Online games are electronic games played over the Internet via network servers and game data stored on the servers. There are currently two major categories of online games:

MMORPGs allow for thousands of users to play in an evolving virtual world at the same time over the Internet. Players’ computers generally need to have game-specific software installed to enable access to specific game servers. In a typical MMORPG, players adopt specific characters within the game to develop personalized experiences, skills and game attributes, which can be carried over into higher game levels

Casual games are relatively easy to play and are typically concluded within a short period of time. Popular game genres include sports games such as car racing and basketball, social games such as dancing games, card games such as solitaire, hearts and poker, chess, trivia games such as puzzles and parlor games such as blackjack and checkers.

The Asia-Pacific online game market is expected to continue its growth, fueled by the development in several countries in the region, particularly China. China is a key online game market in the Asia-Pacific region and has substantial growth potential. According to IDC, China’s online game revenues were US$816 million in 2006, representing a 73.5% increase over 2005. IDC predicts that China’s online game revenues will reach US$3.0 billion by 2011, representing a CAGR, of 30.2% from 2006 to 2011.

The Company’s games also offer significant opportunities for social interaction in cyberspace. Life-like features in some of the Company’s games include marriages among online characters and martial arts apprenticeships, which are historical associations formed by martial arts masters according to Chinese legends. In addition, characters in the Company’s games may visually express feelings by their actions or by using emotive icons that appear within a character’s dialogue box.

Although each game character may be unique, groups of players may, and often must, form teams or alliances to achieve certain collective game objectives, such as battles and missions. The Company’s games also incorporate instant messaging systems and chat rooms, which allow players to communicate and interact with each other in real-time groups or in one-on-one discussions. The bulletin boards in the Company’s games allow players to post notes or inquiries and respond to other players’ notes or inquires.

Perfect World is an adventure and fantasy game with traditional Chinese settings. Players can take on various roles, including swordsmen, magicians, archers, priests and magical creatures. Characters develop skills over time, use magical weapons and team up with other players to fight against monsters and various creatures and to conquer and govern territories.

The Company developed Legend of Martial Arts based on a popular TV drama series with the same Chinese name. Legend of Martial Arts is an adventure story of Chinese swordsmen set in an ancient kingdom. It is designed to provide a more light-hearted and less intense game environment than Perfect World. The game attempts to capture the look and feel that has made the TV series a hit with the Chinese public.

The Company launched its third MMORPG, Perfect World II, in November 2006. The storyline of Perfect World II is set in a similar content and graphic background as Perfect World. Like Legend of Martial Arts, Perfect World II also uses an item-based revenue model. Compared to Perfect World, the Company further improved the playing methods and game environment.

The Company launched Zhu Xian in late May 2007. Zhu Xian was developed based on a popular Internet novel with the same name. The Internet novel was ranked the No. 1 most read Internet novel in 2005 and was among the top five most read Internet novels in 2006 according to the click statistics of Baidu.com, Inc. The basic story concept of Zhu Xian is a martial arts focused adventure set in a fantasy world

For the quarter ended March 31, 2007, cost of revenues was RMB19.2 million (US$2.5 million), a 43.2% increase from RMB13.4 million (US$1.7 million) for the previous quarter.

Gross profit increased by 43.5% from RMB47.4 million (US$6.1 million) for the last quarter of 2006 to RMB68.0 million (US$8.8 million) for the quarter ended March 31, 2007.

For the quarter ended March 31, 2007, operating expenses were RMB26.0 million (US$3.4 million), a 55.0% decrease from RMB57.8 million (US$7.5 million) for the quarter ended December 31, 2006.

Net income was RMB40.0 million (US$5.2 million) for the quarter ended March 31, 2007, compared to a net loss of RMB11.1 million (US$1.4 million) for the quarter ended December 31, 2006.