company has one game in development, King of Kings III , or K III. The Company acquired the intellectual property rights to K III from Lager Network in the third quarter of 2007. The Company’s product development team is presently in the process of working with Lager Network to further develop the game and tailor it to the Chinese market, and it currently expects to commercially launch the game in 2008. K III is a three-dimensional online role-playing experience set in a European-style magical world.

Cost of services in the six months ended June 30, 2007 increased by RMB57.8 million, or 656.9%, to RMB66.6 million (US$8.7 million) from RMB8.8 million in the same period in 2006.

Gross profit increased by RMB547.2 million, or 743.4%, from RMB73.6 million in the six months ended June 30, 2006 to RMB620.8 million (US$81.6 million) in the six months ended June 30, 2007.

In the six months ended June 30, 2007, income from operations increased by RMB467.8 million, or 1,076.8%, to RMB511.3 million (US$67.2 million) from RMB43.5 million in the same period in 2006.

In the six months ended June 30, 2007, interest income increased by RMB1.0 million, or 1,000%, to RMB1.1 million (US$0.1 million) from RMB0.1 million in the same period in 2006.

Net income increased by RMB468.7 million, or 1,075.0%, from RMB43.6 million in the six months ended June 30, 2006 to RMB512.3 million (US$67.3 million) in the same period in 2007.