UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

OR

For the fiscal year ended December 31, 20052006

OR

For the transition period from            to            .

OR

Commission file number: 000-51116

HURRAY! HOLDING CO., LTD.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

Room 305-306, China Resource Building, 8 Jian Guo Men Bei Street15/F, Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring,

DongchengChaoyang District, Beijing 100005,100027, People’s Republic of China

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

NONE

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Name of each exchange and Title of each class on which registered:

American Depositary Shares, each representing 100 ordinary shares, par value US$0.00005 per share,

Nasdaq NationalGlobal Market

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

NONE

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 2,229,754,3402,162,031,740 ordinary shares, par value US$0.00005 per share.

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

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15) (d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  ¨    Accelerated Filer  ¨    Non-Accelerated Filer  x

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

TABLE OF CONTENTS

INTRODUCTION

PART I

i

INTRODUCTION

This annual report on Form 20-F includes our audited consolidated financial statements as of December 31, 20052006 and 20042005 and for the years ended December 31, 2006, 2005 2004 and 2003.2004.

Forward-Looking Information

This annual report on Form 20-F contains statements of a forward-looking nature. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “seeks, “estimates” and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to those risks and uncertainties identified under the section heading “Risk Factors” below.

All forward-looking statements in this Form 20-F are made as of the date of filing hereof, based on information available to us as of that date, and we assume no obligation to update or revise any of these forward-looking statements even if experience or future changes show that the indicated results or events will not be realized.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not Applicable.

Item 2. Offer Statistics and Expected Timetable

Not Applicable.

Item 3. Key Information

A. Selected Financial Data

The following table presents thecertain selected consolidated financial information for our business. You should read the following information in conjunction with our audited historical consolidated financial statements, the notes thereto and Item 5 “Operating and Financial Review and Prospects” included elsewhere in this annual report. The following data as of December 31, 20052006 and 20042005 and for the years ended December 31, 2006, 2005 2004 and 20032004 has been derived from our audited consolidated financial statements for those years and should be read in conjunction with those statements, which are included in this annual report beginning on page F-1. The following data as of December 31, 2002 and 2001(predecessor) and for the years ended December 31, 2002 (predecessor)2003 and 2001December 31, 2002 (predecessor) have also been derived from our audited consolidated financial statements for those years, which are not included in this annual report. Our audited financial statements for the foregoing periods were prepared in accordance with United States generally accepted accounting principles, or U.S.US GAAP.

Our company, Hurray! Holding Co., Ltd. (“Hurray! Holding”), was formed on April 23, 2002. For our 2001 financial statements, our existing affiliate, Hurray! Solutions Ltd. (“Hurray! Solutions”), is treated as a predecessor entity. For our 2003, 2004 and 2005 financial statements, Hurray! Holding is treated as a successor entity. Because Hurray! Holding had not yet entered into definitive agreements with Hurray! Solutions Ltd. (“Hurray! Solutions”) in 2002 and it had limited operations in that year, our 2002 financial statements

are also presented with Hurray! Solutions as a predecessor entity. In accordance with applicable accounting standards,For our 2003, 2004, 2005 and 2006 financial statements, Hurray! Holding is treated as a successor entity. Effective January 1, 2006, we adopted the assets and liabilitiesfair value recognition provisions of Hurray! Solutions have been recorded atStatement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method. Under this method, stock-based compensation expense recognized beginning January 1, 2006 includes: (a) compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006 based on the fair market value as of the grant date, measured in our successor financial statements.accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and (b) compensation expense for all stock-based compensation awards grant on or subsequent to January 1, 2006, based on grant-date fair value estimated in accordance with the provisions of SFAS 123(R). We recognize stock-based compensation costs over the requisite service period which is generally the vesting period.

For options vested prior to January 1, 2006, we accounted for share-based compensation plans in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, as amended (“APB 25”). Accordingly, we recognized stock-based compensation expense only when options were granted with a discounted exercise price. The stock-based compensation expense was recognized ratably over the requisite service period, which was generally the vesting period of the options. The stock-based compensation expenses prior to and after January 1, 2006 are therefore not comparable. See Item 5 “Operating and Financial Review and Prospects” below.

		As of and for the Year Ended December 31,
		2005				2004				2003				2002				2001
														(Predecessor)
		(in thousands of U.S. dollars, except share data and percentages)
Historical Condensed Consolidated Balance Sheet Data
Cash and cash equivalents		$	75,959			$	8,714			$	11,151			$	3,493			$	1,736
Restricted cash			—				—				1,510				1,510				1,466
Accounts receivable, net			18,089				11,883				7,892				2,937				802
Other current assets			2,297				2,133				228				329				1,470
Property and equipment, net			2,536				2,617				1,897				1,028				1,666
Goodwill			23,026				20,412				3,950				—				—
Other assets			4,953				705				231				473				404
Total assets		$	126,860			$	46,464			$	26,859			$	9,770			$	7,544
Current liabilities		$	7,636			$	8,743			$	12,165			$	12,404			$	7,877
Minority interests			605				—				—				—				—
Series A convertible preference shares (nil, 16,924,497, 12,347,966, nil and nil shares issued and outstanding as of December 31, 2005, 2004, 2003, 2002 and 2001, respectively)			—				17				12				—				—
Ordinary shares (2,229,754,340, 1,186,672,000, 1,176,000,000, nil and nil shares issued and outstanding as of December 31, 2005, 2004, 2003, 2002 and 2001, respectively)			111				59				59				—				—
Other shareholders’ equity (deficiency)			118,508				37,645				14,623				(2,634	)			(333	)
Total liabilities and shareholder’s equity		$	126,860			$	46,464			$	26,859			$	9,770			$	7,544
Other Historical Condensed Consolidated Financial Data:
Gross profit margin
2G services			31.9	%			52.8	%			66.0	%			43.5	%			54.3	%
2.5G services			58.5				61.0				50.9				—				—
Software and system integration services			79.4				38.9				22.6				1.9				—
Total gross profit margin			52.0				54.5				53.1				25.4				54.3
Income (loss) from operations			26.6				32.8				21.3				(23.6	)			(267.4	)
Net profit (loss) margin			29.8				32.3				19.7				(27.0	)			(273.9	)
Depreciation		$	1,461			$	1,335			$	858			$	652			$	338
Amortization			478				651				276				142				71
Capital expenditure			1,289				1,871				1,388				441				1,445

		As of and for the Year Ended December 31,
		2006				2005				2004				2003				2002
																		(Predecessor)
		(in thousands of U.S. dollars, except percentages)
Historical Condensed Consolidated Statement of Operations Data
Revenues:
2G services		$	32,571			$	20,131			$	14,946			$	13,471			$	5,948
2.5G services			29,941				35,932				28,227				4,289				—
Recorded music			6,203				—				—				—				—
Software and system integration services			1,177				6,312				10,267				5,363				4,565
Total revenues			69,892				62,375				53,440				23,123				10,513
Cost of revenues:
2G services			24,615				13,714				7,050				4,586				3,363
2.5G services			16,057				14,921				11,003				2,106				—
Recorded music			3,553				—				—				—				—
Software and system integration services			946				1,302				6,277				4,151				4,478
Total cost of revenues			45,171				29,937				24,330				10,843				7,841
Gross profit			24,721				32,438				29,110				12,280				2,672
Operating expenses			21,287				15,818				11,596				7,348				5,156
Income (loss) from operations			3,434				16,620				17,514				4,932				(2.484	)
Interest income			2,576				1,428				38				3				—
Interest expense			(45	)			(27	)			(312	)			(390	)			(357	)
Other income, net			522				991				—				—				—
Income before income taxes			6,487				19,012				17,240				4,545				(2,841	)
Income taxes			(121	)			(393	)			—				—				—
Net income after income taxes before minority interests			6,366				18,619				17,240				4,545				(2,841	)
Minority interests			(562	)			—				—				—				—
Net income (loss)			5,804				18,619				17,240				4,545				(2,841	)
Deemed dividends on Series A convertible preference shares			—				—				(40	)			(113	)			—
Income (loss) attributable to holders of ordinary shares		$	5,804			$	18,619			$	17,200			$	4,432			$	(2,841	)
Income per share, basic		$	0.00			$	0.01			$	0.01			$	0.00
Income per share, diluted		$	0.00			$	0.01			$	0.01			$	0.00
Shares used in calculating basic income per share			2,189,748,563				2,092,089,848				1,208,512,142				1,088,810,959
Shares used in calculating diluted income per share			2,208,758,636				2,129,228,961				1,572,887,775				1,343,606,622

		As of and for the Year Ended December 31,
		2006				2005				2004				2003				2002
		(in thousands of U.S. dollars, except percentages)
Historical Condensed Consolidated Balance Sheet Data
Cash		$	74,597			$	75,959			$	8,714			$	11,151			$	3,493
Restricted cash			—				—				—				1,510				1,510
Accounts receivable, net			13,449				18,089				11,883				7,892				2,937
Other current assets			3,342				2,297				2,133				228				329
Property and equipment, net			1,954				2,536				2,617				1,897				1,028
Goodwill			39,621				23,869				20,412				3,950				—
Other assets			7,027				4,953				705				231				473
Total assets		$	139,990			$	127,703			$	46,464			$	26,859			$	9,770
Current liabilities		$	12,960			$	7,636			$	8,743			$	12,165			$	12,404
Non-current liabilities			851				843				—				—				—
Total liabilities		$	13,811			$	8,479			$	8,743			$	12,165			$	12,404
Minority interests			3,359				605				—				—				—
Series A convertible preference shares (nil, nil, 16,924,497, 12,347,966 and nil shares issued and outstanding as of December 31, 2006, 2005, 2004, 2003 and 2002, respectively)			—				—				17				12				—
Ordinary shares (2,162,031,740, 2,229,754,340, 1,186,672,000, 1,176,000,000, nil and nil shares issued and outstanding as of December 31, 2006, 2005, 2004, 2003 and 2002, respectively)			108				111				59				59				—
Other shareholders’ equity (deficiency)			122,712				118,508				37,645				14,623				(2,634	)
Total liabilities, minority interests and shareholders’ equity		$	139,990			$	127,703			$	46,464			$	26,859			$	9,770
Other Historical Condensed Consolidated Financial Data:
Gross profit margin
2G services			24.4	%			31.9	%			52.8	%			66.0	%			43.5	%
2.5G services			46.4				58.5				61.0				50.9				—
Recorded music			42.7				—				—				—				—
Software and system integration services			19.6				79.4				38.9				22.6				1.9
Total gross profit margin			35.4				52.0				54.5				53.1				25.4
Income (loss) from operations			4.9				26.6				32.8				21.3				(23.6	)
Net profit (loss) margin			8.3				29.8				32.3				19.7				(27.0	)
Depreciation		$	1,580			$	1,461			$	1,335			$	858			$	652
Amortization			1,901				478				651				276				142
Capital expenditure			957				1,289				1,871				1,388				441

Exchange Rate Information

We present our historical consolidated financial statements in U.S. dollars. In addition, certain pricing information is presented in U.S. dollars and certain contractual amounts that are in Renminbi include a U.S. dollar equivalent solely for the convenience of the reader. Except as otherwise specified, this pricing information and these contractual amounts are translated at RMB8.0702RMB7.8087 = US$1.00, the prevailing rate on December 31, 2005.2006. The translations are not a representation that the Renminbi amounts could actually be converted to U.S. dollars at this rate. For a discussion of the exchange rates used for the presentation of our financial statements, see note 2(m)2(l) to our audited historical consolidated financial statements.

On July 21, 2005, the PRC government changed its policy of pegging the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.

Although Chinese governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or security, requires the approval of the State Administration for Foreign Exchange and other relevant authorities.

The noon buying rate in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York was RMB8.0110RMB7.6666 = US$1.00 on June 9, 2006.8, 2007. The following table sets forth, for the period indicated, information concerning the number of Renminbi for which one U.S. dollar could be exchanged based on the noon buying rate for cable transfers in Renminbi as certified for customs purposes by the Federal Reserve Bank of New York.

The following table sets forth the average noon buying rates between Renminbi and U.S. dollars for each of 2001, 2002, 2003, 2004, 2005 and 2005,2006, calculated by averaging the noon buying rates on the last day of each month during the relevant year.

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

RISKS RELATED TO OUR COMPANY

Risks Related to Our 2G and 2.5Gwireless value-added Services

We depend on China UnicomMobile and China Mobile,Unicom, the two principal mobile operators in China, for the major portion of our revenue, and any loss or deterioration of our relationship with China UnicomMobile and China MobileUnicom may result in severe disruptions to our business operations and the loss of a major portion of our revenue.

We offer our services over 2G and 2.5G mobile networks to consumers through the two principal mobile operators in China, China UnicomMobile Communications Corporation, or China Mobile, and China Mobile,United Telecommunications Corporation, or China Unicom, which service the major portion of China’s approximately 392461 million mobile phone subscribers as of December 31, 2005.2006. To a much lesser extent, we also offer our services to consumers through China Network Communications Corporation, (“or China Netcom”)Netcom, and China Telecommunications Corporation, (“or China Telecom”).Telecom. These companies are owned by the Chinese government and have publicly listed subsidiaries. Our agreements with these operators and their provincial affiliates are non-exclusive, and have a limited term (generally one year for China Mobile and one or two years for China Unicom and one year for China Mobile)Unicom). We usually renew these agreements or enter into new ones when the prior agreements expire, but on occasion the renewal or new agreements can be delayed by periods of one month or more.

If either China UnicomMobile or China MobileUnicom ceases to continue to cooperate with us, it would be impossible to find appropriate replacement mobile operators with the requisite licenses and permits, infrastructure and customer base to offer our 2G and 2.5Gwireless value-added services. We derived approximately 64%59% of our combined 2G and 2.5G services revenue and 67% of our 2.5G services revenuefrom China Mobile, 34% from China Unicom, in 2005. Accordingly, although we significantly increased our share of revenue6% from China Mobile,Telecom and 1% from China Netcom and China Telecom in 2005, we have been particularly dependent on China Unicom.

2006. In addition, the Chinese government has extensive involvement in determining the structure of the telecommunications industry in China. During the development of this industry, changes in government policy have resulted in major restructurings of the telecommunications operators, including the establishment of new operators and the combination of all or part of existing operators. Any significant restructuring of any segment of the telecommunications industry in China, including in particular China Unicom,Mobile, China MobileUnicom or any other mobile operators in China and the potential combination of the mobile operations of various mobile operators in China, could significantly affect these relationships, our operations and our revenues.

Due to our reliance on China UnicomMobile and China MobileUnicom for our wireless value-added services, any loss or deterioration of our relationship with them, due to their own business decisions or government-imposed restructurings, may result in severe disruptions to our business operations and the loss of a major portion of our revenue.

The termination or alteration of our various agreements with China Unicom,Mobile, China MobileUnicom and their provincial affiliates would materially and adversely impact our revenue and profitability.

Given the dominant market position of China UnicomMobile and China Mobile,Unicom, our leverage with these mobile operators is limited in terms of negotiating agreements, resolving disputes or otherwise. In particular, our agreements with them can be terminated in advance, penalties may be imposed or other parts of our services may be suspended or terminated, and approval for our new services may be delayed for a variety of reasons which vary among the individual agreements with the mobile operators, including, for example, where we breach our obligations under the agreements, a high number of customer complaints are made about our services or we cannot satisfy the operational or financial performance criteria established by the applicable mobile operator.

We may also be compelled to alter our agreements with these mobile operators in ways which adversely affect our business, such as by limiting the services we can offer or imposing other changes that limit the revenue we can derive from such agreements. In certain provinces, China Unicom recently entered into new contracts with service providers in which it changed the share percentages it retained for customer payments. For example, where in the past service providers would receive 85% of a payment from a customer purchase and China Unicom would retain 15%, China Unicom has changed the share percentage of customer payments that service providers may retain to 70%. We may not be able to adequately respond to any such changes because we are not able to predict if the mobile operators will unilaterally amend our contracts with them.

Unilateral changes in the policies of China Mobile and China Unicom and in their enforcement of their policies have resulted in service suspensions and our having to pay additional charges to the mobile operators, and further changes could materially and adversely impact our revenue and profitability in the future.

China Mobile and China Unicom have a wide range of policies and procedures regarding customer service, quality control and other aspects of the wireless value-added services industry. As the industry has evolved over the last several years, the mobile operators have refined these policies to improve overall service quality.quality and increase customer satisfaction. For example, in July 2006 China Mobile introduced new policies which require extended free trial periods for wireless value-added services, new billing reminders for new and existing monthly subscribers and positive user confirmations for conversion of per-message subscriptions to monthly subscriptions. These new policies negatively affected our results of operations in the second half of 2006. In addition, in the last twoseveral years, acting under the guidance of China’s Ministry of Information Industry, or the MII, the mobile operators have begun enforcing their customer service policies more rigorously than in the past and have initiated steps to improve customer service. This rigorous enforcement has resulted in a number of severe penalties being imposed on us and other participants in the market. Penalties have included precluding service providers from offering certain services over a mobile operator’s network or from offering new services for a fixed period.

We may not be able to adequately respond to these or other developments in mobile operator policies, or changes in the manner in which such policies are enforced. Furthermore, because the mobile operators’ policies are in a state of flux at this time and they are highly sensitive to customer complaints (even if the complaints may not have a bona fide basis), we cannot be certain that our business activities will always be deemed in compliance with those policies despite our efforts to so comply. Accordingly, we may be subject to monetary penalties or service suspensions or both, even for conduct which we believed to be permissible. In 2005, we were required to pay charges totaling RMB6.0 million ($0.7 million) due to improper promotion of our services using wireless application protocol, or WAP, services and improper delivery of our short messaging services, or SMS, to users. More recently, in January 2006, China Mobile downgraded all of the WAPWireless Application Protocol (WAP) services of Beijing Enterprise Network Technology Co., Ltd. (“Beijing Network”), one of our affiliated Chinese entities, to the bottom of its WAP menu and temporarily suspended the approval of all of its new services due to improper promotion of one of its WAP services. In addition, Hurray! Solutions, another of our affiliated Chinese entities, was charged a fine of approximately RMB5.7 million ($0.7 million) by China Unicom for improper delivery of one of its SMSShort Messaging Services (SMS) services to users. Finally in April 2006, China Unicom imposed a fine of RMB3.0 million ($0.4 million) on our affiliated Chinese entity, Beijing Hutong Wuxian Technology Co., Ltd. (“Beijing Hutong”), for violating a China Unicom billing policy by one of its WAP services. The WAP service was also suspended. Any future noncompliance with the mobile operators’ policies by us, whether inadvertent or not, could result in a material and adverse effect on our revenue and profitability.

In addition, China Mobile has implemented a new “double confirmation” policy which requires consumers to confirm their purchases of value-added services by replying to a message from the operator. Without confirmation, the service will not work and we cannot receive payment. This new policy adversely affects our sales of such services.

Our 2.5G revenues were negatively affected in 2006 by the slow growth of China Unicom’s WAP business. If this trend continues or the mobile operators in China experience slow or negative growth in their wireless value-added services user base, our revenue and profitability could be materially and adversely affected.

Revenues from 2.5G value-added services declined from $35.9 million for fiscal year 2005 to $29.9 million for fiscal year 2006, representing a decline of 16.7%. Our 2.5G value-added services have not grown in part because of China Unicom’s decision to delay expanding capacity or building out 2.5G mobile networks into 2007 pending anticipated receipt of 3G licenses. If this market does not grow and evolve in the manner or in the timeframe that we anticipate, we may not be able to generate significant sustainable revenues from our 2.5G business. Such delay has negatively affected revenue from our VASPro Software as noted under “Risks Related to our Software Products.”

The Chinese government, China UnicomMobile or China MobileUnicom may prevent us from distributing, and we may be subject to liability for, content that any of them believe is inappropriate.

China has enacted regulations governing telecommunication service providers, Internet access and the distribution of news and other information. In the past, the Chinese government has stopped the distribution of information over the Internet that it believes to violate Chinese law, including content that is pornographic or obscene, incites violence, endangers national security, is contrary to the national interest or is defamatory.

China UnicomMobile and China MobileUnicom also have their own policies regarding the distribution of inappropriate content by wireless value-added service providers and have punished certain providers for distributing inappropriate content through the imposition of fines and service suspensions. Some of those providers indicated that the mobile operators informed them that certain of their content was construed as too adult-oriented or sexually suggestive. In addition, in June 2004, along with other participants in our industry, we received information and guidance from China Mobile and China Unicom regarding what

they consider to be inappropriate content for wireless value-added services. In response, we reviewed our services and removed certain interactive voice response, or IVR,Interactive Voice Response (IVR), and picture downloads in order to comply with such information and guidance. There can be no assurance that we will not receive future guidance that could compel us to further alter our services.

The appropriateness or inappropriateness of WAP and IVR content is a relatively new and emerging concept in China: the industry is less than four years old and the first publicly announced application of penalties for inappropriate content occurred in the third quarter of 2004.China. Most importantly, the determination that content is deemed to be inappropriate is inherently subjective, and is subject to the interpretation of the governmental authorities and mobile operators in China. Their standards are generally more restrictive than those applied in many other countries like the United States. Accordingly, while we intend to comply with all applicable rules regarding wireless content, it ismay be very difficult for us to assess whether any particular content we offer particular content that could be construed by the mobile operators as inappropriate under current regulations in China. Any penalties imposed on us by the mobile operators for the content of our services could result in a material and adverse effect on our revenue, profitability and reputation.

China UnicomMobile and China MobileUnicom may impose higher service or network fees on us for their own business purposes or if we are unable to satisfy customer usage and other performance criteria, which could reduce our gross margins.

Fees for our 2G and 2.5Gwireless value-added services are charged on a monthly subscription or per-use basis. As provided in our network service agreements, we rely on China UnicomMobile and China MobileUnicom for both billing of and collection from, mobile phone users of fees for our services. As noted above under “— The termination or alteration of our various agreements with China Unicom,Mobile, China MobileUnicom and their provincial affiliates would materially and adversely impact our revenue and profitability,” our negotiating leverage with the mobile operators is limited. As a result, the mobile operators could unilaterally for their own business purposes amend our agreements with them to increase the service or network fees that they retain from the revenues generated by our 2G and 2.5Gwireless value-added services.

In addition, under these agreements, these service fees in some cases rise if we fail to meet certain customer usage, revenues and other performance criteria. Moreover, for 2G services, to the extent that the number of messages sent by us over China Mobile’s and China Unicom’s network exceeds the number of messages our customers send to us, we must pay per message network fees, which decrease in several provinces as the volume of customer usage of our services increases. The number of messages sent by us will exceed those sent by our users, for example, if a user sends us a single message to order a game but we in turn must send that user several messages to confirm his or her order and deliver the game itself. We cannot be certain that we will be able to satisfy any performance criteria in the future or that the mobile operators will keep the criteria at their current levels. Any increase in China Unicom’sMobile’s or China Mobile’sUnicom’s service or network fees could reduce our gross margins.

If either China UnicomMobile or China MobileUnicom change their practices with regard to how service selections appear on their WAP portals, the revenue from our services, and thus our overall financial condition, could be materially and adversely affected.

The current practice of both China UnicomMobile and China MobileUnicom is to place the most popular WAP services at the top of the menu on the first page of the list of services available in each service category on their WAP portals. Services at the top of the menu are more accessible to users than other services and, in our experience, are more frequently accessed than those services lower on the menu. This effectively reinforces the position of the most popular services. The placement of services on these menus creates significant competitive advantages for the top-ranked services and significant challenges for newer and less popular services. We believe that our prominent position on the WAP portals of the two principal mobile operators in China historically helped us maintain our position in the market. Ifmarket.If either China

Mobile or China Unicom changes its current practices so that the most popular services are not those that are the most accessible to customers, restricts the number or type of services a service provider is permitted to place on service menus or adopts new interface technologies that eliminate the current service menus, our services could become more difficult

for users to access and could, therefore, become less popular. In addition, as discussed under the heading “— Unilateral changes in the policies of China Mobile and China Unicom and in their enforcement of their policies have resulted in service suspensions and our having to pay additional charges to the mobile operators, and further changes could materially and adversely impact our revenue and profitability in the future,” China Mobile downgraded the WAP services of Beijing Network to the bottom in its WAP menu in January 2006 for improper promotion of its WAP services. Such downgrade or any of the foregoing changes, if they occur, will likely materially and adversely affect the revenue from our services, and thus our overall financial condition.

Our revenue from wireless value-added services would likelymay be adversely affected ifby China Unicom or China Mobile or both begin providing their own full portfolio of 2G and 2.5G services that compete with our services.

With the exception of a limited number of niche applications such as instant messaging, China Unicom andIn 2006, China Mobile are not offering theirbegan operating its own full portfoliosmusic WAP portal and procuring music content from music companies directly. Our revenues as a service provider have been adversely affected by this development, although some of 2G and 2.5G services.this effect has been mitigated by China Mobile procuring music content from our affiliated music companies. Our business would likely be adversely affected if China Unicom or China Mobile or both decide to begin providingprovide additional 2G and 2.5G services to mobile phone users which compete with our services. In that case, we would not only face enhanced competition, but could be partially or completely denied access to theirthe networks of these mobile operators which couldwould adversely affect our revenue from wireless value-added services.

One of our principal strategies is focusing on 2.5G services in China, the market for which may not grow to the extent we anticipate for a variety of reasons that are beyond our control, which in turn would limit the growth potential of our business and adversely affect the market price of our ADSs.

Revenues from 2G services such as SMS represented 58.3% of our total revenues in 2003. However, our 2.5G services delivered through WAP comprised the largest portion of our total revenues in 2004 and 2005. In 2004, 52.8% of our total revenues were from 2.5G services and 28.0% were from 2G services. In 2005, 57.6% of our total revenues were from 2.5G services and 32.3% were from 2G services. The relative increase in percentage of total revenue attributable to 2G services was due to increases in sales of our IVR and ringbacktones, or RBT, services and a decline in revenue from software and system integration services.

Currently, 2.5G technology is still evolving in China. Factors which could affect the expansion of the 2.5G market and, accordingly, for our 2.5G services in China include:

Because the foregoing factors are beyond our control, we cannot accurately predict consumer acceptance and demand for various existing and potential new offerings and services, and the future size, composition and growth of this market. If 2.5G services, particularly WAP services, are not adopted on a widespread basis in China, our business may not grow to the extent we anticipate.

The popularity of our 2G and 2.5G services, and therefore revenues from these services and our profitability, would be adversely affected if our competitors offer more attractive and engaging services or our services are rendered obsolete by the introduction of newer technologies such as 3G.

The wireless value-added services market is highly competitive, and our competitors may offer new or different services which are more popular than our 2G and 2.5G services. Moreover, our services could be rendered obsolete by the introduction of newer technologies such as 3G mobile networks. The PRC government has not as yet granted any licenses for 3G mobile networks to any mobile operators, and it is not clear when such licenses will be granted. Although we are planning to transition our 2.5G services to 3G services when 3G licenses are awarded to mobile operators in China and 3G mobile networks are launched, it is difficult to predict the development of new mobile technologies or the types of services that will be popular on any new mobile networks. Accordingly, we cannot be certain whether any services we offer which are compatible with such new technologies will be successful.

China UnicomMobile and China MobileUnicom allow us to offer our services over their networks only if we achieve minimum customer usage, revenues and other criteria, and our revenues from 2.5G services depend in particular on our ability to meet those criteria to keep our services among the most popular offered through the mobile operators.

If we fail to achieve minimum customer usage, revenues and other criteria imposed by China UnicomMobile or China MobileUnicom at its discretion from time to time, our services could be excluded from the applicable mobile operator’s entire network at a provincial or national level, or we could be prevented from introducing new services. In addition, we believe that the success of our 2.5G services depends significantly on whether our services appear at the top of the menu on the first page of the list of services available in each service category on the mobile operators’ WAP portals. The ranking of services on these WAP page menus depends on the satisfaction of performance criteria established by the mobile operators from time to time. If we are excluded from any mobile operator’s network or are not able to keep our 2.5G services at the top of the service lists on any mobile operator’s WAP pages due to performance problems, our wireless value-added services revenue couldwould be substantially reduced, which would materially and adversely affect our overall financial condition and the market price of our ADSs.

We are particularly dependent on the success of China Unicom’s 2.5G mobile networks operating on the CDMA platform, and if the use of CDMA compatible handsets does not grow, our ability to generate revenues from 2.5G services could be limited.

A major portion of our 2.5G services revenues in 2004 and 2005 was derived from China Unicom’s users, and we expect China Unicom to continue to contribute a significant portion of our 2.5G services revenues for the foreseeable future. China Unicom’s 2.5G mobile network operates primarily on the code division multiple access, or CDMA, platform in contrast to China Mobile, the dominant mobile operator in China, which operates its 2.5G mobile network on the general packet radio system, or GPRS, platform. Mobile phone users can access China Unicom’s WAP services only if they purchase handsets that are compatible with CDMA. Sales of CDMA handsets, which have historically been significantly more expensive than handsets using older technology such as global system for mobile communication, or GSM, have been growing in China since their introduction in 2002, but the rate of such growth slowed in 2005. We cannot be certain whether the growth rate in sales of CDMA handsets will return to its previous levels or whether usage of CDMA handsets will decrease in the future. The pricing, marketing and other factors which affect the sales of more sophisticated mobile handsets are all outside of our control, and weak sales of mobile handsets for which we have developed services could limit our ability to generate revenues from those services.

We must rely on China UnicomMobile and China MobileUnicom to maintain accurate records of fees paid by users of our services, deduct service and network fees due to them and pay us fees due to us. Errors in record-keeping by the mobile operators could adversely affect our profitability and the market price of our ADSs.

We must rely on China UnicomMobile and China MobileUnicom to maintain accurate records of the fees paid by users and deduct the service and network fees due to them under our network service agreements. Specifically, the mobile operators provide us with monthly statements for our 2G services that do not provide itemized information regarding amounts paid for each of our services or calculations of the service and network fees. As a result, monthly statements that we have received from the mobile operators for our 2G services cannot be reconciled to our own internal records for the reasons discussed under “— China UnicomMobile and China MobileUnicom do not supply us with detailed information on billing and transmission failures, revenues, service or network fees or other charges, particularly with respect to our 2G services, and accordingly, it is difficult to analyze the factors affecting our financial performance.” In addition, we have only limited means to independently verify the information provided to us with respect to such 2G services because we do not have access to the mobile operators’ internal records. Rather, we can only seek consultations with the mobile operators to discuss the reasons for any discrepancies.

With respect to our 2.5G services, the mobile operators allow us limited access to their transmission and billing system information to monitor if our services are actually delivered and paid for, which information we then reconcile to our own internal

records. In addition, the mobile operators in general provide us with monthly statements within two to three weeks after month end. To date, discrepancies between our internal records and the mobile operators’ confirmations has been insignificant. Nonetheless, we are still ultimately dependent on the ability of the mobile operators’ systems to accurately collect and analyze the relevant transmission and payment data regarding our services.

Because of the dominant market position of these mobile operators, we have limited leverage in challenging any discrepancies between their monthly statements and 2.5G system information, on the one hand, and our own records, on the other hand. Our profitability and the market price of our ADSs could be adversely affected if these mobile operators miscalculate the revenues generated from our services and our portion of those revenues.

Our dependence on the billing records of China UnicomMobile and China MobileUnicom may adversely affect our ability to record, process, summarize and report revenue and other information regarding our wireless value-added services. Any inaccuracies in our records and public reports could adversely affect our ability to effectively manage our business and the market price of our ADSs.

We maintain controls and procedures to ensure that financial and non-financial information regarding our business is recorded, processed, summarized and reported in a timely and accurate manner. However, as noted in the prior risk factor, we depend on the billing records of China UnicomMobile and China MobileUnicom and have only limited means to independently verify information provided by them. If the information they provide us is incorrect or incomplete, then our own internal records will also be incorrect or incomplete. Our business could be adversely affected if our management and board of directors make decisions based on deficient internal information, such as strategic initiatives involving new wireless value-added services. Moreover, it is possible that, if information provided to us by the mobile operators were not correct or complete, our public reports could also be deficient, which could adversely affect the market price of our ADSs.

We started to recognize revenue for a portion of our 2G services on an accrual basis, beginning with our financial statements for the year ended December 31, 2004, based on an internal estimation process which involves the use of estimates of monthly revenues to the extent we are unable to obtain actual figures from the mobile operators before we finalize our financial statements, which could in turn require us to make adjustments to our financial statements.

Our financial statements through December 31, 2003 reflected our actual revenues as they appear on the mobile operators’ statements. However, starting from 2004, we recognized revenue for a portion of

our 2G services (as well as for an insignificanta smaller portion of our 2.5G services) on an accrual basis and plan to do so in the future as necessary in order to report our quarterly or annual earnings on a timely basis. This involves the use of estimates of monthly revenues based on our internal records for the month and prior monthly confirmation rates with the mobile operators in prior months if we are unable to obtain actual figures from the mobile operators before we finalize our financial statements. We expect the effect of these estimates on our financial results will be more significant on our quarterly results of operations than on our annual results, as we are less likely to receive confirmation on all of our 2G revenues before we disclose our quarterly results. For both 2004 and 2005, approximately 95% of our 2G revenues were recognized based on confirmations received from the mobile operators. To the extent that our revenues have not been confirmed by the mobile operators for any reporting period, we will need to adjust our revenues in the subsequent periods in which these revenues are confirmed. Actual revenues may differ from prior estimates when unexpected variations in billing and transmission failures occur. Recognizing revenues on an accrual basis could potentially require us to later make adjustments to our financial statements if the mobile operators’ billing statements and cash payments are different from our estimates, which could adversely affect our reputation and the market price of our ADSs.

Our revenues and cost of revenues for 2G services, and to a lesser degree 2.5G services, are affected by billing and transmission failures and other discrepancies which are often beyond our control.

We do not collect fees for our services from China UnicomMobile and China MobileUnicom in a number of circumstances, including if:

These situations are known in the industry as billing and transmission failures, and we do not recognize any revenues for services which are characterized as billing and transmission failures. Billing and transmission failures therefore significantly lower the revenues we record. The failure rate for 2G services can vary among the mobile operators, and by province, and also has fluctuated significantly in the past, ranging on a monthly basis from 2.2%0.5% to 37.1%9.1% of the total billable messages which are reflected in our internal records during 2005.2006.

Although we do not experience the same type of billing and transmission failures for our 2.5G services as we do for our 2G services, we do experience a discrepancy between the revenues recorded by our internal system and the revenues confirmed by the mobile operators. This difference has historically averaged approximately 2% per month and relates to services that are provided but are not billed to the user for a variety of reasons associated with the manner in which the mobile operators register new users and manage their internal billing reconciliation process.

We are also required to pay some of our content providers a percentage of the revenues received from or confirmed by the mobile operators with respect to services incorporating the content providers’ products. In calculating the fees payable to these providers, we make estimates to take into account billing and transmission failures, which may have been applicable to the services incorporating the providers’ products, and reduce the fees payable by us accordingly. Nonetheless, as estimates involve making

assumptions which may prove inaccurate, we have in the past paid, and may continue to pay, such providers fees which are disproportionate to what we have been paid for the relevant service. Our costs of services, gross margins and profitability could be adversely affected if, due to problems in estimating billing and transmission failures, we overpay service providers on a consistent and continuous basis.

China UnicomMobile and China MobileUnicom do not supply us with detailed information on billing and transmission failures, revenues, service and network fees or other charges, particularly with respect to our 2G services, and accordingly it is difficult to analyze the factors affecting our financial performance.

China Unicom’s and China Mobile’s monthly statements to service providers, including our company, regarding the services provided through their networks currently do not contain information about billing and transmission failures, revenues, service and network fees or other charges or detailed information on a service-by-service basis, particularly with respect to our 2G services. While the mobile operators allow third party service providers such as our company to have access to their 2.5G transmission and billing systems, such access is limited and does not offer complete information on all fee calculations and other charges. Moreover, China UnicomMobile and China MobileUnicom have from time to time imposed penalty charges and service suspensions on us when they believe we have contravened their customer service policies. The information provided by the mobile operators does not, however, identify exactly which services caused the problem or the time period in which they occurred.

As a result of the foregoing, we are unable to effectively analyze the factors that affect our financial performance and can only estimate our revenues and cost of revenues by service type. We are also unable to confirm which of our 2G services were transmitted but resulted in billing and transmission failures. As a result, with respect to specific services, we are not able to definitively calculate and monitor revenues, margin and other financial information, such as average revenues per-user by service and total revenues per-user by service, and also cannot definitively determine which of these services are or may be profitable. Moreover, we do not know what adjustments, if any, should be made with respect to specific services to avoid inadvertent violations of the mobile operators’ customer service policies.

The services we offer and the prices we charge are subject to approval by China UnicomMobile and China Mobile,Unicom, and if requested approvals are not granted in a timely manner or approved services are suspended or terminated, our competitive position, revenue and profitability could be adversely affected.

We must obtain approval from China UnicomMobile and China MobileUnicom with respect to each 2G and 2.5G service that we propose to offer to their customers and the pricing for such service. In addition, any changes in the pricing of our existing services must be approved in advance by these operators. There can be no assurance that such approvals will be granted in a timely manner or at all. Failure to obtain, or a delay in, obtaining such approvals could place us at a competitive disadvantage in the market and adversely affect our revenue and profitability. In addition, the recent more rigorous enforcement of customer service policies by China UnicomMobile and China MobileUnicom could result in heightened scrutiny of our existing or proposed services and pricing by the mobile operators. This could, in turn, result in delays in their approving new services, our failure to obtain approval for new services or suspensions (such as the service suspensions we received in January and April 2006) or termination of all or part of our existing services or reductions in approved pricing of our services. The occurrence of any of these actions could materially and adversely affect our revenues.

If either China Unicom or China Mobile adopts a policy that prohibits branding by service providers for services provided on their WAP portals, our revenues could be adversely affected.

We introduced ourHawa brand in the fourth quarter of 2003. The branding of our services is an important part of our marketing strategy to increase user awareness of our services and create enhanced

customer loyalty. China Mobile currently does not permit the use of corporate names to brand services on their WAP portals. If China Mobile expands this policy to include non-corporate names such asHawa or China Unicom adopts similar restrictions, we do not believe we could market our services as effectively, which could have an adverse effect on our revenues.

The Chinese government has granted licenses to offer limited mobility wireless telecommunications services (or little“little smart) in China to China Telecom and China Netcom, two operators with which we have only begun developing relationships, and may grant such licenses to other parties with which we have not yet developed close relationships. If China Telecom, China Netcom or other parties receiving licenses in the future are successful in the wireless value-added services market, but we are unable to continue developing deeper cooperative relationships with such parties, our revenue and overall financial condition could be adversely affected.

The Chinese government recentlyhas granted licenses to offer limited mobility wireless telecommunications services in China to China Telecom and China Netcom. We have begun to develop limited business relationships with China Telecom and China Netcom, but such relationships are not as close as the ones we have developed with China UnicomMobile and China Mobile.Unicom. As a result, if we are unable to develop closer cooperative relationships with such operators, our revenue and overall financial condition could be adversely affected if they take market share from China UnicomMobile and China Mobile.Unicom.

The Chinese government may also grant such licenses to other parties besides China Unicom, China Mobile, China Netcom and China Telecom, although the timing of such grants is unclear. As a result, if any other parties receive wireless telecommunications licenses and are successful in the wireless value-added services market, but we are unable to develop closer cooperative relationships with them, our revenue and overall financial condition could be adversely affected if they take market share from China Unicom, China Mobile, China Telecom and China Netcom. It is also possible that such parties receiving wireless telecommunications licenses may decide to offer wireless value-added services created by them,themselves, rather than by third party service providers such as our company. In that case, we would be in direct competition with those operators, and our revenue and overall financial condition could be adversely affected if we are not able to compete effectively against them.

Risks Related to our Music Business

The businesses of our affiliated music companies are subject to constantly changing consumer tastes.

In order to implement our strategy to enter the music development, production and distribution industry, we formed a new affiliated Chinese entity, Hurray! Digital Music Technology Co., Ltd. (“Hurray! Digital Music”) in November 2005, whose name was changed to Hurray! Digital Media Technology Co., Ltd. (“Hurray! Digital Media”). In November 2005, Hurray! Digital Media agreed to acquire 60% of the equity interest in Beijing Freeland Wuxian Digital Music Technology Co., Ltd., whose name was subsequently changed to Beijing Hurray! Freeland Digital Music Technology Co., Ltd. (“Freeland Music”) to which certain entities of the Freeland Group, a group of affiliated companies in China engaged in the production and distribution of audio and visual products, contributed their respective music businesses. In December 2005, Hurray! Digital Media acquired 51% of the equity interest in Beijing Huayi Brothers Music Co., Ltd. (“Huayi Brothers Music”), a subsidiary of Huayi Brothers Group. In November 2006, Hurray! Digital Media agreed to acquire 30% of the equity interest in New Run Entertainment Co., Ltd. (“New Run”). In March 2007, Hurray! Digital Media agreed to acquire 65% of the equity interest in Beijing Secular Bird Culture and Art Development Center (“Secular Bird”). These four companies have been successful top-tier domestic independent record companies in China which engage in artist development, music production and music distribution.

Each music recording is an individual artistic work. The commercial success of a music product depends on consumer taste, the quality and acceptance of competing offerings released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time activities, general economic conditions and other tangible and intangible factors, all of which can change quickly. Accordingly, there can be no assurance as to the financial success of any particular product, the timing of such success, or the popularity of any particular artist.

The future success of our affiliated music companies depends on their ability to continue to develop recorded music that is interesting and engaging to our target audience, primarily users of the Internet and wireless value-added services. If our audience determines that the content does not reflect its tastes, then our audience size could decrease, which would adversely affect our results of operations. The ability of Freeland Music, Huayi Brothers Music, New Run and Secular Bird to develop compelling content depends on several factors, including the following:

Furthermore, our affiliated music companies must invest significant amounts for product development prior to the release of any product. These costs may not be recovered if the release is unsuccessful. There can be no assurance that such products will be successful releases or that any product will generate revenues sufficient to cover the cost of product development. Because we are relatively inexperienced in the music industry, we cannot predict whether our efforts in this area will be successful.

Our affiliated music companies may unknowingly purchase or license songs which have already been, or may in the future be, sold or licensed to third parties, which could create costly legal disputes over intellectual property rights with such third parties and the songs’ authors or composers.

Freeland Music, Huayi Brothers Music, New Run and Secular Bird generally purchase or license songs for their artists from the original authors or composers of the songs. In China, original authors and composers sometimes license or sell their songs to multiple music companies without informing each such company. In that case, our affiliated music companies may unknowingly purchase or license songs that have already been, or may in the future be, licensed or sold to one or more third parties. As a result, disputes may arise between our affiliated music companies, third party music companies and original authors or composers over the rights to particular songs. Any such dispute may require our affiliated music companies to incur significant costs to investigate and resolve them, including potentially the payment of damages to third parties.

In addition, Freeland Music, Huayi Brothers Music, New Run and Secular Bird license and distribute songs to third parties such as providers of Internet and wireless value-added services, which then distribute the music content to their customers. Freeland Music, Huayi Brothers Music, New Run and Secular Bird may be subject to claims by such providers or any of their other customers if the customers suffer losses as a result of a dispute over the ownership of copyrights to songs provided to them.

Our affiliated music companies often enter into contracts with third parties on behalf of their artists. If those artists fail to satisfy the requirements under those contracts, our affiliated music companies may be subject to claims, which could expose them to significant costs and business disruption.

Freeland Music, Huayi Brothers Music, New Run and Secular Bird often enter into various types of contracts with third parties on behalf of their artists, including contracts relating to album publishing, advertising and promotional activities and public performances. If an artist fails to satisfy the requirements under any such contract for whatever reason (such as health problems), then our affiliated music companies may be deemed to have breached the relevant contracts. In that case, our affiliated music companies may be subject to claims for breach of contract by the counterparty to the contracts, which could expose them to significant costs and business disruption.

Revenue from our affiliated music companies may not grow as fast as expected due to continuing problems of copyright enforcement in China and retention of popular artists.

It can be difficult to enforce certain copyright protections in China. In particular, the music industry in China has suffered from serious piracy issues for many years. Our management estimates that for every dollar of copyrighted CD sales, there are approximately ten dollars of pirated CD sales in China. In addition, it can be difficult to retain artists who become popular and generate large revenue for us, given that such artists may decide to renegotiate with us or contract with other music content providers. This is a common problem faced by music companies in the PRC. The revenue generated from our affiliated music companies may continue to be adversely affected by the difficulty in enforcing copyrights and retaining popular artists, and therefore may not grow as fast as anticipated.

Risks Related to our Software Products

The market for our VASPro software is rapidly evolving and dependent on the growth of 2.5G and 3G services in China and elsewhere. We may not be able to generate significant sustainable revenues from this software if the market does not develop as we anticipate or we are unable to respond to new market developments promptly.

The market for our VASPro software, which allows 2.5G services to be offered through the mobile operators’ networks, is rapidly evolving. We may not be able to develop and introduce software, software enhancements or services that respond to market demands, technology developments, increased competition or industry standards on a timely basis, or at all. In addition, to date, our revenues from VASPro have been primarily derived from one-time licensing and maintenance fees paid by China Unicom based on the capacity of its platform in terms of number of users. Under our current agreements, we only generate additional software revenues if China Unicom adds capacity for additional users on its nation-wide WAP portal or we supply such software to additional China Unicom provincial offices. In 2005,2006, our revenues from VASPro were significantly negatively affected by China Unicom’s decision to delay expanding capacity or building out 2.5G and 3G mobile networks into 20062007 pending anticipated receipt of 3G licenses. If this market does not grow and evolve in the manner or in the timeframe that we anticipate, or if we are unable to respond to new market developments promptly, we may not be able to generate significant sustainable revenues from our software.

Our software sales are currently entirely dependent on China Unicom, and the loss of our relationship with China Unicom would materially and adversely affect the revenue from our software business.

The only customer for our VASPro software currently is China Unicom. While VASPro is highly complex and customized software and, therefore, difficult to replace, it is possible that China Unicom could purchase similar software from third parties, or develop such software itself, and cease using VASPro. Moreover, several provincial offices of China Unicom that operate their own local WAP portals have purchased services provisioning and management software from other parties, and other provincial offices may do so in the future. In this case, not only would we lose future revenues from sales of additional software to China Unicom at the national or provincial level, but we could also lose what we view to be an important selling point when marketing our software to other mobile operators, the fact that the software is being used successfully by a major mobile operator. This would materially and adversely affect the revenue from our software business.

The market for our VASPro software in China is limited, and we may not be able to sell our software outside of China, in which case the potential growth of our software business would be limited.

The other principal mobile operator in China besides China Unicom, China Mobile, purchases its services provisioning and management software from a subsidiary company of China Mobile specifically established for this purpose, and we believe it is unlikely that China Mobile will purchase our software for the foreseeable future. China Telecom and China Netcom have also not purchased our software. Accordingly, the market for VASPro is limited in China. In addition, we may have to market our software in other countries to increase sales, which we may not be able to do successfully. This strategy contains risks, including difficulty in managing international operations due to distance, language and cultural differences and an inability to successfully market and operate services in foreign markets. There are also risks inherent in doing business on an international level, including unexpected changes in regulatory requirements, trade barriers, difficulties in staffing and managing foreign operations, fluctuations in currency exchange rates, and potentially adverse tax consequences.

Our provision of both 2G and 2.5G services and services provisioning and management software and related services to China Unicom or other mobile operators could be perceived as a conflict of interest and unfair competitive advantage. As a result, we could be prohibited from providing certain of those types of services, which could materially and adversely affect our competitive position, revenue and overall financial condition.

In addition to providing VASPro software, we provide China Unicom, at its request, operations support, data gathering, testing, consulting and maintenance services for its WAP portal. Thirdportal.Third party wireless value-added service providers may complain to China Unicom or any other mobile operator that purchases our software that the simultaneous provision of wireless value-added services, VASPro software and technical consulting services for the software by us, which gives us access to China Unicom’s wireless value-added system, presents a conflict of interest and gives us an unfair competitive advantage. Actions arising from any such complaints could impair our ability to provide services to China Unicom or other mobile operators, which could materially and adversely affect our competitive position in the wireless value-added services market, the services provisioning and management software market, or both, as well as our revenue and overall financial condition.

Our VASPro software is highly complex, and any defects in it could result in a refusal by China Unicom or other mobile operators to use it, as well as errors or failures in the networks in which it operates. Accordingly, any such defects could not only adversely affect our revenue from VASPro, but could also subject us to claims from users, mobile operators or other parties and damage our credibility.

Our VASPro software enables mobile operators to manage a wide range of functions, including managing billing and multiple third party service providers. Given the breadth of this software, it is extremely complex for us to design, develop, install and support the operations of VASPro. Accordingly, despite our testing, current or enhanced versions of VASPro may contain software defects. Any such defects could cause China Unicom to stop licensing VASPro and cause other mobile operators to select services provisioning and management software from our competitors. Moreover, VASPro is a key component of the 2.5G mobile networks in which it operates, and defects could cause errors in such activities as billing or provisioning of services or even cause the whole network to crash. In that case, we could be subject to claims from mobile users, mobile operators which use VASPro or third party service providers for incorrect billing or delivery of services or other damages caused by network problems. Our credibility among mobile operators and users could also be adversely affected, which could adversely affect the long-term growth and profitability of our business as a whole.

Risks Related to our Music Business

The businesses of our controlled music companies are subject to constantly changing consumer tastes.

In November 2005, in order to implement our strategy to enter the music development, production and distribution industry, we formed a new affiliated Chinese entity, Hurray! Digital Music Technology Co., Ltd. (“Hurray! Digital Music”). Subsequently, Hurray! Digital Music acquired 60% of the equity interest in Beijing Freeland Wuxian Digital Music Technology Co., Ltd., whose name was subsequently changed to Beijing Hurray! Freeland Digital Music Technology Co., Ltd. (“Freeland Digital Music”) to which certain entities of the Freeland Group, a group of affiliated companies in China engaged in the production and distribution of audio and visual products, contributed their respective music businesses. In December 2005, Hurray! Digital Music acquired 51% of the equity interest of Beijing Huayi Brothers Music Co., Ltd., a subsidiary of Huayi Brothers Group. Both companies have been successful top-tier domestic independent record companies in China which engage in artist development, music production and music distribution.

Each music recording is an individual artistic work. The commercial success of a music product depends on consumer taste, the quality and acceptance of competing offerings released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time activities, general economic conditions and other tangible and intangible factors, all of which can change quickly. Accordingly, there can be no assurance as to the financial success of any particular product, the timing of such success, or the popularity of any particular artist.

The future success of our controlled music companies depends on their ability to continue to develop recorded music that is interesting and engaging to our target audience, primarily users of Internet and wireless value-added services. If our audience determines that the content does not reflect its tastes, then our audience size could decrease, which would adversely affect our results of operations. The ability of Freeland Digital Music and Huayi Brothers Music to develop compelling content depends on several factors, including the following:

Furthermore, our controlled music companies must invest significant amounts for product development prior to the release of any product. These costs may not be recovered if the release is unsuccessful. There can be no assurance that such products will be successful releases or that any product will generate revenues sufficient to cover the cost of product development. Because we are relatively inexperienced in the music industry, we cannot predict whether our efforts in this area will be successful.

Our controlled music companies may unknowingly purchase or license songs which have already been, or may in the future be, sold or licensed to third parties, which could create costly legal disputes over intellectual property rights with such third parties and the songs’ authors or composers.

Freeland Digital Music and Huayi Brothers Music generally purchase or license songs for their artists from the original authors or composers of the songs. In China, original authors and composers sometimes license or sell their songs to multiple music companies without informing each such company. In that case, our controlled music companies may unknowingly purchase or license songs that have already been, or may in the future be, licensed or sold to one or more third parties. As a result, disputes may arise between our controlled music companies, third party music companies and original authors or composers over the rights to particular songs. Any such dispute may require our controlled music companies to incur significant costs to investigate and resolve them, including potentially the payment of damages to third parties.

In addition, Freeland Digital Music and Huayi Brothers Music license and distribute songs to third parties such as providers of Internet and wireless value-added services, which then distribute the music content to their customers. Freeland Digital Music and Huayi Brothers Music may be subject to claims by such providers or any of their other customers if the customers suffer losses as a result of a dispute over the ownership of copyrights to songs provided to them.

Our controlled music companies often enter into contracts with third parties on behalf of their artists. If those artists fail to satisfy the requirements under those contracts, our controlled music companies may be subject to claims, which could expose them to significant costs and business disruption.

Freeland Digital Music and Huayi Brothers Music often enter into various types of contracts with third parties on behalf of their artists, including contracts relating to album publishing, advertising and promotional activities and public performances. If an artist fails to satisfy the requirements under any such contract for whatever reason (such as health problems), then our controlled music companies may be deemed to have breached the relevant contracts. In that case, our controlled music companies may be subject to claims for breach of contract by the counterparty to the contracts, which could expose them to significant costs and business disruption.

Additional Risks Related to Our Company

Our recent acquisitions and strategic investments and any future acquisitions or investments may have an adverse effect on our ability to manage our business and may subject us to unforeseen liabilities.

Selective acquisitions and strategic investments, such as the recent acquisitions of Beijing Hutong, Beijing Hengji Weiye Electronic Commerce Co., Ltd. (“Hengji Weiye”) andagreement to acquire Shanghai Magma DigitalSaiyu Information Technology Co., Ltd. (“Shanghai Magma”Saiyu”) and investments in Freeland Digital MusicNew Run and Huayi Brothers Music,Secular Bird, form part of our strategy to further expand our business. Such companies may not be as successful as they have been in the past, and may also not perform as well as we expect. Moreover, the integration of such companies into our operations has required significant attention from our management. In particular, we must ensure that the relationships of our newly acquired wireless value-added service companies with the mobile operators are not disrupted by the acquisitions. In addition, our management must also devote significant resources to enhancing its knowledge of the music development, production and distribution business in China, with which we have very limited experience. Future acquisitions will also likely present similar challenges.

The diversion of our management’s attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business. Acquisitions expose us to potential risks, including risks associated with the assimilation

of new operations, services and personnel, unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, the inability to generate sufficient revenues to offset the costs and expenses of acquisitions and potential loss of, or harm to, relationships with employees and content providers as a result of integration of new businesses. The acquisition of any company could also subject us to unforeseen liabilities arising from the acquisition itself or the operations of the company or both.

We face intense competition, which could cause us to lose market share and materially adversely affect our business and results of operations.

The Chinese market for wireless value-added services is changing rapidly and is intensely competitive. We compete principally with three groups of 2G and 2.5G service providers in China, which include companies that focus primarily or entirely on these markets, major Internet portal operators in China and niche service providers.

We have faced competition from all three groups since our entry into this market. Moreover, there are low barriers to entry for new competitors in the 2G and 2.5G services market. Many of our competitors have longer operating histories in China, greater name and brand recognition, larger customer bases and databases, significantly greater financial, technological and marketing resources and superior access to original content than we have. As a result, our existing or potential competitors may in the future achieve greater market acceptance and gain additional market share, which in turn could reduce our revenues.

With respect to our music business, we face significant competition from two groups of competitors. The first group consists of traditional record companies which are extending downstream to establish their own wireless value-added services or Internet services companies in China. Such competitors include international record companies and independent labels based in Hong Kong, Taiwan and mainland China, which have longer operating histories, larger music libraries and greater pools of popular artists in comparison to our affiliated music companies. The second group of competitors consists of wireless value-added services providers that focus on music-related products and have extended upstream to establish their own music production businesses in China.

With respect to our software products, we face significant competition from major international software companies such as Microsoft, traditional telecommunications companies such as Motorola and NEC, and major software and professional services companies such as Hewlett-Packard and IBM, all of which have greater market share worldwide and financial resources than we do. These established software and telecommunications companies are better positioned to finance research and development activities relating to 2.5G and 3G technologies. They are also able to provide a wider range of products and services for a greater spectrum of media and have greater resources with which to purchase additional technologies or acquire other companies. We also compete against local software developers and telecommunications companies such as Aspire, Huawei and ZTE.

With respect to our music business, we face significant competition from two groups of competitors. The first group consists of traditional record companies which are extending downstream to establish their own wireless value-added services or Internet services companies in China. Such competitors include international record companies and independent labels based in Hong Kong, Taiwan and mainland China, which have longer operating histories, larger music libraries and greater pools of popular artists that us. The second group of competitors consists of wireless value-added services providers that focus on music-related products and have extended upstream to establish their own music production businesses in China.

We operate in rapidly evolving industries, which may make it difficult for investors to evaluate our business.

We began commercially offering wireless value-added services and developing our VASPro software business in China in 2001, and since that time, the technologies and services used in the wireless value-added services industry in China have developed rapidly. Moreover, we have recently entered the

music development, production and distribution business in China, which is also rapidly evolving. As a result of this rapid and continual change, you should consider our prospects in light of the risks and difficulties frequently encountered by companies in an early stage of development. These risks include our ability to:

Due to these factors, there can be no certainty that we will maintain or increase our current share of the highly competitive markets in which we operate.

We depend on key personnel for the success of our business. Our business may be severely disrupted if we lose the services of our key executives and employees or fail to add new senior and middle managers to our management.

Our future success is heavily dependent upon the continued service of our key executives, particularly certain members of the team which conducted the management buy-in of our company in June 2001, namely, Qindai Wang, our chairman and chief executive officer, Jesse Liu, our senior vice president and chief financial officer, and Haoyu Yang, our senior vice president in charge of research and developmentmusic companies, as well as Shaojian (Sean) Wang, our president and chief operating officer since May 2006 and Jiang Wang, our senior vice president in charge of marketing and content sales since September 2006. Our future success is also dependent upon our ability to attract and retain qualified senior and middle managers to our management team. If one or more of our current or future key executives or employees are unable or unwilling to continue in their present positions, we may not be able to easily replace them, and our business may be severely disrupted. In addition, if any of these key executives or employees joins a competitor or forms a competing company, we could lose customers and suppliers and incur additional expenses to recruit and train personnel. Each of our executive officers has entered into an employment agreement and a confidentiality, non-competition and non-solicitation agreement with us. As we believe is customary in our industry in China, we do not maintain key-man life insurance for any of our key executives.

We also rely on a number of key technology staff for the development and operations of our various businesses. Given the competitive nature of our industry, the risk of key technology staff departing our company is high and any such departure could disrupt our operations.

Rapid growth and a rapidly changing operating environment strain our limited resources. Our future growth could be adversely affected if we cannot manage our expansion effectively.

We have limited operational, administrative and financial resources, which may be inadequate to sustain the growth we want to achieve. If the userusers base of our 2G and 2.5Gwireless value-added services increases or our controlledaffiliated music companies expand, we will need to increase our investment in our technology infrastructure, facilities and other areas of operations, in particular our product development, customer service and sales and marketing, which are important to our future success. If we are unable to manage our growth and expansion effectively, the quality of our services and our customer support could deteriorate and our business may suffer. For example, any such performance issue could prompt China Unicom, China Mobile, China Telecom or China Netcom to cease offering our services over their networks. Our future success will depend on, among other things, our ability to:

Any failures of the mobile telecommunications network, the Internet or our technology platform may reduce use of our services and our revenues.

Our wireless value-added services are offered through the networks of China Unicom, China Mobile, China Telecom and China Netcom. In addition, we use our website to promote our services and enable users to order them. Thus, both the continual accessibility of the mobile operators’ networks and the performance and reliability of China’s Internet infrastructure are critical to our ability to attract and retain users. Moreover, our business depends on our ability to maintain the satisfactory performance, reliability and availability of our technology platform and the VASPro software we license. Any server interruptions, break-downs or system failures, including failures caused by computer viruses, hacking or sustained power shutdowns, floods or fire causing loss or corruption of data or malfunctions of software or hardware equipment, or other events outside our control that could result in a sustained shutdown of all or a material portion of the mobile networks, the Internet or our technology platform, could adversely impact our ability to provide our services to users and decrease our revenues.

Our corporate structure could be deemed to be in violation of current or future Chinese laws and regulations, which could adversely affect our ability to operate our business effectively or at all.

In connection with China’s entry into the World Trade Organization, or WTO, foreign investment in telecommunications and Internet services in China has been liberalized to allow for a maximum of 50% foreign ownership in value-added telecommunications and Internet services in China. To comply with these ownership requirements, we have implemented a structure which is similar to those used by several of our competitors such as SINA, Sohu, NetEase, Linktone and TOM Online by entering into various

various agreements with affiliated companies incorporated in China, including Hurray! Solutions, Beijing Cool Young Information Technology Co., Ltd. (“Beijing Cool Young”), Beijing WVAS Solutions Ltd. (“WVAS Solutions”), Beijing Network, Beijing Palmsky Technology Co., Ltd. (“Beijing Palmsky”), Beijing Hutong, Shanghai Magma and Hengji Weiye and their shareholders. Each of these affiliated Chinese entities is owned by various individuals in China.

We do not have any direct ownership interest in our affiliated Chinese entities but have entered into a series of agreements with these entities through which we intend to be able to assert a degree of control and management. In addition, we control Hurray! Digital MusicMedia through three of our affiliated Chinese entities, Hurray! Solutions, Beijing Network and Beijing Hutong. It is possible that the relevant Chinese authorities could, at any time, assert that our agreements with our affiliated Chinese entities or any portion or all of the existing or future ownership structure and businesses of each of our company, our wholly-owned subsidiary, Hurray! Times Communications (Beijing) Ltd. (“Hurray! Times”), or our affiliated Chinese entities violate existing or future Chinese laws, regulations or policies. It is also possible that the new laws or regulations governing the telecommunication or Internet sectors in China that have been adopted or may be adopted in the future will prohibit or restrict foreign investment in, or other aspects of, any of our, Hurray! Times’ or our affiliated Chinese entities’ current or proposed businesses and operations. In addition, these new laws and regulations may be retroactively applied. If any of our company, Hurray! Times and our affiliated Chinese entities is found to be in violation of any existing or future Chinese laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violation, including, without limitation, the following:

In any such case, we could be required to restructure our operations, which could adversely affect our ability to operate our business effectively or at all.

We depend upon agreements with our affiliated Chinese entities for the success of our business. These agreements may not be as effective in providing operational control as direct ownership of these businesses and may be difficult to enforce.

Because we conduct substantially all our business in China, and because we are restricted to a certain extent by the Chinese government from owning telecommunications or Internet operations in China, we depend on our affiliated Chinese entities, in which we have no direct ownership interest, to provide those services through agreements. These agreements may not be as effective in providing control over our telecommunications or Internet operations as direct ownership of these businesses. For example,

our affiliated Chinese entities could fail to take actions required to operate our business, such as renewing their business licenses or services permits or entering into service contracts with China Unicom, China Mobile and other mobile operators. Moreover, the fees for our services are paid by the mobile operators directly to our affiliated Chinese entities, which are then obligated at our request to transfer substantially all of such fees to our wholly owned subsidiary, Hurray! Times. If our affiliated Chinese entities fail to perform their obligations under these agreements, we may have to rely on legal remedies under Chinese law, which we cannot assure you would be effective or sufficient. In particular, the legal environment in China is not as developed as in other jurisdictions, such as the United States. Thus, Chinese courts are often inexperienced in handling corporate disputes, and different courts may apply laws and procedures in different ways.

We do not believe that we have a reasonable basis to predict the likelihood of the occurrence of the foregoing risks. However, if there is such an occurrence, it could potentially have a significant adverse effect on our ability to operate our business and on our financial condition.

We generate our internal funds almost exclusively from Hurray! Times. If that company is restricted from paying dividends to us, we may lose almost all of our internal source of funds.

Except for thea certain amount of cash held by Hurray! Holding (approximately $60.9$48 million as of December 31, 2005)2006), we have no significant assets other than our equity interest in Hurray! Times. Our internal source of funds has been derived almost exclusivelyWe are a holding company, and we rely principally on dividends from dividend payments from that company after it receives payments fromHurray! Times and technical consulting and service fees, license fees and other fees paid to Hurray! Times by our affiliated Chinese entities.entities for our cash requirements, including any debt we may incur. We are likely to lose all of our sourcesources of funds if

Hurray! Times is restricted from paying dividends to us, except for interest we earn on our investments, which totaled $38,185 in 2004 and $37,875 in 2005. Under current Chinese tax regulations, dividends paid to us are not subject to Chinese income tax.us. However, Chinese legal restrictions permit payment of dividends only out of net income as determined in accordance with Chinese accounting standards and regulations, which in turn restricts our ability to receive these revenues.

The principal differences between net income under Chinese accounting standards and U.S.US GAAP relate to pre-operating costs, stock-based compensation and deferred taxes. Pre-operating costs are expensed when incurred under U.S.US GAAP, while they are amortized over five years under Chinese accounting standards. Stock-based compensation and deferred taxes are not recognized under Chinese accounting standards. Under Chinese law, Hurray! Times is also required to set aside a portion of its after-tax profit calculated under PRC generally accepted accounting principles, or PRC GAAP, for which the legal minimum requirement is 10%, to a non-distributable general reserve fund beginning in its first profitable year after offsetting prior year’s cumulative losses and to certain other non-distributable funds at an amount determined by Hurray! Times. The amount of reserves was RMB3,451,046 ($427,628)nil as of December 31, 2005, which represents the general reserve fund.2006 since Hurray! Times incurred an operating loss in 2006. This reserve fund can only be used for specific purposes and is not distributable as cash dividends. If further restrictions on payments of dividends by our subsidiary are implemented under Chinese law, we may not be able to access our internal source of funds.

Our revenues may fluctuate significantly and may adversely affect the market price of our ADSs.

Our revenues and results of operations have varied in the past and may continue to fluctuate in the future. Many of the factors that cause such fluctuation are outside our control. Steady revenues and results of operations will depend largely on our ability to:

Because the 2G and 2.5Gwireless value-added services industry in China is new and rapidly evolving, our experience in the music industry is limited and our business has experienced significant volatility in terms of financial results as a result of the factors stated above, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is possible that future fluctuations may cause our results of operations to be below the expectations of market analysts and investors. This could cause the market price of our ADSs to decline.

We may not be able to adequately protect our intellectual property, and we may be exposed to infringement claims by third parties.

We believe the copyrights, service marks, trademarks, trade secrets and other intellectual property we use are important components of our wireless value-added services. In addition, our software products are highly complex and involve proprietary software source code and know-how. Our controlledaffiliated music businesses are also substantially dependent on their ability to protect their rights over their music content. Any unauthorized use of such intellectual property by third parties may adversely affect our current and future revenue from such services and software, as well as our reputation. For example, rampant piracy in China has negatively affected offline sales of CDs and tapes by our controlledaffiliated music companies, and if piracy becomes a problem in online distribution channels, their financial results would be further materially adversely affected. We rely primarily on the intellectual property laws and contractual arrangements with our employees, clients, business partners and others to protect such intellectual property rights. Third parties may be able to obtain and use such intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in the Internet, wireless value-added and music industries in China is uncertain and still evolving, and these laws may not protect intellectual property rights to the same extent as the laws of some other jurisdictions. In particular, the intellectual property law in China is less developed than in the United States and, historically, China has often not protected private parties’ intellectual property rights to the same extent as such parties might enjoy in the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources, and have a material adverse effect on our business, overall financial condition and results of operations.

Due to the fact that we aggregate content and applications for our wireless value-added services, and because our services may be used for the distribution of information through, for example, our wireless community services, claims may be filed against us for defamation, negligence, copyright or trademark infringement or other violations. In addition, third parties could assert claims against us for losses in reliance on information distributed by us. For example, if we are found to have infringed any intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternative intellectual property. We receive numerous threats of infringement claims, often in the form of demand letters. Claims are typically made by music companies or other service providers. One recent lawsuit was settled and one is still pending in court. While

the vast majority of such claims do not develop beyond the demand letter stage and do not ultimately result in liability to us, we may also incur significant costs in investigating and defending the claims, even if they do not result in liability.such claims. We have not purchased liability insurance for these risks.

We have limited business insurance coverage which could expose us to significant costs and business disruption.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of

disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources, particularly if it affects our technology platform which we depend on for delivery of our wireless value-added services.

We may be or becomebelieve that we were a passive foreign investment company for 2006 and are likely a passive foreign investment company for the current taxable year of 2007, which could result in adverse U.S. federal income tax consequences to U.S. investors.

We may be classified as a passive foreign investment company (“PFIC”) by the United StatesU.S. Internal Revenue Service for U.S. federal income tax purposes. Such characterization could result in adverse U.S. federal income tax consequences to you if you are a U.S. investor. For example, if we are a passive foreign investment company,PFIC, our U.S. investors will becomebe subject to increased tax liabilities under U.S. tax laws and regulations and will becomebe subject to U.S. tax reporting requirements. The determination of whether or not we are a passive foreign investment company will bePFIC is made on an annual basis and will dependdepends on the composition of our income and assets, including goodwill, from time to time. Specifically, we will be classified as a passive foreign investment companyPFIC for U.S. tax purposes for a taxable year if 50.0%either (a) 75% or more of our assets, based on an annual quarterly average, aregross income for such taxable year is passive assets,income, or 75.0%(b) 50% or more of our annual gross income is derived from passive assets. We have determined that virtually all of our income for 2003, 2004 and 2005 was active income under the gross income test. However, as cash and cash equivalents (which the United States Internal Revenue Service has stated constitute passive assets for passive foreign investment company testing purposes) have comprised a significantaverage percentage of our assets (based on U.S. GAAP) induring such taxable year either produce passive income or are held for the past,production of passive income. For such purposes, if we directly or indirectly own 25% or more of the determination whethershares of another corporation, we will be treated as if we (a) held directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the other corporation’s income.

We believe that we were a passive foreign investment company in prior years or will bePFIC for 2006 and are likely a passive foreign investment company in the future will depend on the valuation of our intangible assets (including goodwill and going concern value) which are not reflected in our financial statements. We did not obtain an appraisal of our intangible assets for passive foreign investment company testing purposes for prior periods, but we believe that the value of these intangibles exceeds the amount of our cash and cash equivalents. Our judgment is not binding on the Internal Revenue Service. The valuation of our intangible assets is based, in part, on the then market value of our ADSs, which is subject to change. We cannot assure you that we will not be a passive foreign investment companyPFIC for the current or any future taxable year. See “— Taxation”year of 2007. Accordingly, the adverse U.S. federal income tax consequences described above could apply to you if you are a U.S. investor. Given the complexity of the issues regarding our classification as a PFIC, U.S. investors are urged to consult their own tax advisors for guidance as to our status as a PFIC. For further discussion of the adverse U.S. federal income tax consequences of our classification as a PFIC, see “Taxation” below.

Anti-takeover provisions in our charter documents could make an acquisition of us, which may be beneficial to our shareholders, more difficult and may prevent attempts by our shareholders to replace or remove our current management.

Our amended and restated articles of association include two provisions which could make an acquisition of us more difficult and may prevent attempts by our shareholders to replace or remove our current management. First, our amended and restated articles of association provide for a classified board of directors. Second, our board of directors has the right to issue preference shares without shareholder approval, which could be used to institute a “poison pill” that would work to dilute a potential hostile acquirer’s ownership interest in our company, effectively preventing acquisitions that have not been approved by our board of directors.

Shareholder rights under Cayman Islands law may differ materially from shareholder rights in the United States, which could adversely affect the ability of us and our shareholders to protect our and their interests.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Law (2004 Revision) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders, and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common

law, the decisions of whose courts are of persuasive authority but are not binding on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law in this area may not be as clearly established as they would be under statutes or judicial precedent in existence in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate laws. Moreover, our company could be involved in a corporate combination in which dissenting shareholders would have no rights comparable to appraisal rights which would otherwise ordinarily be available to dissenting shareholders of United States corporations. Also, our Cayman Islands counsel is aware of only a few reported cases of derivative actions having been brought in a Cayman Islands court. Such actions are ordinarily available in respect of United States corporations in U.S. courts. Finally, Cayman Islands companies may not have standing to initiate shareholder derivative actionactions before the federal courts of the United States. As a result, our public shareholders may face different considerations in protecting their

interests in actions against the management, directors or our controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States, and our ability to protect our interests may be limited if we are harmed in a manner that would otherwise enable us to sue in a United States federal court.

All participants of our existing equity compensation plans who are PRC citizens may be required to register with the State Administration of Foreign Exchange of the PRC, or SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional equity compensation plans for our directors and employees and other parties under PRC law.

On April 6, 2007, the capital account department of SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Option Plan or Stock Option Plan of An Overseas Listed Company, Hui Zong Fa [2007] No. 78),” or Circular 78. It is not clear at this time whether Circular 78 covers all forms of equity compensation plans, including restricted purchase share awards granted by us, or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC listed company such as our company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings by July 5, 2007 if they participated in an overseas listed company’s covered equity compensation plan prior to April 6, 2007. We believe that the registration and approval requirements contemplated in Circular 78 are burdensome and time consuming.

Circular 78 has not yet been made publicly available nor formally promulgated by SAFE, however, it is our understanding that SAFE has begun enforcing its provisions, although we cannot predict whether it will continue to enforce it or adopt additional or different requirements with respect to equity compensation plans. If it is determined that our equity compensation plans are subject to Circular 78, failure to comply with such provisions may subject us and the participants of our equity compensation plans who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our personnel which is currently a significant component of the compensation of many of our PRC employees, as a result of which our business operations may be adversely affected.

Our business benefits from certain PRC government incentives. Expiration of, or changes to, these incentives and PRC tax laws could have a material adverse effect on our operating results.

Pursuant to the Income Tax Law of the PRC Concerning Foreign Investment and Foreign Enterprises and various local income tax laws (the “Income Tax Laws”), Hurray’s PRC subsidiaries and variable interest entities are generally subject to enterprise income tax at a statutory rate of 33%, which comprises a 30% national income tax and a 3% local income tax. Some of Hurray’s subsidiaries and variable interest entities qualify as “high technology” enterprises, and under PRC Income Tax Laws, they are subject to a preferential tax rate of 15%. This classification entitles Hurray! Times to a three-year exemption from enterprise income tax commencing in 2003, followed by a 7.5% preferential tax rate for the succeeding three years and a 15% preferential tax rate thereafter. The three year income tax exemption commenced in 2000 for Hurray! Solutions, 2002 for WVAS Solutions, 2003 for Beijing Cool Young, Beijing Network and Beijing Palmsky, 2004 for Beijing Hutong, 2001 for Shanghai Magma and 2006 for Hurray! Digital Music and Freeland Music. Huayi Brothers Music is classified as a “new enterprise” and, accordingly, enjoys an exemption from both national and local enterprise income tax in 2005. It will be subject to a 30.0% national enterprise income tax and 3.0% local enterprise income tax thereafter. Hengji Weiye is subject to a 15% enterprise income tax. In addition, Hurray’s subsidiaries in the PRC are “foreign invested enterprises,” and under PRC Income Tax Laws, they are entitled to either a three-year tax exemption followed by three years with a 50% reduction in tax rate, commencing the first operating year, or a two-year tax exemption followed by three years with a 50% reduction in tax rate, commencing the first profitable year. These preferential tax arrangements will expire at various dates between 2006 and 2010.

On March 16, 2007, the National People’s Congress of the PRC adopted a new enterprise income tax law that imposes a single uniform income tax rate of 25% for most domestic enterprises and foreign-invested enterprises. This new law will be effective as of January 1, 2008. It contemplates various transition periods and measures for existing preferential tax policies, including a grace period for as long as five years for foreign-invested enterprises which are currently entitled to a lower income tax rate and continued implementation of preferential tax treatment with a fixed term until the expiration of such fixed term. In addition, under the new enterprise income tax law, foreign investors are not expressly exempted from the income tax on dividends from a foreign-invested enterprise, which exemption is currently available until the effectiveness of the new enterprise income tax law. Furthermore, the new law deems an enterprise established offshore but having its management organ in the PRC as a “resident enterprise” which will be subject to PRC tax on its global income. The term “management organ” has not yet been defined by the PRC government. The new enterprise income tax law empowers the State Council of the PRC to enact appropriate implementing rules and regulations. If the transition periods and measures for existing preferential tax policies are enacted as currently contemplated, any preferential tax treatment enjoyed by our subsidiaries and affiliated companies will terminate at the end of the grace period, which period may be eliminated or significantly shortened by the PRC government. In addition, the PRC government may treat us as a resident enterprise

under the new enterprise income tax law, which would adversely affect our financial condition and results of operations. Moreover, our historical operating results may not be indicative of our operating results for future periods as a result of changes in applicable tax laws.

LEGAL RISKS RELATED TO WIRELESS AND INTERNET SERVICES

The telecommunication laws and regulations in China are evolving and subject to interpretation and will likely change in the near future. If we are found to be in violation of current or future Chinese laws or regulations, we could be subject to severe penalties.

Although our 2G and 2.5G services are subject to general regulations regarding telecommunication services, specific laws at the national level governing wireless value-added services, such as our services related to SMS and WAP, have only been issued recently. The interpretation and application of newly issued Chinese laws and regulations and the possibility of new laws or regulations being adopted have created significant uncertainty regarding the legality of existing and future foreign investments in, and the businesses and activities of, Chinese companies providing 2G and 2.5G services, including our Chinese affiliated entities. Many providers of 2G and 2.5G services have obtained various value-added telecommunication services licenses.

Each of our affiliates, Hurray! Solutions, Beijing Palmsky, Beijing Network, Hengji Weiye, Beijing Hutong and Shanghai Magma, has been granted an inter-provincial value-added telecommunication license by the Ministry of Information IndustryMII that permits it to conduct inter-provincial operations. Our affiliate, WVAS Solutions, has been granted a value-added telecommunication service license issued by the local Beijing Municipal Telecommunications Administration Bureau. This license may not be sufficient to authorize WVAS Solutions to provide value-added telecommunication services on an inter-provincial basis. We cannot be certain that any local or national value-added telecommunication license requirements will not conflict with one another or that any given license will be deemed sufficient by the relevant governmental authorities for the provision of this category of service, due to the lack of a comprehensive body of laws and regulations governing our 2G and 2.5G services. It is also possible that new national legislation might be adopted to regulate such services.

If we or our subsidiarysubsidiaries or affiliates are found to be in violation of any existing or future Chinese laws or regulations regarding our 2G and 2.5G services or Internet access which is discussed in the following risk factor, the relevant Chinese authorities have the power to, among other things: